Am I about to lose everything?

What's up you guys, it's Graham here. So, if you're not already aware, I read all of the comments—literally every single one of them without fail—because I don't have a life. So, if you comment something, I read it.

Now, part of the reason that I do this is that it allows me to shape my upcoming videos around any recurring topics or comments that keep coming up. Sometimes, I'll be able to see if there's demand for a certain discussion, or if something needs to be explained a little bit further, or if people just want to know more.

And wow, I mean, this is probably one of those questions I need to address because I've got it, no less than a few hundred times. This is what it is: when the real estate market drops, you're going to lose everything. This is such a recurring comment that people were even posting about this on Reddit and having full-blown discussions about this, which is pretty interesting because I read Reddit all the time.

So, let's go ahead and directly address this concern, not only from my own perspective but for anyone who's interested in investing in real estate, leveraging their money, and wanting to build their wealth. Because let's be real here, the market will drop at some point. I'm 100% sure of that. I'm 100% sure the market can't just keep going up indefinitely.

So, in a way, I do see this as a very legitimate question and concern that really deserves its own sincere, honest answer as to what will happen when the market drops. And also, what will happen if you don't smash that like button? If you haven't done that already, make sure to always do that. Just destroy the like button! There we go, thank you.

Now, just to bring you guys up to speed here, I started working in real estate in the spring of 2008. Arguably, I mean that was probably the worst time to possibly start in real estate. Real estate had pretty much just peaked in value and was starting to decline. The stock market was just about to post a nearly 40% loss. No one was buying real estate, and foreclosures were up a record 81%.

At that time, because very few people were buying homes, I pretty much built my entire career and made money by helping people rent homes instead. There were so many sellers out there who over-leveraged on their homes, and then they lost their income and couldn't afford to live there anymore, and they couldn't afford to sell it either because they owed more than the home was worth. So pretty much, they had no other choice other than to rent their home out instead.

And it's about three and a half years of working 12 to 14 hours a day every single day, mostly helping renters go and find homes just to save up enough money to start investing in real estate. Then between late 2011 and mid-2012, I ended up buying three properties in cash. At the time, people were telling me that was a massive mistake, that real estate was going to get worse, that it was never going to recover, and I should save my money instead and just buy gold.

But I didn't listen to any of that. I knew it was a good deal, and looking back in hindsight, that just happened to be the very bottom of the real estate market. As soon as I jumped in, obviously, since then prices have picked back up. All of those renters ended up becoming buyers, and as a real estate agent, I started making way more money.

The more money I made, the more I just funneled it all back into buying more real estate. Then I kept saving and saving and saving. I bought a house in West Los Angeles in 2016. I bought another duplex in mid-city in 2017. I bought another duplex in 2018, also in mid-city. Then I made the video about how I did a cash-out refinance of one of those properties, and another follow-up video about why I was $1.75 million in debt, explaining all of that.

And then people got even more triggered and told me that I was about to lose everything if the real estate market drops. So here I am today explaining all of it. Let's go ahead and answer that question: what will happen if the real estate market drops?

I don't doubt whatsoever that the market will drop in price. It has to. I've been saying it from the very beginning since I started this channel about two and a half years ago that it is unsustainable for real estate prices just to continue going up five to fifteen percent every single year indefinitely. We're naturally going to go through phases of high demand where prices go up; people capitalize on that momentum.

Demand soon tapers off, people over-leverage themselves and have to sell. Too much selling drops the market even further. Then that inventory is slowly bought up at low prices, demand begins to come back, and prices begin to increase again. Real estate prices are very much cyclical, so to say that prices just can't keep going up indefinitely is very, very accurate, and I agree with the sentiment.

So that then begs the question: what happens when the real estate market does drop, and what's realistic to expect? Now, we can look back to just recently because arguably 2008 was really one of the worst real-estate market price drops we have seen since the Great Depression of 1929. During that time, real estate on average dropped about 30% in value, though obviously some areas got hit much harder than this and some areas much less.

But let's just take the average and say the market is going to be going down 30%. So what's gonna happen? And what's gonna happen to me? Well, the answer is pretty boring because it's relatively nothing. Happens. This mainly has to do with the style of real estate investing that I practice and talk about on the channel, and that is known as the B.R.R.R.R. method.

