Where and How to Buy Investment Properties after Losing Everything in the 2008 Recession

So Shane writes in and says, hi Marco. I found your podcast a couple of weeks ago, and I have been listening for hours each day while I am currently building our home.

I am in my fifties and my wife and I have been married for 28 years, and we feel like we have made sound investments in the past 12 years since we lost our home and all of our investments during the 2008 recession. Well, I’m very sorry to hear that. I have so many questions about what to do with our current and future investments that we are thinking about diving into. Since listening to you and your guests on your very informative show, I’ve already purchased three of the books you’ve recommended. I’m trying to learn as much as possible so as to not make the same mistakes as before 2008. I’m a general contractor and know how to do pretty much anything on a home, whether new or an existing remodel. To flip, we are debt-free and wanted to buy some homes or multi-unit housing to rent out with some money we are receiving from an investment using a 1031 exchange, we will have two homes as our personal property and are going to do nightly rentals with the existing home we currently live in after we finish our other home.

Okay, interesting idea. I have a company that will take care of the 1031 exchange, but my wife and I are wondering where to buy real estate and do we buy multiple inexpensive properties or just pay cash for one property for rentals? I assume you mean a more expensive property versus multiple inexpensive properties. And then Shane goes on to say, do we buy near us or should we buy an existing home or multiplex somewhere more inexpensive than where we live? Do we apply for a HELOC, like a home equity line of credit on our personal property and buy more homes or just try to stay debt-free with our home? We know we only have 180 days to transfer it to another property and he’s referring to the 1031 exchange here to another property and didn’t want to go into more debt unless you think it would be beneficial to do so for our retirement.

My vivid vision is I would like to purchase as many rental properties as I can in the next 10 years so we can retire and follow our vivid vision and do service projects for people that can’t help themselves even more than we already do. Now, I feel like I can’t buy as many rental properties as I would like to unless we take on debt for the properties. I have disliked debt since 2008 and never want to lose my portfolio again with an exclamation mark. It made us strong and resilient and taught us to pay cash for everything, but we are up for suggestions now that we can invest in other things. Thank you, Shane.

Great email and thank you for the questions, Shane, this is great. So you’ve got a lot to unpack in here, so let me do my best to address and answer as much as I can.

So first and foremost, thank you for being such a loyal listener that it’s a huge compliment, very big compliment. I really appreciate that. Glad you’re getting a lot of content and value from the show. I try and put as much as I can out there and I try and bring in, you know, a wide variety of guests to educate on a variety of different topics. So thank you for being a loyal listener, I appreciate that. And I’m also sorry to hear about your losses back from 2008 and what we ultimately ended up calling the Great Recession. A lot of people, and I’m talking millions of people were affected directly and indirectly from that. A lot of people lost their homes, their savings, their rental properties or investment properties as they called them, even though many of them were not investment or rental properties. They were speculative plays, but I don’t know what you did.

But anyway, I’m sorry to hear about those losses back in 2008. But you know, it seems like there’s always a silver lining. Anytime there’s a, you know, a kick in the gut, a downturn, a recession, a pullback, whatever you want to call it, it seems like more often than not we come out of it better, stronger with a better education, more wisdom. And at least that’s the way I look at it and and that’s what I try and do as well. So I’m glad that you’re you’ve come out a lot better and stronger from it. So regarding the books, I’m glad you’re reading some of the book recommendations I made. There are plenty of books out there, especially on the topic of real estate and investing in general, but real estate, there’s just hundreds of them. Not all of them are great. Some of them are good, some of them are great, many of them are soso.

It’s a lot of rehashing of the same information. But you know what, it’s not like there’s a a new thing every month or every year when it comes to real estate investing. The principles and the strategies pretty much stay the same. Tactics might change from time to time, and you adapt your strategy based on the environment. Are we in a recession, borderline depression? Are interest rates high or low? Is access to capital easy? What is the availability of inventory? What is the affordability in the housing market like? There’s so many variables and things ebb and flow all the time, but strategies and principles more or less stay the same all the time. Tactics will change and, and you adapt as the environment changes. Now you asked some really good questions here about your wife and you wondering where to buy real estate. Well, this is a darn good question.

