Real Estate Investing Lessons From the Great Recession

Real estate investing can be just as challenging as it can be rewarding at times, but most investors who have done it would probably say that the benefits exceed the risks. The Great Recession was a time of significant disturbance within the housing market, both for homeowners and real estate investors alike.

During and in the years after the Great Recession, more than 9 million families lost their homes to short sale or foreclosure. The effects of the recession continued as late as 2014—seven years after the timeframe most people associate with the Great Recession. Since the recession especially hit the housing industry hard, real estate investors experienced major difficulties, with many losing all or most of their properties.

financial crisis lessons learned

Real Estate Investing During the Great Recession

Forbes contributor Scott Jelinek was one of those who lost everything, but today, he is thankful for the real estate investing lessons he learned by weathering the Great Recession. He shared four of those lessons in a post for the news site.

Jelinek lost most of his properties and all of his cash when the market crashed in 2007. Despite that, he tells new investors that the Great Recession was the best thing that ever happened to him. He even feels bad about who entered the real estate investing market after the crash because they won’t learn the lessons he learned until there is another major crash.

Story of an Investor

He started his property empire small, buying houses one after a time with a little bit of money as a down payment. He had 84 houses and $1 million in cash by 2007 by following the BRRR method, which is bought, rehab, refinance and repeat. Real estate investing was really working for him.

When the market crashed in 2007, his income dried up. About 30% to 40% of the houses he owned were occupied, but the tenants weren’t paying rent because they couldn’t afford to do so. He still owed approximately 80% of the value of the properties, but he suddenly was underwater on all of them as the value of those properties was sliced in half overnight. He lost millions of dollars in equity and owed much more than what the properties were worth.

Even though he spent all the cash he had just to get by, he still lost 50 of the houses he owned. He said he did precisely what experts said to do by leveraging his properties, but then his business crumbled. And yet, he learned a lot about real estate investing from the market crash that occurred to kick off the Great Recession.

Beware of Leverage and Debt

Perhaps the most important lesson he learned was to ignore the advice of so-called “real estate moguls” who advise new investors to borrow as much money as they can so they could buy as many properties as they can. Investors who do this basically just amass an empire that the banks own.

Jelinek advises new investors to borrow as little as they can and pay whatever debt they do accrue off as quickly as possible. He said the goal should be to own the property free and clear, which means growing more slowly than would be possible with high leverage, but in a much safer way.

He added that “good” debt doesn’t actually exist. Although loans are a necessary evil, they should be repaid as quickly as possible because until they are paid off, any work done is done for the lender and not for yourself.

The same holds true of personal debt. He advises real estate investors to avoid taking on personal debt, including everything from auto loans to credit card balances and personal loans. He notes that finding success requires you to live within your means, which may mean buying a less expensive car so you can pay it off quickly or even immediately with cash.

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Hold Plenty of Cash in Reserve

Just as important as avoiding debt is the need to hold plenty of cash reserves. After all, a recession isn’t the only way a real estate investing business can shift from profitable to unprofitable. Sometimes all it takes is not choosing tenants wisely, a series of bad luck and costly repairs, a lawsuit, or a divorce.

Having a significant amount of cash reserves will enable you to weather virtually any storm, including both personal issues and market-related problems.

Take Advantage of Downturns

Finally, he advises real estate investors to see economic downturns as opportunities rather than serious problems to be managed or avoided. When the housing market crashes, equity will shrink suddenly, but it also means that the prices of properties will also shrink, making an economic downturn an excellent time to accumulate more properties.

Property prices plunged in 2007, although rents remained high, which meant good things for real estate investors. Because of how leveraged most investors were, much of the competition in the market was wiped out, which made the situation even better for the investors who survived the crash. A market crash can present a real opportunity for investors who have a significant amount of cash held in reserve with very little debt and are ready to buy up more properties when prices crash.

Summing up the Goal of Real Estate Investing

Jelinek feels that because of all the real estate investing lessons from the Great Recession, he is now freer than ever in his pursuits. He isn’t weighed down by debt or obligations to banks or other debts, and he learned that freedom, not money, is the ultimate goal for real estate investing. He noted that having a big cash flow really doesn’t matter when you have bills that are even greater than your cash flow. Additionally, he believes it’s better to own 10 houses without any debt on them than 100 houses that the bank can repossess the next day.

He also noted that most experts on real estate investing don’t teach the same things. They promote high debt and high growth over low debt and low growth. However, he also said that most investors aren’t thankful for the market crash.

Sabine Ghali

Sabine Ghali

Helping real estate investors build wealth over time

Sabine Ghali, Managing Director at Buttonwood Property Management, Award Winning Real Estate Broker and an Entrepreneur at heart. Sabine is on a mission to help investors create real estate wealth over time in the Greater Toronto Area. Sabine is published in a number of media outlets, including Toronto Star, The Globe and Mail, Toronto Sun, Entrepreneur, Forbes, and Gulf News, among many others.