For me, this is all it is: you save up between 20 and 25 percent as a down payment to go and buy real estate. You then find and buy a property that's under market value, which is pretty much just like getting it at a discount. You then go and renovate it, which will then further increase its value. You then go and rent it out to cover all of your expenses plus some profit.

You can then go and refinance to get your money back if applicable and if it makes sense at the time. And then either way, you just continue repeating the process over and over and over again. This strategy really relies most on cash flow, forced appreciation, and most importantly, patience, which is what a lot of people fail to realize.

Really, the market value of a property just becomes this arbitrary number that doesn't make any difference whatsoever for any other reason besides refinancing to get your money back if it makes sense at the time. And if it does not make sense or values aren't up to your expectations, then you don't refinance. You keep everything the exact same, and you keep your money in the property.

Using this strategy also means that you can buy a property significantly below what it's worth so that if the market does hypothetically crash, your worst-case scenario is usually just breaking even. Now, yes, this does require a lot of time and education to find a deal that's actually worth buying.

But that's partially one of the reasons why I don't own more real estate. I am extremely selective about what I buy just so I make sure there's enough of a buffer in there to make sure I'm not gonna be losing money. So given all of that, what would happen in a hypothetical situation if 2008 happens again and real estate values dropped by 30%?

Well, assuming I have about $4.1 million worth of real estate that would now be worth $2.9 million after a 30% drop, I would still have the same $1.75 million worth of mortgages, and that would put my net equity, just in real estate—not including anything else—at about $1.15 million. Even a 50% drop in prices would still leave me with equity in the deal, so I'm not gonna be underwater.

But here's why none of this matters at all. I bought all of these properties with the intention of never selling. I have never once sold anything that I bought, and the only thing I care about instead is just smashing the like button on this video if you haven't already. Just kidding! No, the thing I really care about the most is cash flow.

My entire intention all along was to buy a property that cash flows, hold it for 30 years until the mortgage is paid off, and when it's paid off, I'm gonna retire on a surplus of rental income when I no longer have any more mortgages. A lot of you guys were asking too about what the cash flow was like, so between six properties, my gross monthly rent is about $15,700 a month.

Then, of course, I have mortgages on some of those properties which comes to about $8,200 a month. And then we have taxes and maintenance and repairs and insurance and everything else that goes along with that, which comes to an additional $2,700 a month. So that means my total cost out of pocket on all of these properties is $10,900 per month.

They bring in $15,700 per month, and that leaves me with $4,800 per month in profit after expenses. Now, in addition to that, I'm also paying down my loan balances by, on average, $2,700 per month, which means that in 30 years, I'm not going to have any more mortgages.

That means my total return from all of these properties, between cash flow and also paying down the loan, is about $7,500 per month. See, the thing with this strategy of not selling and not flipping and only caring about one thing, and that is cash flow, is that it doesn't matter to me if these properties are worth $10 million or if they go down to $1 million.

All I care about is that I bring in, in rent, at least $10,900 per month to cover all of the expenses. And the good news with this is that even during a recession, when real estate prices are going down, rental prices stay relatively the same, if not actually starting to go up.

Here's some proof: as you can see here, this chart shows a 30% decline in prices from 2008 to 2012, compared to this chart showing the rental prices during the same time period. Rental prices were nearly unchanged the entire time and even began going up, even as home prices were falling. Rental prices are almost immune to any sort of outside market correction for one simple reason: we all need a place to live.

I can personally attest to this as well from my own experience working in the rental market during one of the worst housing crises that we've seen. Here in Los Angeles, rental prices never went down; they went up because everyone was renting. Even now, Los Angeles is experiencing one of the worst housing shortages we've seen in a very long time, and we're not even close to being able to fulfill that demand.

I expect that even if real estate values follow, that rental prices should stay relatively the same, if not continue the upward trajectory. But hey, you know what? Let's assume that all the data and the logic and the research, it's all fake news and all of it doesn't matter, and the rental market crashes by 30%. Then what happens? Well, then I guess it grows $11,000 a month in my expenses, or $10,900 a month, and then I only make $100 a month in profit while also paying down the loan by an additional $2,700 a month.