It’s kind of the number one question that you know, investors ask all the time. And also, you know, should you buy inexpensive property? Sometimes people refer to those as cheap properties or should you pay cash or should you leverage your investment? Well, let’s talk about these things and break it down a little bit. I’ve, I’ve gone into great detail in previous episodes over the years about market research, market types, market drivers, location neighborhoods, et cetera, leveraging and financing and all that good stuff. So obviously when you choose a market, you want to pick a market that’s gonna make the most sense, I’ve said for about 20 years now, live where you want invest where it makes sense. A lot of investors seem to think that they should be investing in their own market, their own backyard because they’re familiar with it, but that doesn’t make it a good investment.

That doesn’t make the market favorable. You wanna invest in a market that’s gonna give you the best overall returns in terms of cash flows and price appreciation, which you can’t control and is not always predictable. But you can look at the variables and the factors and the drivers that drive the market that will lead to strong appreciation potential. So you do your market research, I basically classify markets as three basic categories or general categories. I refer them as tier one, two and three markets. Tier ones are the big metro areas like LA and New York. Of course those are gonna be divided up into submarkets and even smaller submarkets within those. And so there could be very, very good and attractive submarkets within a larger metro area. But in general terms, you wanna look at a market to see if the numbers make sense. In general, is the market healthy? Is there inventory? Is there product to choose from? Whether it’s new construction or whether there’s a good resale market. Is there enough inventory to choose from within the neighborhoods that you ultimately will be buying in? So tier one markets, you know, you really have to break it down and be more granular. Tier two markets are typically my favorite. Those are the mid-size markets. You know, they’re generally speaking a hundred, 200,000 to possibly three, four, 500,000 population as a whole. But places like Kansas City, Missouri, Indianapolis, Memphis, Tennessee, Jacksonville, Florida, these are all markets that I refer to as tier two. And then, you know, tertiary markets are the smaller bedroom communities. They’re further out, they’re smaller markets. So those are the markets that also make for good investments as long as there’s a feeder market, meaning that they’re close to or relatively close to a larger market that, you know, offers all the amenities and shopping and everything else that’s needed by the people who live in those smaller markets.

Otherwise, if it’s too small of a market, it could be very cyclical, there could be a lot of noise, there could be a lot of volatility in that market because they’re often driven by one or two industries or types of jobs. And if there’s something that impacts that industry like oil and gas for example, it can have a huge impact or a huge effect on that market. So just keep that in mind. So do your market research. You know, there are different market types and then also there are markets that tend to be very cyclical in nature where prices go up and down fairly quickly, they’re aggressive markets. And then there’s also markets that are more subtle, I call them linear markets. They still appreciate, they still have cycles, but they’re not as wildly aggressive as a, a more cyclical type of market. And you know, of course every market has its own drivers, you know, what’s driving that market?

And often it’s, it comes down to jobs and job growth. You know, are there a lot of jobs in that market? Is there job growth? Are people moving there because there are employment opportunities for the opportunity to make more money? That’s usually a major factor, if not the number one factor that drives people into markets. So if you don’t have jobs, people are gonna ultimately leave at some point, you know, in, in search of employment. So look at market drivers. The two biggest things I like to look at or consider in a market are the job environment. The job market, is it growing and are there jobs? And secondly, population growth. You know, a long-term population growth is good for a real estate market. It’s good for housing. A long-term population decline is gonna be bad for housing. And Detroit is a great example of this where there’s been long-term in terms of decades of population, either growth or decline.

And so, you know, it was a, a mega market many decades ago. It was kind of like the, almost like the epicenter of the world because it was the automotive industry and then people were moving out decade after decade. And it, it just became almost like a ghost town. There were so many neighborhoods and areas that were filled with vacant homes. So it’s got its pros and cons, but you know, that’s not a good thing if you’re an investor. Now, you made a comment about price. Should you buy inexpensive properties? You know, I don’t think you should be looking at price in isolation. And I’ve made the mistake long ago at buying when I first went essentially full-time in real estate investing, buying cheap homes or cheaper homes. And that basically pushed me into areas and neighborhoods that I would call less desirable, sketchy, questionable, sometimes scary.

