Real Estate Bubble?

I am an aspiring Real Estate Investor. I am still in the research and planning phase, and have not done any deals yet, but plan to soon. I have one small concern that I am interested in getting some input from those of you who do invest and have for years. A lot of so called “experts” are claiming that there is an expanding bubble in real estate values nationally, even world wide that may soon burst. There is no doubt that, when taken as a whole, appreciation in real estate prices has been quite high over the last few years. However, I have my own theories about this situation that does not involve a bubble. My question is this:

Suppose the following situation occurs:
1)The area in which I chose to begin my investing business does experience a decline in real estate values in a few years.
2)I am highly leveraged in some properties I am holding as rental properties that I bought when prices where higher.

As real estate values drop, will rental rates drop as well, to the point where my cash flow enters the red? I am assuming that real estate values and rental rates are closely and positively correlated, which may not be the case. I am, of course, not going to limit my portfolio to just rental properties. I will be searching out sub2 and lease option deals as well. I am just curious if this is a legitimate concern or just paranoia as a result of inexperience. Thanks for your input!


Howdy Will:

You are correct. Real estate as well as most everything in live goes in cycles. There are corrections in all markets all the time. In real estate builders step in when the market rents are high and so is occupancy and start building and building and building. All of a sudden too many apts and rents go down as builders and investors fight for tenants. As rents level out and go down so do values.

Also tied to all this is the cost of money. With rates being low money lenders are getting less for their capital. Also with rates lower building sellers have been able to raise prices as buyers are willing to accept a smaller return on their investments and building are selling at lower cap rates which means a highr price with everything else being equal.

The tax reform act of 86 drove values down as investors could not shelter other income with losses from limited liability partnerships. The so called crooked bankers and appraisers got most of the blame but it was mostly due to tax reform in my opinion.

The best idea is to buy property when the prices are depressed in a particular area and hold until the area rebounds. Certain risk is assumed depending on the reasons for the down turn. Do noy buy land near a nuclear explosion or leak for instance as the area never will come back.

Also when rents go down the vacancy rate will go up too. When folks lose their job they tend to move back home or out of the area creating even more vacancy.

The best suggestion is just to buy right where you have good cash flow and can afford even a loss of 20 to 30 % of your income and still be able to survive.

Another good example is the 20 % per year increase in the stock market in the past. You could not miss just buy anything and watch it grow . Not true today in stock or REI either.

Being highly levered in good cash flow deals is not a big problem. Being 100% levered with high rates and low rent will put you in Chapter 7 or 13 or jumping off bank towers yelling you basturds.

Thanks for the info. Ted, I really appreciate it. No doubt there are a lot of factors to take into consideration when choosing the right area and property. I have been reading a lot of your other posts and it sounds like you have a lot of valuable experience. I’m glad you are so willing to share that experience.

I live in Albuquerque, NM now and all indications point to sustained growth in real estate values for a while. Good advice on finding good cash flow properties that will sustain a 20-30% decline in rental rates. It will be a bit more difficult to find these, but I’m certain it can be done. I’m beginning to think that lease options may be the best way to go, at least for a beginner like myself. I still have a lot of learning to do before I would feel comfortable carrying one out. But, I’ll be there soon. One thing I’m somewhat confused about is how large of a role should an attorney play in any lease option deals you do? Are there any standard lease option contract forms that can be adapted and modified or should you have an attorney create a new one for each lease option deal? Thanks,


Howdy Will:

I have never done a lease option. I did several contracts for deed that used to be about the same as lease option but that has changed at least here in Texas. The are good ways to control property with little risk or cash. The main risk is if the seller gets in default and loses the property or gets sued and has liens attached to the property and of course you learn nothing until you get a title report when you get ready to sell to your buyers. For these reasons I do not like them but that should not stop anyone from doing them but just be aware of the dangers.

I do more buy and fix and sell deals using hard money. I am looking to buy and hold too but looking for bargains in commercial areas.

As far as attorneys and forms to use it is up to you. I would just use a standard form for the lease and another standard form for the option. I have been told it is best to have two agreements especially if you are the seller. The option consideration can get confused with the lease deal and be considered as a refundable deposit or part of prepaid rent. Leases are available anywhere. You can probably find some good option agreements on line or from other investors. If you are really nervous then get an attorney to help with the first one or two and then you should be able to do them without help.

