I never liked bullies. Since I was never the biggest kid in school, anyone who uses their size to intimidate others is certain to get my attention.
I can still remember the time a football player pushed me in the hallway because I was “In his way.” He never knew what hit him because no one had ever stood up or fought back before. I kicked his butt up and down the hallway until a teacher pulled me off of him. He and his friends never bothered me again because I was willing to go to war – even if I lost – and they frankly didn’t want the hassle or the embarrassment of losing to a smaller foe.
This brings me to hedge funds and their goals of owning rental properties and pushing smaller investors out of the market. I say “Bring it on.”
Real Estate Investors: This is how you compete with a Hedge Fund:
First: Appreciate their strengths but don’t fear them.
Hedge funds have a lot of capital and if they can show a model that produces a decent return of ONLY 7-9% they will get more capital to continue their acquisition spree. In addition, hedge funds can leverage technology to the hilt, so they will have more applications and databases than you can shake a stick at, but remember bad data fast is still bad data.
Another reality of their size is their need to buy lots of property quickly. When they move in for the kill they will buy large pools of properties in short periods. However, as a small investor, I can focus on a single purchase to add to my portfolio instead of having to find 10, 20 or 50 properties to buy. I have no idea how these buyers can stay up to date with 50 escrows, repairs, and rentals, at one time. In the end – appreciate their need and ability for frequent acquisition.
Second: Understand their purpose and goals.
Hedge funds are great at taking advantage of market dislocations. They use their tremendous capital base to buy distressed assets (of any kind) and then wait for markets to repair themselves and return to long run averages. This means that most hedge fund buyers will have a clock on their capital and they will become sellers at some point. The best part is that most hedge funds will likely become sellers, at the same time producing nice buying opportunities in the future – likely 5-10 years from now – at much higher prices.
Finally: Understand where they are weak.
Most hedge fund buyers don’t live in the markets where they invest. They may send out a team or two from New York or Boston to live in Atlanta, Southern California or Phoenix for a couple of years but these assignments are rarely given to locals.
Why would they trust a local with their billions of dollars?
The first thing to do as a small investor is remember to build quality relationships as frequently as you can. All real estate is local and most of it is sold by local resources, so if you can become the trusted buyer of many different agents and other investors, you will have the inside track to deals that a hedge fund never sees. Most of my deals come from relationships that hedge funds would pay dearly to have.
Also never (and I mean NEVER) go straight at a bully [hedge fund]. Understand what their strength is and do something different. In the early example I will admit the football player never saw me coming because he pushed me and just kept walking, as he never thought to make sure I wouldn’t respond. I dropped everything, jumped on him, and got him on the ground where my speed was a huge advantage and his superior strength and reach was negated. In short - I won and he lost because I did the unexpected!
When it comes to competing with a hedge fund that has access to millions or billions of dollars, don’t fight for the properties they want, it’s losing proposition. Instead – buy around them and let their efforts increase the value of your purchases. If hedge funds want properties newer than 5 years, then buy the 10, 20 or 50 year old homes at which they refuse to look. If hedge funds want certain zip codes, buy the zip codes adjacent to their neighborhoods. If hedge funds want single family – buy multi family. If Hedge Funds want to buy at the court house steps or want to buy foreclosures on the MLS, then buy short sales or probate deals.
I love to see hedge funds over pay in my market, as they are adding to my net worth by increasing market values across the portfolio. Regardless of their buying – my 10+ years of relationships allow me to find tremendous deals regularly.
In the end – don’t fear the bully; just out smart and out work them. They are 100% beatable.