Don't be a retail investor!

Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes

I'm haunted by Ben L.'s comment "Don't be a retail investor!" in the podcast on rental properties. This is also common advice in real estate investment books. Always buy at a discount, or, as Warren Buffett says, with a margin of safety.

I've been evaluating some turnkey opportunities and am close to pulling the trigger on one, but Ben's admonition is in the back of my mind, watering the seeds of doubt.

Is it really that big of a sin to pay the asking price if the cash flow makes sense? I am also trying to buy in an area that I believe will appreciate over the next few years.

It's hard for me to conceive of how I can "buy below market" value in this market. If a property is below "market value", why is it even available at that price? Common sense dictates that those kinds of opportunities are ephemeral and elusive by their very nature.

This probably works with properties that need some kind of repair, or where there is value to be unlocked by some kind of zoning change, etc... I don't see how this applies to what I'm doing.

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Joe Bertolino

Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes

10y

I feel like a little piece of me dies every time I pay retail for anything.

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Sarah Ziehr
Real Estate Broker · Chicago, IL · Member since 2015 · 531 posts · 266 votes
10y
If the numbers make sense, then why hesitate?
There are investors in my market that focus on selling turnkey properties. And there is a market for investors and owner occupied buyers who want this. They have never stepped foot in a Home Depot and will never do a rehab.
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Mike Makkar
Investor · Plano, TX · Member since 2014 · 188 posts · 149 votes
10y
@Nate R., Its all about hedging your risk. Non-Retail buying allows you to get 20% to 30% below intrinsic value. So even if the market tanks, you may be covered. As I understand Ben is in a non-growing part of Ohio, where he may have to take extra steps to hedge. But if you're in a market which is greatly devoid of inventory, Austin for e.g., if the property cash flows with a healthy return, why worry if its retail or not?
My first property was a retail property from MLS. Well, technically it was a "back on market" that I bid 15% below and the seller emotionally gave in to. I probably got it for 5% below its intrinsic value. However, I bought it in a region that had extremely low inventory and was able to get above-market rent within 4 days, getting me 13% cap rate or 1.2% of property value in monthly rent. Was this is good buy? According to most BP investors who strive for the 2% unicorn properties, probably not. But in 3 months, I was able to get 4 properties on the same street from door-knocking at around 1.6% or caprates at 18%. So in hindsight, the first property wasn't too bad after all. Lesson learned, although, I didn't hedge for a discounted price, the apparent growth in the local market helped boost the intrinsic value, albeit through some managed luck, and thereby try out the BRRR strategy to finance on the appreciated value.
For those of us, who have a hard time getting non-Retail due to time constraints or lack of interests, lets just make sure our at least properties cash flows healthily!
PS: Some investors around here are so obsessed with **non-retail**, that they would pay higher dollars for properties from wholesalers requiring TLC than for clean staged property on MLS set at lower prices! Lol!
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
No such thing as a "retail investor" ... there are "retail buyers" and "investors", and never shall the two meet in my opinion. If you are buying everything at retail and not adding any value, then where would you expect your profits to come from? There's a word for that, but investing isn't it ...
To put things into context, you happen to be in a crazy market at the moment ... and crazy markets make some crazy people do some crazy things; don't be one of them. It wasn't always this crazy, nor will it always be this crazy. In the meantime, there are ways to play a crazy market sanely. For example, get your RE license and start selling ... just plan ahead for the day when the craziness ends. If you know Warren Buffet, then you know to "be greedy when others are fearful, and fearful when others are greedy."
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Brian Lacey
Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes
10y
If you remember (I'm listening to that recent podcast right now for a 2nd time in a row; slow day at the W2), it's about adding value.
Let's use an example.
You spend 30k for a house. And you know (before purchasing) that it's really worth 50k because you're going to force the appreciation.
YOU created value that you foresaw. Hope and pray is a fool's game.
It's all about minimizing your risk. That entails securing your downside, and adding the value that you see.
You see what can be, as well as what it is.
Very much like planning a trip. You have a start, the purchase. The arrival, your exit. How the hell do you get to your destination? Better have a map and plan laid out. You don't hope and pray to find a gas station along the way or hit the road without a spare and tool kit.
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
Originally posted by @David Faulkner:

