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.
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.
Photo: Kevin Dooley