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If It Were Easy, Everyone Would Do It

by Michael Zuber on January 8, 2013 · 10 comments

  
Easy

The title of this blog post happens to be one of my favorite quotes about real estate investing. I have had to repeat it to myself with increasing consistency lately.

Why?

The simple reason is that the 2013 real estate investing environment is a lot different than the environment from 2008 to early 2012. For nearly four years straight – finding profitable deals was almost too easy. We were earning 20% return on capital before private financing was in place and normally 80% return after placing a passive investor in first position.

Looking back I freely admit it was easy, fun and very profitable. However, as we start a new year it has become painfully clear that 2013 will be a very different investing year for several reasons.

The supply and demand picture has changed drastically. Around 2009 we would bid on 5 properties for every one we secured and we were very picky with our offers and selections. As we enter 2013 we haven’t found a single family house deal we’ve liked for several months. In fact most of the deals we have seen lately are 20 to 30K overpriced in our opinion.

This has been caused by a dramatic fall in available inventory of distressed properties in my investing market. We used to find 20 to 30 new listings a week in our little sub market and today maybe 1 to 4 a week. On the demand side we used to feel like we were one of maybe ten investors looking for deals in our market but today it feels like we are one in a thousand. So with supply falling by 80% and demand increasing by say 1000% – what has to happen to prices?

Simple: prices have to go up which will drive down yields or return on capital which is our main driver for investing. Hence, I have to repeat: If it were easy everyone would do it!

I believe we are at the cusp of several years of a positive feedback loop around real estate. I heard once that when investing in real estate you are choosing an industry that runs in 10 year cycles (peak to peak) while investors only have a five year memory.

Given that dichotomy, and the fact we are 5-6 years past the peak, new investors are going to start looking at real estate again as the press starts repeating over and over again that home values have “risen X % this month” or year. As more individuals start to jump in, demand will rise along with prices. This positive feedback loop will go on for years and if you own investments it will be fun to watch. The challenge with this reality is it is a lot more fun and profitable to be a contrarian and invest in properties when everyone hates them than to invest in a new purchase when everyone is chasing the same deal and willing to pay almost any price to get a property.

I’ll repeat again: If it were easy everyone would do it.

Real estate investing should never be as easy as it was in the period from 2008- Early 2012. I believe 2013 is just the start of another 5 year swing and this time to the upside. The folks that invested wisely prior to 2013 will be richly rewarded. The investors that work hard and find solid deals in 2013 will be richly rewarded as we have only begun to see the swing to the upside – in my opinion.

Good Investing
Photo: Kevin Dooley

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{ 10 comments… read them below or add one }

Jason January 8, 2013 at 10:37 am

Mike,

Its very interesting that the two bloggers I respect the most on here have written on the same topic the same day. (slightly different variations) I hope others take notice, because you hit on something that is easy to gloss over. The best don’t just work harder and smarter, they work much much harder and smarter. I look forward to reading your accomplishments for 2013.

Jason

Reply

Mike Z January 8, 2013 at 11:48 am

Jason
I appreciate the feedback.
I take the responsibility to write weekly articles very seriously and glad you like them
I look forward to 2013 as well as it will be very profitable even if we don’t buy anything given the great base we built 2008-2012 (but we will do deals in 2013)
Good Investing

Reply

Lee Carney January 8, 2013 at 5:16 pm

Fellow Investors,

I hear you and I know where you are coming from, however, I respectfully diverge. Have you ever heard the ‘Fly on the Window Sill’ story? In a nut shell, flies try very hard to get through the window as they bang themselves against the glass repeatedly. Then they try harder and harder. Invariably, what do you see at the bottom of the window sill…you are right, DEAD FLIES! The ‘try harder’ method is admirable, but I have developed a better way.

I am a real estate investor – indirectly, and times have never been better. I say indirectly because I am a private lender who takes real estate(and other tangible assets) as collateral. My borrowers are rehabbing and selling their properties or putting them into their rental own portfolios. I like the private lending side because I make money like a BANK. My borrower puts his time and effort into finding the good deal which I take as collateral, he puts his own capital and money into my collateral in the form of improvements, he takes most of the risk, and he pays me a nice interest payment to do it.

In the Pacific Northwest where my business is located, the real estate market has not adversely changed, however, if it did, as a private lender, I would simply make loans to other entrepreneurs and take other tangible assets as collateral. For example, after the banks run out of foreclosures to discount and sell, the next play will be construction loans. Many builders were hurt in the last RE downturn and they will need to get loans from private lenders because banks have unfortunately been regulated out of the business.

Again, this is what I like about being a lender, but I did not come up with it, I simply perfected it for the everyday investor to earn a High ROI while being secured. Banker’s have been making money like this for hundreds years.

AND…don’t worry about not having money to loan. I started my business on credit cards and built credibility with other investors to use their funds. I want to leave you with this thought, learn the time-tested art of private lending and how to make money like a BANK and you won’t be subjected to the whims of the local real estate market. Onward!

Lee Carney

Reply

Jason January 9, 2013 at 7:15 am

Lee,

Before trying to sell your website, perhaps read the article and comments. You will notice we talked about working smarter, not banging our head against the glass until it hurts.

Jason

Reply

Glenn Espinosa January 9, 2013 at 12:48 am

Mike,

Great article! I too have felt the momentum shift in my local market. I am fortunate enough to have started investing in early 2011. If I knew what we’d be facing now back then I would have bought more!

Competition is getting fiercer as you have stated. Any strategies for investors to differentiate themselves from the influx of new guys jumping in the market?

Glenn

Reply

Mike Z January 10, 2013 at 12:38 pm

Glenn,

Stay nimble and keep looking for opportunities to solve problems and create value.

The next couple of years in my opinion is where the real investors step up and make money as almost anyone could have done it in 2009 and felt like a Guru

Good Investing

Reply

Karen Rittenhouse January 9, 2013 at 12:53 pm

Hi Michael:

As I’ve been saying for the past 8 years, there’s never been a better time to be in real estate! (one of my favorite quotes)

No two years seem to be the same. We morph and shift with the cycles. I hope your prediction is accurate because, if so, we can sit back and lap up some well deserved appreciation!

Thanks for your article.

Reply

Mike Z January 10, 2013 at 12:39 pm

Karen

I agree no two years are a like

As for prediction it is pretty easy with demand up and supply down.

Good Investing

Reply

Farrell January 10, 2013 at 10:31 am

Lee,

Cash on cash returns explode with leverage as you well know and assuming the lender is charging a competitive interest rate. Do you do non-recourse loans and if so at what rate?

Farrell

Reply

Perry January 10, 2013 at 8:17 pm

Thank you for this relevant information although I new to investing in real estate, I will make sure I follow this message closely.

Reply

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