These are generally speaking what I’ll refer to as a C class neighborhood and sometimes a D class neighborhood, which is, you know, some would argue a war zone. I like stay in the B class neighborhoods, B, B plus A minus even an A, but that’s more expensive. The numbers don’t look as sexy in the short term, but you know, they tend to have stronger appreciation potential long term, but cheaper is not better. And what happens is if you’re buying cheaper properties, they’re often in sketchier or less desirable neighborhoods, what I’ll call C class neighborhoods. And your tenant demographic is gonna be different. You have to just learn to accept the type of customer you’re gonna have that demographic. The amenities in those areas are gonna be different. The tenant turnover is gonna be different. The care and attention to your property by those tenants, that tenant class is gonna be different than what you might find or probably will find in a class neighborhoods.

You know, just think about where you live. Break up the city into a, B and C class neighborhoods and you know, think about what’s there, what the neighborhoods look like, the streets look like, what the basic demographic is of the people who live there. You know, how they live, what they drive, what the lawn looks like, our properties well groomed and taken care of. All that kind of stuff. You know, neighborhoods play a significant role and I put a lot of weight in the neighborhood, not just the market, but the neighborhood specifically. And you know, one of my 10 rules for successful real estate investing is to take a top down approach. That means you don’t look at the property first, you look at the market, you look at the overall market, maybe the metro area, then you look at the market, then you look at a submarket and then you work your way down to the neighborhoods that you want to invest in, where the numbers make sense, there’s inventory, the numbers pencil out and it’s the type of demographic you want to deal with as a a landlord.

So you just have to, you know, break it down. And it’s not that hard. The information is out there, it’s plenty of it. A lot of it’s free. You know, a search engines like Google will help you find a lot of the information you’re looking for. In fact, on our website there’s tons of it. Our, we post every single day on our blog at noradarealestate.com. So just go to noradarealestate.com and go to the blog and do a search for the, the city or the metro you’re looking for. You’ll find all kinds of great information. Now to your comment about, you know, buying cash. You know, buying all cash is not always the best thing to do. You know, if you’re not trying to grow and scale your portfolio as quickly as you can, then leverage is not that important to you. You know, you’ll just have a debt free property or properties and it’ll pretty much be all cash flow.

You know, property taxes is insurance, property tax, insurance and your property management is what you’re gonna be paying for. There’s no debt service. So you’re gonna maximize your cash flow at that point. And then as time goes on, if your rents increase faster than your expenses, your cash flows are gonna increase even more. But if you looking to grow and scale, you know, you’re gonna have to look at using leverage. And it doesn’t have to be maximum leverage At 80% you could do 75, 70% even less. You don’t have to maximize fully, but leverage is definitely gonna help you grow your portfolio faster and scale that portfolio quicker. Especially if you have aggressive goals or you’re on a timeline to build a portfolio. So I’m thinking here that you know, when it comes to leverage and mortgage financing, I consider that to be good debt.

You know, there’s good debt, bad debt, bad debt is consumer debt. It’s things that are Due Dads, as Robert Kiyosaki would say, you know, it’s money being spent on stuff that really doesn’t generate income or a return. It’s questionable, even with art and collectibles, you know, maybe that’s an investment in some people’s eyes, but if you’re taking on debt, make sure that you have the ability to repay that debt there, that you can service the debt in some way, shape or form. And real estate is great for this. ’cause When you buy real estate the right way, you can service the debt and all the expenses on the property leaving you something left over called cashflow or positive cashflow. And that’s the income from the property. And sometimes that doesn’t happen in the first year or two, especially with new construction. It might be very low, maybe it doesn’t look all that great on paper initially, but it does grow over time, over the years as your expenses are relatively fixed, your debt services definitely fixed, but your rents will go up over time.

