If you’re anything like most real estate investors (or hopeful, someday investors), you are amped up to find your next (or first) great deal. The only emotion that rivals the intensity of your excitement is the overwhelming discouragement of not being able to find anything that makes sense to buy! The competing emotions of excitement and discouragement swirl around your brain, creating a bipolar environment that can make even the most iron-willed investor go crazy.
This is real estate investing in 2017.
It wasn’t always this way—at least, not from what I hear. While there have always been those investing in real estate, my understanding is that for the longest time, it was really a relatively small group of people who were pursuing it seriously. Real estate investing isn’t like other forms of investing. It’s not quite as difficult as buying a business to run, but it’s definitely more complicated and involved than just pushing a button on a computer to buy some stock. There is a knowledge base and skill set necessary.
That’s why websites like this one exist—to help people build up that knowledge base and to sharpen that skill set.
For a long time, there was a select group of people who gained the knowledge and learned the skill set, and they were the main players buying rental properties. These people were willing to deal with the headaches of managing tenants, making repairs, and negotiating with lenders. In exchange, they saw healthy, long-term equity growth—and hopefully a little cash flow to go with it. They tapped into this not-so-well-known-asset class and profited handsomely from all the ways it can build wealth. If you didn’t know one of these people to teach you the game, you either learned through the school of hard knocks or you never got started.
As most people aren’t willing to learn from that school, there were a lot less real estate investors competing for the inventory!
Well, those days are gone—in some ways, probably for good. While this doesn’t mean you can’t find good deals (you definitely can), it does mean you would be wise to understand what changed, how we got to this place, and what may be changing in the future. If you can understand the past, you have a better chance of being prepared for the future. I want to help you with that.
Allow me to present some recent phenomena that have led to what I believe is an exaggerated interest in real estate. This exaggerated interest has led to more competition than a healthy market should bear. We see it affecting many parts of real estate. Single family housing is definitely one of them, but large scale commercial investments and note investments are getting it even worse! If you’re frustrated with the amount of competition out there right now, take a minute to think about some of the reasons why it may be higher than it normally would be.
Stupid-Low Interest Rates
Due to government intervention trying to spur the economy (the type of behavior that always leads to some form of correction in some way), we are currently living in a period of interest rates that are, quite frankly, stupid-low. Through programs such as Quantitative Easing and the FED keeping the prime rate low, interest rates have been incredibly low for a pretty significant period of time.
While at first glance this may seem like a great thing for those of us buying real estate, there are other, hidden problems with an environment like this, and the consequences can be pretty significant. From what I can see, low interest rates have affected real estate investing in two major ways. The first:
Making Loans More Affordable
This is the more obvious effect and therefore the one most of us think of first. With the government working hard to create low interest rates, mortgage rates for homes are kept low as well. This makes homes more “affordable” for someone trying to buy them, as a lower interest rate obviously leads to a cheaper house payment. Good thing, right?
Well, maybe not—at least not all the time. The more “affordable” low interest rates make housing, the higher a price sellers can ask for their homes. Buyers can afford these higher prices because their mortgage payments are so much lower with these incredible low rates. Win/win for everyone, right?
This is only a win if interest rates never go up. You may have happily paid $300k for a property with a 4% interest rate on the mortgage. However, if interest rates jump up to the 8-10% range (a historically more healthy range, according to many economists), you may find yourself having a much harder time selling this property to someone else. The person trying to buy it will have to pay you less in order to get their payment close to the same amount you are paying with your 4% mortgage rate. Not a great thing for you if you want to sell and make money on the deal.
These low rates also make down payments much less important. With rates this artificially low, you can borrow so much money and not see your payment increase very much. This creates very little incentive for people to save up a lot of money to put down on a house to keep their payment low. There was a time when having a large down payment served as an advantage to your investing business. Now, not so much. As an investor, you may find yourself competing with those trying to buy a primary residence and able to put just 5% down. Most banks require you to put 20-25% down. This allows others to buy more than you can and still afford the payment with ease.