No such thing as a "retail investor" ... there are "retail buyers" and "investors", and never shall the two meet in my opinion. If you are buying everything at retail and not adding any value, then where would you expect your profits to come from? There's a word for that, but investing isn't it ...
Beg to differ, but then there's all kinds of investors. If you start with flip+rehab, then buying right is essential and the margin at buy-in may be the dominant portion in your end game.
Buy & hold however, is quite different. Although buying at discount NEVER hurts, the B&H is all about cash flow - - you're investing in a cash flow and a caprate - - and it's annual, multi year return whereas flip+rehab is a one-roll crap shoot and you need to repeat repeat repeat, each with the same odds as a come-out roll of two - - you loose.

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Joe Bertolino
Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
10y
I feel like a little piece of me dies every time I pay retail for anything.
12 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Originally posted by @Jeff B.:

Originally posted by @David Faulkner:
No such thing as a "retail investor" ... there are "retail buyers" and "investors", and never shall the two meet in my opinion. If you are buying everything at retail and not adding any value, then where would you expect your profits to come from? There's a word for that, but investing isn't it ...
Beg to differ, but then there's all kinds of investors. If you start with flip+rehab, then buying right is essential and the margin at buy-in may be the dominant portion in your end game.
Buy & hold however, is quite different. Although buying at discount NEVER hurts, the B&H is all about cash flow - - you're investing in a cash flow and a caprate - - and it's annual, multi year return whereas flip+rehab is a one-roll crap shoot and you need to repeat repeat repeat, each with the same odds as a come-out roll of two - - you loose.

I'm a buy & hold investor, not a flipper. It is true that I've flipped every property I've ever bought, but I flip them to the rental market, not the sales market. I realize that this is not the only way to invest, but they all entail buying below retail at some point (purchase price, renovations, materials, management, and/or sales, etc.) and adding value to the transaction in some way, shape, or form. Otherwise, it is buy and pray.
Yes, this is especially true for a fix & flip. Yes, this is also true for a buy & hold IMO. Out of state newbie buy at retail (or above retail) from a turnkey operator and hold is a real crap shoot. If the pro forma cash flow does not get realized, they have no profitable exit strategy. Cash flow is an important thing, but it is not the only thing ...
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
Originally posted by @David Faulkner:

Originally posted by @Jeff B.:

