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Will The Housing Market Crash Soon?
This question seems to be on everyone’s mind these days… Now I don’t have a crystal ball, but I do have a personal history involving the subject.
Here is what I do know…
Real estate has a market cycle that is driven not only by supply and demand, but also by human emotion.
If you have been an investor for some time you have experienced these ranges of emotions. Whether it’s the stock market or any market, our emotions are what ultimately drive our decisions.
In my case, I’m in the “Thrill” phase this time around. As of September 2018, I have sold all the rental properties that I purchased during the down market for a hefty profit. My investors have been patting me on the back telling me I’m brilliant. However, I don’t have to look too far into the past to see I am not…
I started my real estate career in 1999. I purchased my first home in 2000 and brought two of my college roommates with me (see photo of 1564 Forrest Ave). I purchased the home for $82,000 and had my roommates cover the mortgage at only $350 a month rent each. I covered everything else but food and beer. Two years later I sold the home for $110,000. I was hooked.
For the next six years, I did anything I could to buy four to five-bedroom homes in Grand Rapids, so I could rent them to college students. At that time financing was easy and FHA allowed up to ten mortgages. I quickly surpassed that number by fixing up properties, renting them to college students, and then refinancing. The rent payments were used to offset my debt to income ratios and Fulton Management Company was born.
The first part of my brilliant strategy (or tragedy might be more appropriate) was to buy properties fast with cash in order to beat out the competition. To be able to do that you need cash, which I didn’t have… The plan was to use short term, one year or less financing with hard money lenders. They charged 4% of the loan amount in upfront costs and then interest rate at 12% for one year. I know… really dumb. But at the time all I had seen was properties going up and everyone was on the same bandwagon. This was the Excitementphase of the real estate cycle.
I thought I was smart because all I was looking at was my cash on cash return. If I didn’t put up any money other than a little rehab cost it came out to a 200-1000% profit when I sold it. I’m brilliant…right?
The second part of my purchasing strategy was a loan called an 80/20. Because I didn’t have any real money, I would do an 80% first mortgage and a 20% second. The plan was to refinance out to a lower interest rate, which worked for a while. However, eventually I was stuck with several high interest loans. These loans were to the tune of about a 11.5% second mortgage and a 6.5% first mortgage.
Then something I didn’t account for happened. From 2007-2009, rents went down, property values plummeted, and financing dried up. Now I’ve gone from thinking I’m brilliant to the Panic and Desperation phase. To compound the problem, I moved two hours away to Metro Detroit to be closer to my fiancé about a year before. On top of that, I purchased a 975sqft bungalow for $205K – the smallest property I owned. At 6’7” tall I couldn’t even do laundry in the basement without hitting my head constantly.
Can’t get worse… right? Then I received a call from my mom and pop property manager that she quit and was sending me the remaining leases. If you have ever tried renting to college students in August, it’s probably too late. I scrambled to get bodies in the properties before winter came. Otherwise I would be paying to heat vacant homes and a mortgage with no rent.
I was 29 years old with $3.7M dollars in debt secured by property that was worth maybe $2M. It was the middle of 2009, and at this point I had been holding on somehow for over two years and paying the difference from the rents and repairs. I was making a meager living working for a company as a multi-family broker. However, the apartment market was hit so severely that what sales that did take place were a fraction of what they were selling only a year before. Meanwhile, every news article was saying that the world was ending, and we should all just dig a hole and bury ourselves.
It put an emotional toll on me. I went three days without sleep once. That final night I did fall asleep and in the middle of the night I jumped over my wife in bed and ran out of the house during a sleepwalk night terror. I woke up outside of my house standing at a stop sign near my home. That’s when I realized the situation wasn’t getting better, and I needed to do something.
You might think I lost it all and filed for bankruptcy. But you would be wrong. I did lose my life’s savings and I did do a short sale on the 975sqft home and the one I lived in before in Grand Rapids. Additionally, I had seven properties that I purchased on land contract that I gave back to the owner. Even though I never missed a payment, he was still happy to do it. I had rehabbed all the homes and put in new carpet and refinished the hardwood floors. From the time I purchased them I increased rent by 25% and now he had a property manager. Remember the mom and pop property manager I trained and taught the business? Well that is where she went, to help him. His income from the properties doubled and we went our separate ways. I heard from my Realtor in Grand Rapids that he just sold in 2018 those properties for more than double what I was into them. Always great to hear.
What about the hard money lenders? It took me three years to sell those properties and I made every payment. I was so good about making the payments that they offered me more money to do more deals during the downturn. This saved me and allowed me to partner with my doctor friend. Together he and his father helped me rebuild my rental business while we came out of the Depression phase and entered the Hope and Optimism phase.
Today we are all a lot richer. And I am a lot wiser… I don’t over leverage and in fact my current distressed mortgage investing business uses no leverage.
I am telling you this story because emotions can get the best of us. Investing is 50% managing your emotions and 50% knowing what you’re doing. After 20 years in real estate I know what I’m doing, and I know the end of boom cycle is coming.
In my opinion, it’s hard not to see that we are starting to leave the Euphoria phase and starting to see Anxiety in the market. Its time to build the war chest and I know exactly what to do this time around.
We are prepared to capitalize on the next downturn and I want as many qualified investors I can find to join me. If you missed the opportunities during the last recession, now is the time to position yourself for what is to come.
Kyle Zimpleman- Roller Coaster Ride through the Great Recession