This same principle applies to all-cash buyers. Having a lot of cash to buy a property with is a big deal if interest rates are high and home prices get pushed down. It’s much harder to work this to your advantage when money is cheap to borrow and those with lower incomes qualify to borrow more money because the debt service on this money is so cheap! Low interest rates level the playing field in many ways, but this isn’t always good if you’re an investor. Investors look to take advantage of whatever they can, and level playing fields can take away some of our advantages.
Making real estate more affordable makes it easier for more people to get in the game and therefore decreases your chances of finding a better deal. With more people eligible to play, you have more competition on the field. This isn’t good when you’re all competing for a limited number of properties.
Creating an Unhealthy Thirst for Yield
The other (and more significant) problem with low interest rates are the impact they have on those trying to save money in the bank or invest in other, lower risk investment vehicles. By making interest rates so stupid-low, the government has really punished those who were good at saving or planned to live off the interest of their savings. Let me explain.
When I was just out of college, I was able to open a CD at my bank for a 6% return. This meant I was earning $500 a month on the money I put into the CD. This $500 covered the rent I was paying to rent a room from a partner at work. I was more than happy with this arrangement and satisfied with my return. I probably would have kept my money in there for a very long time—except interest rates dropped to near zero, and suddenly I wasn’t making jack squat on my savings.
I’m not the only person who went through this. In a healthy economy, people have healthy options from which to choose that earn a return on their money—vehicles like CDs, money market accounts, treasury bills, bonds, etc. While none of these are considered aggressive investment strategies, they are good for parking money in to be kept relatively safe and are very low maintenance. For a lot of people, this is all they really need. Give them a 6-7% return on money in one of these investment vehicles, and they will be thrilled with that return, considering it requires no work, no headaches, no learning, and not much risk.
Take that option away, however, and you create a sort of desperation to get a return.
Enter real estate as a replacement option.
The point I’m getting at here is there are, in my opinion, a lot of people investing in real estate, be it directly or indirectly, not because they always wanted to be a landlord, but because they don’t have much choice. This thirst for yield has created a sort of real estate vampire that has to prowl around looking for something to satisfy its thirst! Vampires aren’t known for making great life decisions.
Think about it. Real estate is something we all love, but if you could get the exact same returns without having to go through the hassle of locating, rehabbing, and managing an asset, wouldn’t you take that? Of course you would! Now, what if you could get half of the return you’re used to for zero work? Would you consider taking that?
A lot of people would, especially if they were close to retirement, had lower expectations, and were not interested in learning a whole new knowledge base and a whole new skill set.
With this new, low interest rate environment we have now, those people don’t have a choice anymore. One half a percent return on your money in the bank isn’t going to cut it when you’re living on a fixed income. You need more than that. So what do you turn to? Real estate investing.
Now, some of these people start looking for properties to buy and to compete with you and me. While this may be the most obvious impact they are having on your business, there are actually other ways they are affecting the real estate investing market. A big one is in syndication deals.
Are you one of those people who used to see tons of cheap foreclosures in your area, and all of a sudden they just disappeared? Weird, right? Well, maybe not. Huge hedge funds, seeing the great opportunity for yield that real estate investing can provide, have jumped into many markets over the last 5 years and bought up massive amounts of inventory. These hedge funds pack some serious punch in the way of investor dollars they are throwing at these properties.
Who do you think is funding the hedge funds?
Older people with a lot of money in the bank thirsty for yield, that’s who.
It’s not just single family houses, either. Have you ever gotten really excited about the idea of buying a big commercial property with hundreds of doors and managing just one property instead of several? Awesome idea, right? I agree—until, of course, you actually go and try to buy one right now!
Cap rates in some areas are plummeting just as fast as interest rates. The large multifamily market is scalding hot, and it’s very hard to find anything resembling a good deal on the open market. Why, you ask? Consider how many people are looking for a place to park their money and get a decent return.
