biden tax changes impact on real estate investors

Worried about a housing market correction?

You certainly aren’t alone. With the words “recession” and “correction” on everyone’s lips, here are some recession-proof ways to invest even if real estate markets dip in value in the near future.

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Resources Mentioned in This Podcast & Video:

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

live off rents podcast transcript

Brian: Hey, guys. Brian Davis and Dennise Supplee here from Spark Rental, how are you doing today?

Deni: How is everybody? How was your fourth? I hope everybody had a safe and fun, fun times.

Brian: Everyone got blown up by fireworks.

Deni: Yeah, my husband’s a real pyro, so we had a lot of fireworks here.

Brian: Oh, fun. Yeah. My dad likes them as well.

Deni: Really? You know, it’s funny, when we went to buy him the box that he got this whatever was called the. The divorce maker.

Brian: Yeah, I love it.

Deni: What a name. Anyway, I’m glad that you’re all joining us. Let us know where you’re joining us from. Just throw that in the comments. And if you were with us last week, Brian, interview Tom Dunkel, who was an interesting, knowledgeable guy. And this week we’re going to be talking about how to invest if you’re afraid or fearing a housing market correction, which seems to be the topic these days, being a realtor, I don’t know how many people I hear. Even yesterday, some of the people that were here, there was somebody that was thinking of possibly selling their home because they don’t want to miss the opportunity, the high prices. And now with the radio, it’s like all the talk. So anyway, Brian, why don’t you start us off and give us some ideas on how to how to stay towards your goals of investment even during these times?

Brian: Sure. So first of all, it’s not guaranteed that we’re going to have a housing market correction. They don’t happen that often, even when we have recessions. Home prices don’t always dip. When they do dip, they tend to only dip 5%, maybe a little bit closer to 10% in the worst ones. But as far as I know, there have only been there’s only been twice in American history when housing prices have dipped more than 10%. And those were, of course, the Great Recession and the Great Depression. So, two quite extraordinary events, as you know. So, you know, we’re not talking about the end of the world here for housing prices to dip 5%. Now, if you are worried about it and it’s keeping you up at night, you don’t have to invest in real estate right now. You can always pump your money into stocks while they’re down. It’s a good opportunity to buy stocks at a discount, you know, on sale, as it were. So, yeah, if this is something that you’re chewing your fingernails about and keeping you up at night, then don’t feel like you have to invest in real estate right now. If you do want to continue investing in real estate, another option is buying long-term investments that cash flow well. So even if home prices do dip 5%, maybe even 10%, it won’t really affect you, right? Because your cash flow will continue coming in even while prices dip down a little bit and before they recover.

Brian: Who cares? As long as you’re holding it long-term, you can keep cashing those rent checks every month or keep cashing those dividends if we’re talking about real estate crowdfunding investments. So, bear in mind here, that rents almost never dip. So even during the Great Recession, when home prices dropped significantly. So, if you look at the larger cities, they dropped around 20% in some markets, in some rural areas, housing prices dropped 30, even 35% in the US. Rents didn’t drop. They leveled off some for a couple of years, but they did not drop. So even during housing market corrections rents, rents don’t drop. So, your cash flow will still keep flowing in. Even when home prices drop. Even if we do have a little bit of a recession now, that doesn’t mean that you don’t have other risks. As a social landlord during recessions, you may have higher default rates on the rent. You may see higher vacancy rates but rents themselves don’t drop. So, if you have screened your tenants really well, if you have really solid, stable tenants in there, you should be fine as a long-term rental investor.

Deni: And if you’re working the numbers out, you know what I mean? It does obviously the price does mat matter. But if the numbers are working and rents generally do go up, you should be okay. There is always some type of deals out there.

