Blog | Real Estate

Is the Next Real Estate Market Crash Here?

Here are some tips when considering real estate, and how to take advantage of the next crash.

play cashflow now

With the recent real estate boom, people can’t help but to wonder how long the market will stay this way. In fact, people constantly ask Robert and me about the next real estate bubble.

Yet, our response when someone asks if one is imminent almost always catches the person off guard: “We sure hope so!” Seriously, their looks of bewilderment never get old. Yeah, you heard me right. We love market crashes. Why?

First, I’d like to suggest you familiarize yourself with the seven stages of a financial bubble, which will help set the stage for what I’m about to discuss. As you can see, booms, busts, and bubbles are very familiar and natural cycles in our economy.

In this blog, we’ll go over why real estate market crashes can work to your advantage, and some tips to get you started on your real estate journey.

What is a real estate market crash?

Let’s start with the basics. What exactly is a real estate market crash?

In short, it's when real estate values take a sharp decline after housing prices were inflated for a significant period of time. Typically, a real estate market crash is caused by a slowing economy, rising interest rates, and/or tighter credit standards.

Why is a real estate market crash a good thing?

Ok, now here’s the answer you’ve been waiting for: Market crashes can be the best time to buy, because people are so panicked and focused on selling that they’re far more likely to make you a better deal. Robert and I witnessed this first-hand in 1991, when we moved to Phoenix, Ariz., and began buying up properties left and right. Amateur investors wanted out of their financial commitments so badly, that they were actually calling us and offering to pay us to take their properties off their hands. We happily agreed and definitely got the last laugh: We made so much money during that time, that we were able to retire by 1994.

Don’t listen to the haters

Although a crash is my favorite time to buy, the market’s immense pessimism makes it a tough time to do so. Your family and friends, possibly even your financial advisor, will think you’re absolutely crazy and try to prevent you from “making a big mistake.” I remember when we bought gold at $275 an ounce in the late 1990s. The so-called experts were eschewing gold in favor of high-tech and dot-com stocks back then. But we knew we were getting an incredible value. Today, with gold above $1,300 an ounce, I’d say we certainly made the right call. Thankfully we trusted our instincts and followed the strategy that has worked for us time and time again.

People will also be lined up warning that “investing is risky.” However, the important detail to note is that not everyone defines “investing” the same way. Many amateur investors bought into the real estate market when it was hot, prices were soaring, and they invested on the hope that home values would keep going up and up. They probably had plans to flip the property and make a quick $50k. Investing for the purpose of capital gains instead of cash flow is the very definition of risky.

Experienced investors, like Robert and I, understand the fundamentals of real estate investing. Investing doesn’t have to be a gamble. Good cash-flow investments are based on having a solid financial education. Knowing and following the fundamentals takes much of the risk out of investing. Sure, there’s always some element of risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.

Getting started

Let’s say the real estate market is on the verge of a nosedive, and you’re looking to jump in. I want to share a few pros and cons of real estate investing before you get started, so that you can be certain whether or not it’s for you.

The pros of real estate investing

  • Tax advantages

    1. Depreciation is an annual deduction that is a percentage of the value of the property that you can write off as an expense against revenues.

    2. Tax credits are available for low-income housing, the rehab of historical buildings, and certain other real estate investments. A tax credit is deducted directly from the tax you owe.

    3. In some countries, the gains from the sale of real estate can be postponed indefinitely as long as the proceeds are reinvested in other real estate.

  • Slow

    You usually have time to do your homework, make comparisons, analyze the numbers, and make the best investment decision for you.

  • Experience in real estate ownership

    If you can buy your home or personal residence, then you can get into investment real estate.

  • Home-based business

    Include your children in each rental property you purchase. You can learn together!

  • Leverage of OPM (Other People’s Money)

    You may pay 10%, 20%, 30% as a down payment, and a bank, lending institution, or private party provides the rest of the funding. You can own a $100,000 property for just $10,000 or $20,000.

As you get more seasoned and sophisticated, you can leverage OPM for the down payment as well.

  • Cash flow

    If the property is purchased and managed correctly, real estate can provide tremendous opportunities for cash flow.

  • Appreciation

    (an increase in the value of the property over time) - If you manage the property well, your rents will increase. When your rents increase (or your expenses go down), the value of the property appreciates. Cash flow and appreciation are two forms of revenue from rental properties.

  • Control

    You have control over the income, expenses, and debt of your properties.

  • Not as subject to the fluctuations of the markets

    A cash-flowing property is not subject to the daily ups and downs of the markets. It is typically a long-term play; this is why a down real estate market can actually be the best time to buy.

The cons of real estate investing

  • Time lag

    Offers, counters, appraisals, inspections, financing—they all take time.

  • Not liquid

    Liquidity is the ability to convert an asset to cash. You cannot get in and out of real estate quickly.

  • Difficult

    Of the four asset classes, real estate is the second most difficult (after business). You must also deal with vacancies and bad tenants at times.

  • Time-consuming

    It takes time to find a good deal. Properties must be managed on a daily basis.

So, will the market crash in 2022?

Though it’s not a certainty that the real estate market will crash in 2022, we are seeing a dip in housing prices.

According to Bankrate.com, the National Association of Realtors states that home sales fell almost 9% from May 2021 to May 2022. Additionally, we saw a decline in the median price of homes sold by realtors from March 2020 to July 2022.

Again, the market still seems “hot” according to experts, but the market is destined to fluctuate; and when the crash does come, we’ll be ready.

Don't be threatened

Robert and I continue to invest even though the threat of another bubble keeps looming. But we’re more like hibernating bears, waiting for the party to end. What are you going to do to increase your financial education today? Will you be ready—and more importantly, willing—to jump on investment opportunities when the next crash happens?

Original publish date: June 28, 2018

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