If you are someone with a decent chunk of change in the bank and need somewhere for it to earn you a decent return (say, 6-8%), your easiest option is probably to give it to someone putting a syndication deal together. If you are someone putting a syndication deal together and need something to buy with all this money, the easiest option is to buy one big ol’ property and spend it all at once. This is part of the reason why the multifamily apartment space has gotten so competitive and good deals have been so hard to find.
The fuel behind all of these syndication deals and hedge funds is the abundance of money sitting in accounts unable to earn a return there. It’s created a hunger that wasn’t there before for normal people, previously uninterested in getting involved with real estate, to join the market.
Today’s technological advances are also responsible for the growing popularity of real estate. Years ago, you had to go look at a property yourself or pay someone to go take pictures of it (then develop the film) if you wanted to see what it looked like. Now almost any house you want to see is spread amongst tons of websites!
Not only are pictures available, but so are property taxes, neighborhood scores, home price estimates, etc. Never before has it been easier for the casual Curious George to feel like they have enough information at their fingertips to jump into investing. This has helped fuel both the thirst and the curiosity of many who never before would have considered real estate investing as a realistic venture.
And it’s not just the internet. Real estate shows are exploding in popularity as well! HGTV is becoming a powerhouse, as show after show with the name “flip” somewhere in the title are taking off. There are home flipping shows in every market imaginable, shown over several different TV networks, all portraying real estate investing as fun, easy, and always profitable. These false portrayals of how RE investing really works have boosted the confidence of many who never would have dreamed of getting involved in real estate investing.
People with zero idea of how to run numbers want to get into house flipping solely because they enjoy interior design. People who have never worn a tool belt see Tarek and Christina or the Property Brothers swing a hammer in one shot to knock down a piece of a wall and think it looks “fun” to flip a house. Those of us who have actually done it know how ridiculous this sounds. But to those who have only seen it on TV, the whole thing seems much more reasonable to undertake than ever before.
TV and the popularity of real estate investing shows have done a lot to create false confidence and bolster the curiosity of the casual viewer.
One of the biggest boosts to my own confidence as a real estate investor came from listening to the BiggerPockets Podcast. I’ve probably listened to every single episode. Hearing how other people were buying and managing properties helped me to feel good about the way I was doing it. Hearing how different strategies worked for different investors gave me ideas for how to do things differently. Being able to listen to a podcast about something as specific as real estate investing did a ton to help me not feel like a crazy nut who really liked buying houses.
Nowadays, there are tons of podcasts about real estate investing. They aren’t all great, but the sheer amount of them alone is indicative of how crazy popular real estate has become as a genuinely realistic way to build wealth. What was once something that required you to know someone intimately involved with it has grown to something that anyone with a smart phone and an internet connection can learn about. Listening to a podcast is like having a conversation with someone who has been doing something successfully that you are really interested in. It cuts down on the learning curve significantly.
The same can be said for books—and boy, are there a lot of them. While there have always been books about how to be successful investing in real estate, I’m not so sure they have always been so readily available. Gone are the days of needing to drive to a library or go to a bookstore. You can now order a book on Amazon and have it sent right to your house. Better yet, you can order the electronic version and have it sent right to your phone. Better even than that, you can download it on a service like Audible and have someone else read it to you while you drive, run, cook, etc.!
There are so many ways to absorb the material of books now that just about anyone, even if they hate to read, can learn how to get started in this niche that was once only a realistic possibility to a small group of people.
Along the same category of books and podcasts are blogs. The internet is full of them. There are more blog posts about real estate investing than you could ever hope to read. At this point, there are very few things you could ever need to know that you can’t find information about. The increases in modern technology have made the information about how to get into this niche so readily available that now any average Joe can get started buying houses.
The Final Product
So, let’s sum this up. Real estate investing is all over the TV, being portrayed as fun and profitable at every turn. People can see it and have their interest piqued. Once it’s piqued, there are insane amounts of literature to help build on that interest—books, blogs, podcasts, etc. The information is now available to the masses, where it was once much harder to find. We have the desire followed by the knowledge.
