The economic downturn of 2008 was mostly inspired by the crash of the housing market. Everyone was buying houses they couldn’t afford, paying interest-only, and virtually everyone got approved, until everything came crashing down seemingly pretty quickly. Foreclosures dominated marketplace more than five years afterward until there was finally an end in sight, and homes began to regain their value. Now the bubble appears to be reaching its peak point again in 2018. Homes are being sold well above their asking price in areas like California, Colorado, and Washington. Demand for homes is outpacing the supply, and so prices are through the roof. But how do you know if this is the precursor to an economic downturn, or just people able to afford pricier homes?
Is This a Real Estate Bubble?
When you hear the word ‘bubble’ used in the context of real estate, it means unrealistic and unsustainable growth. The US experienced this in 2005 when lenders were giving out sub-prime mortgages to people who could not afford to pay back the money they borrowed. The market was flooded with foreclosures when the loans reset, which further dropped the market. Most real estate agents and lenders are much more cautious about the terms of the loans their clients receive. Home mortgage rates are fixed over thirty years, and rates do not adjust. The loan amount itself is based on the buyer's income. While the outward appearance doesn't seem to be a bubble, other external factors could cause a real estate market collapse. An overall economic recession is one of the main factors in whether the market performs well.
Using the BRRRR Method
Real estate owners who are looking to make the most of their properties in a potential economic downturn should use the BRRRR method. That stands for Buy, Rehab, Rent, Refinance, Repeat. After buying a fixer-upper and renting it out and refinancing your loan for the initial costs, you may discover that you only had a few thousand left in the property, rather than a massive up-front sum.
Saving on Insurance
Another good way to look at cost-saving measures in a real estate downturn is shopping around for insurance. The cost of insuring your house can change dramatically based on factors like the condition of your home and the rating of the neighborhood. You should look into websites where you can compare home insurance online to see if there is money that can be saved there.
Buy Cash Flow Properties
Much of the real estate economy is based on renting. Properties with positive cash flow are worth more because they bring in more income than they cost to own. These are the best properties to own in an economic downturn because they bring in money regardless of whether or not the value of the house changes. Properties that can be rented for 1% of the purchase price each month are a good investment for a positive cash flow home. Despite that rule, try to stick to neighborhoods with a good rating.