Brian: Yeah. So yeah, home prices, home price corrections in the US, represent an opportunity to buy houses at a discount. But so, we actually did an analysis about a month ago on how recession proofs our rental properties are and added a link to it in the comments here. But we have some graphs showing some of this data over time, including housing prices during recessions, rents during recessions, vacancy rates for rental properties during recessions, and during normal times as well. So, take a look at some of that data, if interested. And it’s a pretty clear breakdown of what are the risks as a landlord during recessions if assuming you’re not looking to sell during the recession, but rental properties are safer investments than most during recessions. Now, they’re not the only long-term real estate investment you can make. Crowdfunding investments like fundrise and streit wise are both long-term equity investments in properties. You’re buying fractional shares of pools of properties, so we’ll add a couple of links to.

Deni: I already did.

Brian: Oh, thank you, Deni. Yeah. So, I invest some of my personal money in both fundrise. And streit wise, I’ve had very good experiences with both. So, you know, those are they are long term investments, don’t get me wrong, five-year minimum investments for these. If you put your money out early, you do get hit with a penalty. So yeah, these are places where you park your money long term in real estate and in the meantime, you earn a healthy cash dividend every quarter. So streitwise has been paying 8.4% annual dividend for years now. So those are a couple long term options that you can invest in real estate. Even if you’re worried about a little housing market dip over the next year or two. You know, as long as you’re holding long term and just collecting the cash flow, you’ll be okay. Now, there are other types of real estate investments that people like as recession-proof investments. I put that in air quotes because, you know, is anything truly recession-proof? Who knows? But we had so last week we had Tom Dunkel on the show, and he was talking to us about self-storage facilities and that’s the niche that he is occupying right now. They do syndication projects for the self-storage facilities. They’re expensive properties usually. So, it’s not like the average person can go out there and just drop a million bucks to build one of these facilities. But you can invest in smaller ones. You can invest in syndication; you can partner with people. So, we’ll put a link in the comments here to last week’s episode with Tom Dunkel.

Deni: I just put it in.

Brian: Yeah. And so, the reason, by the way, let’s just explain for a second why people consider self-storage facilities, recession proof. So, during recessions, some people will downsize their homes. Or they will move in with family members or friends, which is effectively the same thing as downsizing. Right. They are moving into a new home that doesn’t have enough space to fill all of their belongings. So, what do they do? They put it in a storage facility. So that’s why self-storage facilities are largely considered recession proof, because as people shrink their home size down or they move in with someone else, which is, by the way, the technical term for that is household bundling, if you are a real estate nerd like we are. But that is that’s the side effect of downsizing or bundling your house over someone else, moving in with someone else. You don’t have enough room for your stuff. So, you put yourself in storage. That’s the bottom line there. So, yeah, that is an option as well if you are worried about a recession or a housing market correction. Self-storage facilities are a good place to start. Mobile homes, same concepts. You know, in recessions, people look for more affordable options for housing. Well, homes are historically a more affordable housing option. So, you can invest in mobile homes as a more recession-proof option as well. Or in that same vein, you can invest in mobile home parks. So rather than a single mobile home in the entire park. Different business models, of course, but the same underlying economic principle. Right. That in recessions people look for more affordable housing.

Deni: I actually even for like an Airbnb, if it’s in an area, you know, like a mountain area or whatnot, I love the idea of buying a piece of land, throwing a mobile home on there and which is kind of what they do. And I just thought that was the coolest thing.

Brian: Oh, yeah. And you guys have an RV for traveling around. I love it. I love it. So, yeah, no RV parks, mobile home parks. I mean, you know, all of these are viable options during recessions. And, you know, yeah, people do sometimes go live in their RVs during recessions and rent out their homes if they own a home, you know, or maybe instead of their family vacation that year being like, oh, we’re going to fly to Europe or fly to the Caribbean, like, oh, maybe we RV around for a couple of weeks.

Deni: There’s that’s been way popular even. Like it’s just funny how popular it is.

Brian: Yeah, absolutely. So, you know, these are all options if you’re concerned about housing market correction or recession.

Deni: It’s not just for senior citizens anyway.

Brian: Although, you know, let’s be honest, these cliches exist for a reason, right? Yeah.

Deni: Careful, I thought you were going to say. Well, look.

