If you are basing your decision solely on equity position, that is speculation.
The fundamentals for supporting the property must work to survive downturns.
In other words, if the value of the property goes downward, you can still sustain a property if it positively cash flows. It helps if you had the foresight to buy at a discount.
The danger for many people is they will do a negative cash flow property and not be protected on the equity side. The reverse is also true. If equity is uncertain, you have to be able to make the debt service and have positive cash flow on top of it.
In any case, downturns are rare except for the highly dynamic markets in the coastal or NE cities. Most everywhere else in the U.S. don’t fall into that danger you speak of.
How to Handle Declining RE Market - Posted by Kevin - WA
Posted by Kevin - WA on April 11, 2006 at 21:58:39:
Hi,
I am not totally a newbie, but not an expert. I have been doing REI for 14 months, and have done about 8-9 deals.
My question relates to when the “market turns.” I keep hearing people talk about “the newbies will fall by the wayside when things get hard,” and “just wait for the interest rates to go up,” etc. What I am wondering is whether or not someone has a special report or website that I could research to figure out the best ways to profit and still do deals when “times are tough.” We are not to that point here in my market, but I just want to educate myself ahead of the curve.
For example, I would not want to take a Sub-2 and have my payment “adjust $300 per month” all of a sudden, and there is only $5K in equity. Or, how do you make money in foreclosures when the market is going down? Do I try to buy a $150K house for $105K, and hope that I can sell it before the equity erodes with the declining market? Do people typically move away from quick-turn strategies and just try to buy low and rent out?
Thanks for any insight. I am not trying to suggest that the sky is falling, I just want to recognize that things will not always be this “easy” (I am exaggerating here) and have some plans for how to adjust in the coming months / years.