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In a Real Estate Down Turn, Consider a House as a Savings Account
The inability to unload alligator properties (those with negative cash flow that if you don't feed, they eat you) makes this a financially draining situation in real estate for many investors who bought in the last couple of years.
Here's what I mean: the purchase of a house with cash-back-at-closing, albeit a negative cash flow, seemed like a good deal last year or the year before because the way the markets were going, a year-later sale or refinance seemed highly possible. Maybe even equity growth along the way.
However, in many markets, appreciation has not only screeched to a halt, values have dipped below what many owe on their properties. Rent only covers a portion of the expenses, as lowering house prices certainly don't mean that mortgages get lower, or taxes and insurance either. The cash back has run out and the investor becomes a serious don't-wanter. For those who didn't get cash back, the situation is even more dire.
What does this evaporation of paper worth mean?
Foreclosure, certainly for some. It's sad but may seem necessary to some people who cannot manage the payments. This is especially so for those who have been unable to lease their properties at all.
It could mean coming out of pocket to get out from under the house, especially those that were bought with 100% financing. According to some realtors, they can't get any interest from buyers unless sellers are willing to sell for 20% below market. Unfortunately, many sellers simply can't do that and cover what they owe.
For others, it means an uncomfortable yet doable waiting period for the market to turn around. This could take years. How many, is anyone's guess.
In the meantime, my suggestion is to think of the house as a savings account. If you can, keep feeding it as required; as much as it hurts, eat the costs to save your credit rating. You won't be able to sell it or refinance it anytime soon, but it will recoup value over time. Just as there is a penalty for early withdrawal with certain savings/investing plans, so there is now with many properties.
Gone are the days of house as ATM. Can't just pull money out of it like before. There may be none to pull. At least, in highly speculative/overbuilt markets. Whatever liquidity real estate used to have, is just not applicable to purchases made in the last year. That kind of appreciation is under water.
The reality is that people keep being born, will keep buying houses, and there is of course limited space and land available. So oversaturated markets will turn around -- eventually. That's small comfort to investors in these times, when there is a huge amount of oversaturation, and builders just keep building.
Don't set yourself up for having to feed the alligators for however long it takes this cycle to turn...if you haven't already, don't. Consider those properties that will pay for themselves no matter what the markets do.
I'm Shannon Gunderson and I'm a professional real estate investor, artist, writer, and more. In over two years of being "unemployed", my partner and I have bought more houses than we ever dreamed of. We're creating the life we always wanted and will never again be at the mercy of a paycheck. We love to help teach what we do, which is why I write on our blog. I love to get feedback, and would be happy to hear from you!
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