How to Beat the Hedge Funds – Advice from the Pros
The sky is falling!
Life is ending as we know it!
Run for the hills!
No – I’m not talking about some natural disaster that we face – but by the rhetoric that exists on this subject, it sure can feel that way some time.
I’m talking about the Hedge Funds.
The source of the biggest hysteria to plague the real estate investing community in my lifetime, and a constant source of worry, fear, irritation, and competition.
For those unfamiliar with the “Hedge Fund Problem” – essentially, these giant financial companies are coming into certain real estate markets and buying up everything and anything they can – causing inventory to drop like TV prices on Black Friday and sending investors scrambling to find good deals.
The argument of “right versus wrong” has been debated here on BiggerPockets before – and there is a great article from Chris Clothier from last week that looks at some of the big problems that these Hedge Funds are causing – but in this article I want to focus less on the problem and more on the solution.
Now – I’m thankful that the Hedge Funds have not moved in on my area (yet!) but I know this is an issue that many are facing and I may need to face in the future. As such – I wanted to reach out to a number of real estate professionals (and BiggerPockets Bloggers) and ask the question “How do Investors Beat the Hedge Funds?”
The following are their answers.
How to Beat the Hedge Funds
Tracy Royce: RoyceOfRealEstate.com
“Anyone in the Phoenix area experienced a tsunami in the desert in 2012. Before we knew what hit us, the wave of pooled money was gobbling up any and all inventory on what fit their criteria. But with that, is the David vs the Goliath loophole.
The thing is, fixing, flipping, renting, holding…it all existed before this microcosm of a funded market rally existed. He who deploys the most channels, typically wins. But, when expediency is the name of the game, the little guy can use that size and structured criteria to their advantage.
These companies are not using grassroots methods (to my knowledge) to cultivate leads. (“Aint nobody got time fo that!”) They want deals. Now. With that, it’s increasingly important to reach homeowners directly via your personal and online networks, so the leads are your own. Or, grow your sphere of influence so the relationships are extended further into the community with you as the aggregate. Short sales are still a great way to have a lot of leads that others may not want to touch.
How did the Volkswagen Bug break into the American market as an ugly car, during a time when the sentiment towards Germany was less than desirable? Why do people choose farmers markets over Walmart for their produce? Sit in the thought of what it is your product actually is, what you offer, and how you tactically and tactfully can market yourself to gain goodwill, have control over your leads, and play the offensive.
I think also being flexible in your exit strategies helps maintain any sort of volume, as well. Who knows, you may find wholesaling TO these groups is an ironic addition to your profit model.”
Kyle Zaylor: RealEstate-Java.com
Here’s one tip to consider:
Partner with them
The arrival of hedge funds potentially represents a major disruption and shift in the way real estate is bought, sold, built, and developed (think Walmart for the retail industry). Because of their sheer size and access to capital, many hedge funds are able to absorb differences in market conditions on a macro scale while still pursuing their investment strategies. They generally have an ability to absorb risk and hold portfolios for the long term. One tip to try, which could take some time but could be a beneficial long term strategy, is to partner with big hedge funds instead of combating them. The exact mutual benefit to partnering will depend on your strategy, size, and market, yet partnering can provide a way to ride the hedge fund real estate investing wave. How do you initiate the partnership? Find the investors seeking large bulk deals in your neck of the woods and request a meeting to discuss future deals. If the fit is right for your business (and theirs), a partnership could be a fruitful strategy.
Mike LaCava: HouseFlippingSchool.com
In regards to beating the hedge funds, I don’t look at it like beating them but navigating around them. They will pay more money than anyone to build up their inventory and we will not overpay like them. We keep doing what we do and we are getting deals. Until that stops I don’t pay too much attention other than reading about their progress. They are hot in some markets and haven’t seemed to bother my strategy too much here in the north east.
We continue to use our wholesalers program, short sale purchases, tax liens, absentee owners……We are relying less on MLS deals because the competition is driving prices higher than what we want to pay. We do still try but if that is all we were doing we wouldn’t be doing too many deals.
On a positive side this is driving prices up and we are shifting to a sellers market and are selling houses much more quickly. It will be interesting to see how these hedge funds work out 5 years later. Could be the next bubble & we will be there picking up the pieces.
Ali Boone: HipsterInvestments.com
“There’s no way to beat the funds, you just have to work around them. They make finding good inventory harder, but it’s not undoable and you just have to be quick on your feet and be willing to put a property under contract as soon as you know it’s a good deal! If you can’t beat ‘em (which you can’t), join ‘em! In this case, join them by shopping in the same markets because they are in that market for a reason and find sellers who are willing to sell to individuals as well as the funds.”
Dave Van Horn: PPRNoteCo.com
1.) Diversification – let’s face it, these guys are bigger and stronger than the average Real Estate investor. So why compete when you can invest in different markets and asset classes. Branch out and diversify, that’s what I did with investing in paper and debt when the housing market crashed.
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2.) Now not all of these hedge funds are publicly traded, but for the ones that are I would also suggest buying stock in those funds you’re competing with. It’s like when gas prices go up, instead of complaining you buy oil stocks. If you can’t beat ’em join ’em!
Not to sound dismal, but these hedge funds aren’t going away for the next couple of years and a lot of them are smart. They have a lot of cheap money (which even allows them to outbid most RE Investors) and they know the market’s coming back. In a way they’re also doing the market a favor, many of these funds are buying properties cheap from the banks, fixing them up, and putting retail product out. This will help future appraisals, so it’s not all so bad!
Many major investors, because they’re buying in bulk and because they may not have specialized knowledge about the area, set rules for themselves about the types of properties they will and will not buy.
They might write-off a property, for example, because it lacks a certain number of bathrooms, or lacks a garage, or because it’s less than a predetermined minimum number of square feet.
But you, the individual investor, can exercise judgment. You know whether renters in that specific neighborhood are content with tighter spaces and fewer bathrooms. You know whether renters in that neighborhood expect a garage or if they accept — even assume! — street parking.
Admittedly, this advice won’t help you buy real estate in bulk. I have no idea how to do that. But if you’re the type of investor who selects properties slowly, one at a time, your neighborhood-specific judgment can help you jump on a deal that bulk investors might overlook.
What Do You Think?
I don’t need to add a lot of my own thoughts here – I think the pros who are dealing with the issue have the final word. I’ll just sum up though the sentiment that dealing with the hedge funds is not easy, and it’s going to take hard work and creativity, but the sky is not falling. It’s not the end of real estate investing as we know it and there are still many deals out there to build your real estate portfolio.
Above were 5 different opinions on the best way to deal with the hedge funds – but thousands of people are going to read this article so – I’m calling on YOU to add to this list.
Leave your comments below and share your thoughts. Ask questions, offer advice, and let’s create a conversation around helping each other face this hedge fund problem and come out stronger, wealthier investors.