Yes, I admit it. I am scared of a real estate bubble. But I\u2019m continuing to invest anyways. Here\u2019s why.\u00a0<\/span><\/p>\n Over the past several years, I\u2019ve heard the following claim consistently made by investors both in my home market of Denver and nationwide. It seems by far to have been (and continues to be) the most popular prediction made by investors, both experienced and novice:<\/span><\/p>\n \u201cThe market is probably going to [reset\/correct\/crash\/fall\/decline\/etc.] over the next 18 to 24 months.\u201d\u00a0<\/span><\/em><\/p>\n Pundits have predicted a price squeeze or bubble that was two years out on average\u00a0<\/span>every year<\/span><\/em>\u00a0for the last six. Don\u2019t believe me? Check out article after article from basically every major media outlet in the United States predicting a bubble at some point in the last eight years. I\u2019ve even compiled a sampling for your reading pleasure below:<\/span><\/p>\n 2013:<\/em><\/strong><\/p>\n 2014:<\/em><\/strong><\/p>\n 2015:<\/em><\/strong><\/p>\n 2016:<\/em><\/strong><\/p>\n 2017:<\/em><\/strong><\/p>\n 2018:<\/em><\/strong><\/p>\n 2019:<\/em><\/strong><\/p>\n 2020:<\/em><\/strong><\/p>\n 2021:\u00a0<\/em><\/strong><\/p>\n I could go on.<\/span><\/p>\n If you believe that a market crash is coming, you are either right\u2014or else you might be waiting a long time to get started in real estate investing. People were waiting for the next crash in 2013, 2014, 2015\u2026and every year since up until now.\u00a0<\/span><\/p>\n Oh, and of course, there were just as many equally well-written and well-researched opinions talking about the housing market\u2019s great health and future growth. These bullish opinions are just as prevalent today. I could easily compile a list of housing market bulls to complement the bears I posted above.<\/span><\/p>\n But the point is that I\u2019ve heard about an impending market crash throughout my (admittedly short) entire investing career.<\/span><\/p>\n Let me ask you this: When the next crash comes, will prices drop below 2013 levels? Below 2015 levels? Below 2017 levels? How much do those waiting for a crash stand to gain by waiting it out, and how much will those who own property today lose?<\/span><\/p>\n How low do prices have to go to eliminate the gains of the last eight years here in Denver? How about your city?<\/span><\/p>\n I don\u2019t believe that these pundits have any real advantage in predicting the market on you or me. The thing is, I don\u2019t think anybody knows when the market will crash. Nobody knows if that will happen this year, next year, the year after, in five years, or in 20.<\/span><\/p>\n To be clear, I\u2019m\u00a0<\/span>not<\/span><\/em>\u00a0saying that I think the market will continue to go up forever. And the truth is, I\u2019m scared. I\u2019m afraid of two things:<\/span><\/p>\n I\u2019m\u00a0<\/span>equally<\/span><\/em>\u00a0afraid of both of these things!<\/span><\/p>\n I\u2019m sure that if you have an opinion on the market over the short-to-medium-term (two to five years) future, you have great reasons. I bet you have a bunch of charts, just like those pundits. I\u2019ll bet that you can cite numbers that talk about supply, demand, interest rates, leverage ratios, employment, household income, the stock market, bitcoin, inflation, the trends of the Millennials, the trends of the Baby Boomers, or something else that\u2019s just as important as all of the above.<\/span><\/p>\n But I\u2019ll also bet that the fellow who is just as smart as you\u2014but has the exact opposite opinion\u2014has strong data behind his beliefs as well.<\/span><\/p>\n The fact of the matter is that if you believe that the market will crash, you could be right! You could also be wrong! Or (and in my opinion, the worst and saddest waste of being able to say \u201cI told you so!\u201d) you could be right and still lose.<\/span><\/p>\n The thing is that\u00a0<\/span>you don\u2019t know<\/span><\/em>\u00a0which of those metrics and factors will be the lever that actually moves the housing market over the next few years.<\/span><\/p>\n As I hope I\u2019ve demonstrated with the news articles above (and I can anecdotally tell you that I\u2019ve been part of discussions on BiggerPockets about this very topic since 2014), we hear this song and dance about impending crashes all the time as real estate investors.<\/span><\/p>\n It scared me when I was thinking about starting to invest in 2013, and it scared me in 2014 when I bought my first property. It scared me in 2015 as I held that first property, and it scared me in 2016 when I bought again. It scared me in 2017 as I held those two and bought a third. It\u2019s scared me as I\u2019ve bought more since 2017, and it scares me as I just closed on a property here in May.<\/span><\/p>\n One day, the doomsday prophecies\u00a0<\/span>will<\/span><\/em>\u00a0come true. These pundits (and you, if you agree that we are headed for a correction\/bubble burst) will be proven right eventually. But will that be this year? Next year? Five years? What if the correction comes in seven years? What if every metric that you can conceive of screams, \u201cbubble!\u201d and still prices climb? What if the bottom of the correction sees real estate prices and rents much higher than today\u2019s?<\/span><\/p>\n Those sitting out will be right, and they will still lose.<\/span><\/p>\n That is why I continue to invest\u2014even though I, too, fear a bubble. I believe that over a long time horizon, say 20 or 30 years, prices and rents in my market will appreciate at a rate equal to or greater than inflation. I believe that this will be the case regardless of whether I buy at the top or the bottom of the market today. And I believe that so long as I can ride the tides of market volatility and sustain possible cash flow, that I will not regret my decisions over time.<\/span><\/p>\n I also believe that I am incapable of accurately predicting when the market will boom and bust.