Throw into that stupid-low interest rates, and you can see how the ability to invest gets included in the mix. People can borrow a lot of money from someone else to buy an asset and still have a relatively low payment. On top of that, there are a lot of people who I honestly feel have very little interest in or desire to be a landlord but simply don’t have much choice. With interest rates where they are, many people are forced into this asset class to find some form of return on their money at all. This creates real estate vampires thirsty for yield wandering into an asset class where they never wanted to be.
So what does this mean for those of us trying to make a long, healthy career in real estate investing?
Try to remember that the easier it is for someone to get started in something, the easier it is to quit when it gets hard.
Easy come, easy go. Many of those who are investing in real estate right now probably don’t want to be. Being a landlord isn’t the worst thing in the world, but it’s definitely not something the majority of people enjoy. They have to deal with frustrating tenants, late payments, managing contractors, city code violations, and the list goes on. There are times when it is not much fun trying to keep your properties profitable. For someone in my position, it’s worth dealing with the bad because I know I have 30-40 years of appreciation to look forward to. For someone in the twilight of their retirement, not so much! I expect a lot of these “reluctant landlords” to sell their properties and get the heck out of real estate investing as soon as they can get a healthy, fair return on their money somewhere else that requires less work and less risk.
The same goes for the hedge funds who need to repay their investors who let them borrow the money. Many of these companies will have to liquidate their inventory at some point. This is going to mean more rentals hitting the market and more opportunities for other investors to buy.
I expect to see a similar result in the large apartment complex space. Those who borrow money through syndications have to liquidate at some point. The investors expect a return. If interest rates increase, they may have their investors clamoring for their money back so they can go invest it somewhere else. It will also be much less desirable to try and refinance these large buildings at a higher interest rate when those balloon payments come due. Many will opt to sell and be done with it. This should lead to more opportunities for those who have been patiently waiting and saving money on the sideline.
Think about the true, honest miners during the gold rush of 1849. If you were a gold miner back then, it had to have been highly discouraging to see every single able-bodied man who could shake a rocker-box making their way to California to compete with you for gold. However, at a certain point, the vast majority are going to give up and go back home. That is when you are going to make your killing. Think of all equipment you’ll be able to buy for dirt cheap from miners selling what they have to pay for a train ticket back home. Think of all the land you’ll be able to buy at distressed prices from those no longer interested in owning it, as it didn’t help them strike it rich like they thought.
If you were wise, you would have saved all your money and waited for the others to quit. Buying cheap land and cheap equipment from your competition as they called it quits, you’d grow your own ability to leverage your business. Some of these people would be dejected but unable to afford a trip back East. These are the people you could hire as cheap labor to work for you. If you played your cards correctly and positioned yourself right, you could make an artificial boom work to your advantage because you are in it for the long game.
I want to encourage those of you reading this to think the same way. I know it can be tough finding deals right now. In some markets, you could have thrown a dart at a map and the property it hit would have made you money. It’s not going to stay this way forever, though. The economy will shift, markets will change, and people will want out for various reasons.
Spend this time before that happens educating yourself and putting yourself in a strong financial situation so you can strike when the time is right. Make connections and strengthen relationships with those buying properties you think are priced too high. You want to be that guy all the miners approach to sell their equipment for pennies on the dollar because they don’t want it anymore. You want to be the person with enough money saved up to be able to buy it all!
There are many factors affecting the real estate investing world that are abnormal. Crazy-low vacancy rates, low interest rates, and an economy trying to climb out of a huge recession are just some of them. Things will turn around eventually, and you’ll be kicking yourself if you miss out because you got discouraged that deals were hard to come by in the meantime. Don’t make that mistake! Understand the big picture and wait for the tides to turn in your favor.
Do you agree with this assessment of the market? What kind of rising popularity for real estate investing are you seeing in your area?
Let’s discuss in the comments section below.