So keep in mind that there’s good debt and bad debt. Try and focus your investments using good debt. That’s the best way to go about it. And then, you know, as far as what happened to you back in 2008, you know, that sucks. You lost some properties in your portfolio and, but that created fear in a lot of people. And you have to be mindful and conscious of the fact that you are, you know, coming out of that 2008 recession with your tail between your legs. But don’t let that fear drive your decisions. Avoid the fear that you have from 2008 in making good decisions. Don’t let it hold you back. I guess that’s my point is don’t let that fear from the loss in 2008. The best thing to do is let that fear drive you forward. Look at the mistakes you’ve made, why did those mistakes happen?

And don’t repeat those same mistakes. And often what it was back then is a lot of people were speculating on real estate financing and leveraging it to as much as they could get 80% or more of the purchase price. And they couldn’t rent it. They couldn’t service the debt. They were hoping to flip it, they couldn’t flip it, and now they couldn’t afford it. And then the real estate market turned and property values went down and now all of a sudden their mortgage financing was more than what the property was worth. So they couldn’t even sell the property, let alone carry it. And, you know, that was purely a speculative play. That is not something I would argue is or was, you know, a logical, rational investment. But you know, leverage will get you there faster. It allows you to take your investment capital and leverage it up to as much as five to one, which means that you could put 20% down on a property and borrow the other 80% and have a hundred percent of the benefits even though you’re only investing 20% of the purchase price.

Which is a beautiful thing about real estate. It’s, it’s a powerful thing. So use that leverage wisely. It can be a very, very powerful tool. Yes, it’s a two-edged sword, but it can be a very, very powerful tool. So again, none of this today is financial advice. Use debt responsibly, make your investment decisions wisely, and learn to be market agnostic. Don’t be married to any specific market. Choose your markets based on where your investment dollars will go the furthest. And then I guess in wrapping up, you mentioned a HELOC. You know, a HELOC can be a great powerful tool ’cause you can get very inexpensive debt financing on your property that you could use like as if it was a checkbook. You just use it as you need it. But you have to just run the numbers. It’s all math. You have to just run the numbers and see one if you can service the debt on that home equity line of credit and how long you need to service that debt before you have to pay it back and how you’re gonna be able to do that.

And with real estate often it means that you have enough cash flow to service the debt over a period of time, three years, five years, seven years, maybe as much as 10 years. But at some point you’re gonna refinance that property that you used the HELOC to purchase as the down payment to pay off the HELOC. So you’ll refinance it and establish a new first mortgage on that property that, in that, in the course of that refinance, you’re gonna pay off the home equity line of credit. Now you’re, you know, back to having one mortgage, you’ve essentially reset the clock if you want to and then just continue forward. So the HELOC can help you acquire more property faster. Just have a plan, which doesn’t always work out exactly the way you want it to, but have a plan that you can refinance it. Here’s the variable that you won’t be able to predict where mortgage rates or interest rates will be in three years, five years, seven years, 10 years from now.

When it comes time for you to pull the trigger on refinancing and paying that HELOC off. If you have enough cashflow, you could certainly pay the HELOC down and it would be an easier thing to refinance down the road. So, you know, these are just things that you can forecast, you know, on paper or in a spreadsheet and just make some assumptions, but see how it’s gonna look three years, five years, seven years down the road with reasonable appreciation rates and you know, reasonable assumptions for mortgage rates when it comes time to refinance.

So Shane, a lot of great stuff here, a lot of great questions. I’m not even sure what to title this particular episode yet because there’s just a lot of good stuff here. But thank you for submitting your question. And anybody listening to this who has a question about real estate or investing or finance or anything, whatever it may be, even a personal question, just send it over to me.

You can go to passiverealestateinvesting.com and submit your question. There’s a link or a button there. It says Ask Marco. Just send that in. I will see that. And I’ll do my best to answer it on a, on another episode here. Alright, well remember to subscribe if you haven’t done so already, share the show with other friends, family, like-minded individuals, leave us a rating and review on iTunes. I greatly appreciate all the positive comments and the five star reviews. It means a lot to me. And that is it for today. So thank you for listening and I will see you all on our next episode.