Brian: Yeah. So, you know, another option here for investing in real estate. If you are worried about a housing market correction, low LTV loans, loans that have that are a low percentage of the property value. So, there’s still plenty of meat on the bone. There’s plenty of room, plenty of equity. If the borrower were to default and the lender had to foreclose, they’d still be able to get their money back. So typically, we’re talking about hard money loans here to real estate investors. These loans are usually in the 60 to 75% LCV range. So, you know, if the housing market or housing prices do drop 5%, you still have 20 to 30% equity available in the property for foreclosing and getting the money back or working out a short sale or whatever with the owner. So, there are a couple of real estate crowdfunding platforms that specialize in these sorts of hard money loans with low LTVs. And by the way, the fact that these are two real estate investors make them way easier to foreclose as opposed to foreclosures on homeowners, a very lengthy process, and a lot of regulation. It’s a much more streamlined process to foreclose on a real estate investor where it’s not their primary residence. So as the effective lender here, that’s good news for you. So yeah, ground floor and concrete are two that Denny and I both invest in personally. Low LTV loans, hard money loans to real estate investors had great experiences with both. So those are options as well. So, Deni, what do you want to avoid during if you’re worried that we are approaching a housing market dip or a little housing market correction here?

Deni: I think the worst thing that anybody can do is panic and make decisions out of that panic without taking everything, you know, like just. Yeah. Because that can get you into more trouble than anything.

Brian: No question about it. And that goes for everything. That goes for selling stocks, selling real estate. You don’t want to panic, sell, you know. Everyone knows the rule. Buy low. Sell high. Panic selling is selling low. So that is the exact opposite of what you want to do. So, one strategy that does not work particularly well during or if there’s a housing market correction approaching is flipping houses because then when prices do drop, you can be stuck holding that property. So, if you are a flipper or a wholesaler, you want to have some contingency plans in place in the event that home prices do dip by 5%. Is that going to wipe out your entire profit? Is it going to put you in the red? So, you want to be careful about those because even though they’re short-term, flipping a house is a short-term investment. Six months, maybe a year. We don’t know what the real estate market will look like six months from now or a year from now. It might dip by 5%. We don’t know. We are already seeing market cooling, especially in the markets that overheated the most during the pandemic.

Deni: I never thought I would say this, but houses are sitting for over a week. In my area that’s like what?

Brian: Eternity.

Deni: It’s crazy.

Brian: Yeah. So, you know, the bottom line here, is there is still an inventory shortage. So, this is not 2008. We do not have the same fundamental problems or challenges in the nationwide real estate market that we did then. So, we’re not looking at a 20 or 30% crash in home prices the way that we saw in the Great Recession and its aftermath. That being said, housing markets have been overheated for a couple of years and they are definitely being cooled down by the jump in inflation, higher interest rates, the jitters among the general public. Consumer confidence is very low right now, so we may be spooking ourselves into a recession, even if the economic fundamentals are pretty strong at the moment. So, a strong labor market, for example. So, if you do want to continue investing in real estate and I encourage you to do so but build some extra buffer into your margins so that a 5% dip in home prices doesn’t put you underwater, doesn’t ruin your deal, or ruin your day.

Deni: So, when you’re figuring out what you’re saying, the numbers, and whatnot, make sure that you put that buffer in there so that you are prepared. And yeah, you don’t want to gamble on time and market.

Brian: No, don’t time the market. Investing one on one. Deni, any other comments that you want to add here before we call this episode complete?

Deni: I don’t think so. But I know that I’ve been through ups and downs in this market and survived in a lot of ways survived pretty good. So, I think there’s always a way to make money.

Brian: No question. And you know, so final thought for me on this is if we do have a housing market correction, take advantage of it and buy low.

Deni: Exactly.

Brian: All right, guys, we will see you next Tuesday at 2 p.m. Eastern. In the meantime, stay in touch. Shoot us an email. Let us know what you want to hear about soon and what you’re looking for as far as tools, tips, and anything else that we can help you with? As a real estate investor.

Deni: Absolutely. Have a good day.

Brian: Bye now.

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