Hi Will:
You have to realize that there are different markets all across the nation. Some markets are uprising while some are at the top. Dont get caught up in the rental game either. This can make you flat broke if in the wrong market if you dont know what you are doing.

I would recommend you take care of todays cash flow deals by:

You could also take care of tommorrows cash flow needs also by renting and lease optioning, but I would wait until renting until you have more experience, take a few courses on managing tenants and how to spot the different markets in the U.S.

-Buyers Market Stage1
-Buyers Market Stage2
-Sellers Market Stage1
-Sellers Market Stage2

Best Regards,
Jeff Adam

Hi Jeff,
Thanks for the Advice. I appreciate it. As an aspiring real estate investor, I have been overwhelmed by the many different investing strategies and the unbelievable amount of information available. I am interested in wholesaling. Do you have any recommendations for good information on this subject as well as how to evaluate a given market (ie. books, courses, websites, etc.)? Also, could you expound a little on “don’t get caught up in the rental game”? Thanks again for your help.


Hi Will:
Ron Legrands Wholesale/Retail Course is a good course. You can find it used on ebay. There may be some good courses on this site also on wholesaling. There are also some good forums here you could read.

In terms of knowing the different markets… This comes with experience.

In regards to not get caught up in the rental game. There are guru’s out there that tell you to go buy 20 properties and rent them out for positive cash-flow. They dont mention what happens when you have to evict tenants, do a major rehab after they destroy the property, the market collapses, etc… You need to take care of todays cash flow needs. I would recommend wholesaling and then keeping the ‘cream puff’ properties along the way. Maybe 1-2 a year while you are just starting out. After you build up more cash flow and are more experienced, you can go from there. This is a very good site for you to come and read for an hour or so lately. I wish I had a site like this when I was first starting out. Most people were not even online!

Best Regards,
Jeff Adam


I am going to take a slightly different approach to your questions.

If your rental property is generating a sufficient cash flow now, it should continue to do so in the future. If you should see a decline in housing prices in your market, you should not automatically expect a decline in rental rates. In my experience in a rapidly appreciating market, housing prices rise a lot faster than rents. When housing prices decline, rental rates stabilize or stagnate for awhile, but do not drop precipitiously.

For example, I bought a townhouse in 1999 for $49K and rented it for $650 per month. Today, comparable sales prices put the market value of my townhouse at $160K but in those same five years my rent has only increased to $875 per month. Let’s say that next year the value of my rental townhouse drops 30% from $160K to $112K. My rent will not go down, it just will not go up that year. My point is that if the property was generating a positive cash flow when you purchased, your fixed overhead won’t change just because you see a little decline in the property’s appreciation.

The rent the market will bear is not as closely tied the the value of the property as it is to the cost of homeownership for the same property. In my example, the cost of owning my townhouse at $160K is about $1200 per month. I think I have an adequate rental pool with rent at $875 per month. Even if housing prices for the same property drop to $112K and the cost of ownership drops to $900 per month, with my rent slightly below the cost of homeownership, I still have an adequate rental pool. I don’t have to drop rents to get a qualified tenant, though I will likely have fewer applicants for the same property.

If you were brand new to the landlording business, then Jeff Adams’ caution about not getting “caught up in the rental game” might bear noting with some concern. However, you are not new to the landlord business with some rental properties already in your portfolio. If your properties are generating a positive income, don’t abandon them to concentrate on property flipping.

Quick cash deals can be attractive because of the large paydays, but the money does run out. To get another payday, you have to do another deal. What happens when you want to slow down or “retire” but you can’t because your expenses don’t slow down or retire. You always need to do another deal to get another payday. Only by building a portfolio of income producing assets, will you be able to slow down or “retire”. If you hold the property long enough, your tenants will have bought it for you, and your free and clear property(ies) will continue to generate a monthly income to meet your lifestyle needs even if you never do another deal.

Don’t get me wrong. Quick cash returns are great when you need to build working capital. But, if you wisely invest some of your working capital into your rental property portfolio along the way, you will one day discover that you have amassed considerable wealth.

You know that this thread is almost 9 years old, right? You probably won’t get many responses from the original posters…