<\/span><\/p>\n I could be wrong on these beliefs, and I constantly reassess the foundation upon which I construct my investing philosophy. But this is my philosophy and approach for now\u2014and the one I have acted on and plan to continue acting on until I find something better.<\/span><\/p>\n Given my overall take on investing, I believe that I can maintain a system of investing such that I give myself reasonable odds of winning financially in all three market scenarios:<\/span><\/p>\n This means a substantial cash cushion and substantial cash flow from existing properties. And I have no doubt that a sudden drop in equity will be hard. I try as best I can to mentally prepare for that ride and to learn from folks who have been through the 2007 recession.<\/span><\/p>\n Guess what? If you own no real estate, you cannot develop this reputation. I am not investing alongside someone in a recession or depression who has no experience, who owns no\u00a0<\/span>rental properties<\/span><\/a>, yet who tries to convince me that they\u2019ve known all along that the crash was coming. A very long parade of people have come through the BiggerPockets forums and every major news company in the country over the past 10 years predicting a crash.\u00a0<\/span><\/p>\n I am instead going to look for someone with years of experience and the confidence to say, \u201cSure, I\u2019ve lost some equity, but I couldn\u2019t care less! Every month, I achieve a 10%+\u00a0<\/span>cash-on-cash return<\/span><\/a>, and I\u2019m foaming at the mouth to buy as much as I can now that I see 20%+ cash-on-cash returns everywhere!\u201d<\/span><\/p>\n No one can predict when the market crash will happen, how severe it will be, or what its effects will be. For all we know, we might be in for a run of inflation for 3-5 years in the double digits. The Fed might have to spike interest rates to 10%, 15% or higher to combat it!\u00a0<\/span><\/p>\n If that happens, prices might fall in real estate, but rents might skyrocket. Meaning that buy and hold investors like me see a tremendous run-up in cash flow that we would not be able to realize if we were not in the market the whole time, but also realize an uncomfortably low rate of appreciation during that period.<\/span><\/p>\n To be clear, I am\u00a0<\/span>not\u00a0<\/span><\/em>predicting this or any event. I\u2019m just pointing out that this is one of many possibilities that could negate the effects of other market conditions and throw off the predictions of even the best pundits.<\/span><\/p>\n Now, all this said, I certainly do not believe that now is the time to overextend. I buy well within my means, with a rock solid personal financial foundation, and spend very little on my lifestyle. I maintain a high savings rate and have stashed away a large cash reserve. I also own a large stock portfolio (which, by the way, the pundits were\u00a0<\/span>finally<\/span><\/em>\u00a0right about \u2013 for the first time in 10 years, we are seeing a sustained drop in equities \u2013 I\u2019m continuing to buy my boring old index funds as I write this).<\/span><\/p>\n I do this because, just in case the pundits ARE right this time (and we are certainly 9 or so years closer to the next correction than we were in 2013!), I do not want to be caught with my pants down.<\/span><\/p>\n Related:<\/span><\/em><\/strong>\u00a0<\/span><\/em>3 Strategies I Use to Succeed in a Cooling Multifamily (or Any) Market<\/span><\/em><\/a><\/p>\n But I am not staying out of the market entirely, regardless of what may or may not be on the horizon. I\u2019m doing this because I believe the best policy is to adopt a conservative, winning formula and to apply it consistently. And that is what I\u2019ve done and plan to continue doing.<\/span><\/p>\n I do not believe that continuing to buy is any riskier for me than staying out of the market is. Although I tremble with every purchase.\u00a0<\/span><\/p>\n Should you wait for the next market crash? I don\u2019t know. Someday, the pundits will be right. I\u2019ve shared what I\u2019m doing and why, and I hope that perspective gives you something to think about.<\/span><\/p>\n I\u2019ll caution you, though. I think, personally, that it is unwise to invest a large, lump sum of money all at once in a real estate investment. And when I say large, I mean an amount that is more than one to three years of savings, given your current financial position.<\/span><\/p>\n If you do this, it means that you might be investing in a manner that is unsustainable for you. And if you are investing unsustainably, you risk losing a huge chunk of savings, perhaps all of your investment and then some, all in one go.<\/span><\/p>\n I believe my system has a good chance of working for me because I believe that I have an excellent probability of being able to buy similarly sized or larger properties year in and year out in my market and sustain a system of dollar cost averaging.<\/span><\/p>\n If I wasn\u2019t able to do that, I\u2019d be finding another market to invest in, developing another investment philosophy, or working on my personal financial position outside of real estate to the point where I thought I could\u00a0<\/span>sustain<\/span><\/em>\u00a0my approach in an up, down, or sideways market.<\/span><\/p>\n Modify your investing tactics\u2014not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with Recession-Proof Real Estate Investing<\/a><\/em>.<\/p>\n<\/div>\n<\/div>\n<\/div>\nHow Long Are You Willing to Wait for the Impending Market Crash?<\/h2>\n
\n
\n
A) You have the personal financial position and stability in your portfolio to make it through even serious market drops, particularly in rent.<\/h3>\n
B) You have the reputation to convince lenders and potentially other investors to invest alongside you when\/if bargains do begin popping up.<\/h3>\n
Why I\u2019m Not Investing Aggressively<\/h2>\n
Conclusion<\/h2>\n
![\"recession](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/04\/recession-proof-1.png\" "\\"Yes,")
<\/source><\/source><\/picture><\/figure>\nPrepare for a market shift<\/h3>\n