Owning Real Estate (primarily investment) during an serious economic crisis?

[ord33]

I have a question about owning real estate investment properties during a time of a serious economic crisis and would appreciate some insight, commentary, and opinions.

Here is my family's specific situation. The vast majority of my family's assets are the equity in real estate. At current prices the loans on the property put us in about a 50% equity position. We have 4 rental properties ranging from about $130,000 to $200,000 (all with existing loan amounts of about 50% of the property value) each of these rentals cash flow currently, but it is becoming much more difficult to find good tenants. We also own 5 small parcels of land (with no income) and we have loans of about 40% of their current value.

My question is what do we do? I am increasingly worried about an economic crisis. I definitely think the value of real estate will continue to drop. Everything seems so difficult to predict. With a serious economic crisis and the value of the dollar dropping drastically, we will experience hyper-inflation - would this cause the rents tenants pay to rise dramatically along with the cost of other goods? In this scenario, it would actually be of benefit because the difference between our gross rental income and our fixed rate loan(s) should increase, causing larger profits. On the other hand, the asset itself, the property, would be decreasing in value. This brings in another question. If cash is needed by our family this could end up being OK, but the net worth and long term outlook would probably be worse than if we just sold now and invested in gold/silver/other commodoties.

Nearly all of our assets are in real estate and hold very little in cash. Real estate could never go to "zero" like certain stocks or the value of the dollar, but we are hesitant in keeping so much of our assets in something without much liquidity, especially something that will likely lose value in the future.

So basically a couple questions:

What are your expectations for the cost of people to rent during a time of economic crisis? There are a couple ways of looking at it in my opinion. Hyper-inflation should cause rent prices to go up, but on the other hand other investors may be desperate to have good tenants and create more competition driving prices down and people may be cash strapped and not have the ability to pay higher rent prices even though it would be considered an essential. But also you have to figure in a substantial amount of people losing their homes, causing them to rent, so the demand could be high.

With home values going down is it better to just weather the storm or sell now and invest in something else immediately focused on a declining economy such as gold/silver or an ETF trying to capture the inverse of the S&P, DOW, etc. The problem with selling is all but one of the properties are 1031 exchanges, so the sale of the property and non-reinvestment in like property would cause a pretty large capital gain tax (but not as large as if Obama has his way!).

It is a tough call for us and I'm not sure if it should be or not. What are your opinions on holding investment property during these tough times?

(Out of the land we own, only one parcel is really large enough to sustain an active farm or a situation where someone could "live off the land" the others are just small subdivision lots. I am tempted to sell all the land with exception to the acreage (that brings in no income at all) and invest the money from those sales in something.

Thanks, for all of your opinions. I love reading the "Economic & Sound Money" forum!

[Kotin]

bump because this concerns me as well.

[FrankRep]

//

[misericordia]

if you can't make the payments or grow cash crops on the bare land lose it NOW.

[noxagol]

Sell it off ASAP. It will drop in price within months quite much and you will have no equity left.

[jonahtrainer]

We have liquidated most assets and moved the proceeds to some offshore jurisdiction with less political risk than the US and are sitting on the cash looking for good deals.

During a Deflationary Winter cash is EMPEROR (you really need to understand that article). But you still need some cash-flow as it is King. There may also be tax and estate planning considerations unique to your family as reasons for holding onto the properties.

If you hold onto the properties, which may be perfectly appropriate in your case, then I would recommend putting gold clauses, as legalized under 31 USC 5103-5118 (of course consult an attorney), into the rental agreements.

For example, a year ago we (a FLP so I am not the sole decision maker) were renegotiating a lease on one of our 40,000 square foot commercial office buildings. I wanted to have a gold clause in the contract but my other family members thought it wasn't worth the effort. Instead the rent escalation clauses are based upon CPI. So far our monthly rental income is down significantly (over 30%) in terms of gold ounces (I prepare financial statements in both US$ and goldgrams). Usually monthly I remind others, just to reinforce the point, how many ounces we would have received and how many we can purchase with the rent payment.

You want to open someone's eyes about what is going on just prepare the financial statements in gold. For example, take your parent's 401K's performance over the past 5 years and restate it in goldgrams. Here is an example.

[tmosley]

Real Estate is down a lot. It's probably not the time to sell. In times of economic downturn, rents tend to go up, as more property is forclosed on and people lose their homes, they either have to start renting or go homeless.

It depends on your market. Is there a glut of rental properties in your area? If so, you might not be able to get good renters who are willing to pay enough for you to cash flow your properties, in which case it would be a good idea to dump it and get into PM's. Once prices fall enough, then you can get back into real estate. My personal price point (set by Robert Kiyosaki of Rich Dad, Poor Dad fame) is about 500 ounces of silver or 10 ounce of gold for a middle of the road 3 bedroom home (this is a little under $10K in today's USD). In the event of total economic collapse, it might get even more affordable than that.

On the other hand, if you are in an area without a lot of rental properties, or where the local economy is doing well, you should hold your properties and simply keep doing what you are doing. Perhaps you could even pick up a few more distressed properties on the cheap.

Play your cards right, and you will outlast the storm, and you might even come out the other side as a land baron. Buy low, sell high (or rather, buy things when no-one else will touch them, and sell them when everyone is going crazy trying to get them). Be disciplined. If you can manage it, you'll be ahead of 99% of the people out there.

[rapidtrends]

IMO depends on your ability to weather the upcoming storm in terms of reserves, both cash and gold/silver. We are looking at another 3 to 5 years of real estate values going down imo. on the very conservative side, longer if we go into a deppression and incomes drop.

While people will always need a place to live, keep in mind that discretionary income is rapidly evaporating, and with the current Fannie and Freddie bailout this will only accelerate into the next few years. When large bailouts occur, that money finds its way into commodities, gas, food etc.

I have many clients right now selling most or all their property (globally, not just USA) and buying gold and silver bullion. While I am not telling or advising them to do so, when they ask my opinion of this I do not tell them its a bad idea, if you catch my drift.