That means I make a total profit of $2,800 per month if rents decline on everything by 30%. Now, with this strategy that I talk about and practice, the mortgages are what's called fixed-rate, meaning the rate does not change, and the payment does not change for the lifetime of the loan, no matter what happens. Even if the economy crashes and interest rates shoot to 10%, my loan remains unchanged until the very day it's paid off.

Those loans cannot be called either, meaning the bank can't just come and say, “Hey, the values have declined; you owe us the full amount of your mortgages in 90 days, otherwise we're gonna come and foreclose.” That doesn't happen; as long as you just make the exact same payment as agreed to when you first got the loan, you're fine. There's also no prepayment penalties either, so if I decide tomorrow I just want to start paying off mortgages early, by all means, that's totally fine to do, and that's not going to cost me any sort of fee or anything.

And again, that's what I've always recommended to people as well: to really hedge yourself in the event of an inevitable downturn, that you rely on cash flow, and you don't over-leverage, and you make sure to always get a fixed-rate, 30-year mortgage.

Then just to answer all the people who think that, in the astronomical, non-existent chance that all of my 10 units go empty at the exact same time, that I lose my job and don't make another dollar of income, that I can't even go and rent the properties for a dollar a month. What am I going to do?

In that situation, I have enough cash reserves to pretty much support these mortgage payments for a little bit over four years, including my own cost of living. Which, let's be real here, we're just as likely to see aliens come down from space and bring us world peace than we are seeing 10 properties stay vacant in Los Angeles for over four years while I can't make another single dollar. That just doesn't happen.

However, I really got to say that we do not have the same driving forces today like we did back in 2008. Thanks for not selling subprime mortgages! They're not giving out 0% down loans. They are not allowing risky borrowers to buy real estate, and all of that specifically caused real estate to be hit very hard in 2008.

What we do have now, though, is real estate prices propped up by cheap money. This is really causing more demand than what would be natural just because money costs so little to borrow. But generally, those are not the people to go and sell if the market goes down.

Instead, these are people like me who really just want to lock in a low interest rate for a very long time and then just hold it and keep that mortgage for as long as possible if they don't want to pay it off early. What really ends up hurting people the most in real estate is really just this: it's when you buy a property with no equity, with no cash flow, on a very large loan when you have insufficient income.

Like, if I were going out getting short-term loans to try to flip real estate, and that was my full-time job, then I would be very, very concerned right now, and I think the risk of losing money is very high. But really, on rental properties, the biggest concern is either having a prolonged vacancy or a very expensive repair.

And that is entirely mitigated by having cash reserves, diversifying your income, and having multiple units. It's also really important to fully understand your rental market so that way you know exactly what your unit is realistically worth, and that insulates you just in case the market goes down.

And really, when you're buying rental properties, you're not buying for appreciation; you're buying for cash flow. Appreciation is really just the icing on the cake, but it's never something that you should or could rely on.

And when it comes to me, I live drastically below my means. I try to save close to 100% of my income just so I can go and reinvest it. Real estate is not my only investment, nor is YouTube my only source of income. It's really one of six.

When I make videos on real estate, I really do them from my own experience and share what I am doing personally. I really do my best to share by example and practice what I preach. And if anything, when it comes to investing, I'm a very conservative investor because I hate losing money.

People that know me know that even if I lose $1, I'm upset. I didn't have it. This is the reason why I've chosen the buy-and-hold rental strategy because my own experience and data has shown that they weather recessions very well. They're stable. They're consistent. You could build up positive equity very quickly, and your chances of making money are significantly higher long-term than if you're out there just trying to go and flip properties really quick on short-term loans.

Proper research, due diligence, and just common sense go a long way when it comes to real estate investing. So I just got to say, sorry Frank Martinez, I don't think you'll be able to buy one of my properties in foreclosure, so you should probably look elsewhere. But you know what? I'm very happy that you're debt-free!

So with that said, you guys, thank you so much for watching. I really appreciate it. If you guys enjoy videos like this, make sure to always smash the like button. Also, make sure to subscribe—that is totally free, that doesn't cost you anything to subscribe. Get three videos a week. Also, feel free to add me on Instagram; I post there pretty much daily, so if you want to be a part of it there, feel free to add me there.

Thank you again for watching, and until next time!