Yes, this is especially true for a fix & flip. Yes, this is also true for a buy & hold IMO. Out of state newbie buy at retail (or above retail) from a turnkey operator and hold is a real crap shoot. If the pro forma cash flow does not get realized, they have no profitable exit strategy. Cash flow is an important thing, but it is not the only thing ...
I don't understand buying via a middle man like a TK vendor, so no comment there.
I bought FMV directly from the owner with tenants in-place; day-1 cash flow. PROFORMA? Can't trust that either - - deal with actual rents. If it didn't panout, it would be my failure in due diligence and I can't blame anyone but myself.
We went on site Nashville for a prospect and glad we did - - save my toosh. For me, it's all hands on and only if out of state would I consider a PM - - because there's no other choice.
Likewise, I've done the work and not ashamed of my results either. Over time it's just gone skyward. We put 95k down and today the NOI is 49k+ - - buying FMV retail. Wish I had another one just like it. Don't guess - - run the numbers.
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Nate R.
OP
Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes
10y
Originally posted by @Mike Makkar:
"@Nate Reed, Its all about hedging your risk. Non-Retail buying allows you to get 20% to 30% below intrinsic value. So even if the market tanks, you may be covered. As I understand Ben is in a non-growing part of Ohio, where he may have to take extra steps to hedge. But if you're in a market which is greatly devoid of inventory, Austin for e.g., if the property cash flows with a healthy return, why worry if its retail or not?"
-----------------------------------------------
The properties are actually in San Antonio. I should clarify, too, one is turnkey, one is through a connection in BP. Either way little work would be involved for me as everything I'm looking at is new construction and I would be hiring out PM.
I've already looked in Austin, but the market is "hot". I have seen a couple of things come up that looked interesting but they were quickly snatched up. I'd rather look somewhere where there are plenty of opportunities, so I started looking in SA.
Ben specifically said don't buy the capitalized value of future rents. By that I infer he means to use market price as a measure of value and ignore the future income stream.
"Value" and "price" are constantly shifting yardsticks. This reminds me of dividend stocks over the past few years. Low interest rates and the hunger for yield have pushed up prices of dividend-paying stocks beyond any measure of "intrinsic value," but those stocks keep paying dividends and raising them. As they do, the prices continue to go up...
I guess what I would be worried about is new supply. If I'm depending on rents at current levels, then the real risk is over-building. Austin's advantage is there is very little inventory in the more central areas.
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Nate R.
OP
Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes
10y
There is something wrong with the BP forum post WYSIWYG editor. I can't quote someone without the formatting being applied to the entire message.
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Nate R.
OP
Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes
10y
The TK guys are basically marketers. I wouldn't have found this without them. I'm buying from the seller and his agent.
Since it's new construction and all the units are being managed by the same company, I can easily find the comparable leases for identical units in this neighborhood.
Of course, I will verify those numbers but I visited the neighborhood yesterday and it looked good.
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John Santero
Investor · Chattanooga, TN · Member since 2012 · 227 posts · 114 votes
10y
It all depends on your end game.
TK markets opportunities for those investors who rather let someone else do the heavy lifting and they are able to get (after their due diligence) a better rate of return then other investments that they know. Maybe they want to diversify into other investments rather than stocks and bonds and dont want or no need to find/rehab/rent a property. A good TK player should leave some meat on the bone to make the investment attractive so that that investor will come back to him for more--- They can still buy right, get a good return and be passive.
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Mike Makkar
Investor · Plano, TX · Member since 2014 · 188 posts · 149 votes
10y
@Nate R., It's common for engineers like us to get into analysis paralysis mode. Every rule has to be met and vetted before a decision can be made. However, there are a lot of metrics you need to assess. And sometimes, you won't meet all of them. There are several tangibles and intangibles to consider. Not every investment is going to fit every rule that you read on here. The 30% below ARV-repairs rule, the 2% rule, the OpEx below 50% rule. Here's my last "Retail" purchase from MLS.
MLS Advertised Price: $101,000
Purchase Price: $90,500 cash (Only 10% below advertised)
Repair Costs: $3500 (Now only 7% below retail advertised)
Monthly Rental Rate: $1650 (2 yr lease)
Cash Flow: 809 /mo
Last Zillow Zestimate: $135,000 (surprise appreciation???, but i'm not counting on it)
Cap Rate: 15.5%
Cash on Cash Return: 36%
I failed on all 3 of the golden rules here; paid only 7% below retail - Rental rate is lower than the golden 2% - My expenses (PITI+Maint) is 51% of the rent.
And yet I took the plunge for the 36% CoC return!
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10y
I believe the idea of buying below market is a misnomer. If a property is distressed, and sells at a discount to the properties around it...it is not bought below market value. It is purchased for it's market value. Two people agreeing on a price is a market. All of the things that create that cheaper price affect the market value of a property.
Also if your numbers work, there is nothing wrong with paying whatever price works for your numbers. If you buy right, and plan on holding on for a long time, it doesnt matter if you overpay a little. Just dont go out there and over pay $100k.
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Jacob Sampson
Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
10y
I don't think asking price = retail value. So paying asking price does not mean you are a retail investor. That being said, you said something that worries me. You said you think properties will appreciate over the next several years. This makes me think you are trying to convince yourself to pull the trigger on a marginal deal by tacking on some other possible benefits to make the deal appear better than it is. Or to justify it to yourself.
For me appreciation doesn't factor into my equation at all. The deal has the potential for acceptable, to me, long term cash flow or it's no deal.
You want to buy deals that if all goes well you make GOOD money. If several things go wrong you make less cash flow than expected. If there are some major issues you can exit break even. Only a total catastrophe will cause you to lose money. To have that sort of situation you need as many options leaning in your favor as possible. Cash flow and equity are 2 of the most important.
Not all stocks are worth buying and not all areas are worth investing in. You may need to look at alternative ways of investing in RE or other investment opportunities. REI is not the only game in town. We RE investors like to think this is the end all be all of investment strategies but this is truly just one of many investment options.
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Nate R.
OP
Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes
10y
Originally posted by @Russell Brazil:

I believe the idea of buying below market is a misnomer. If a property is distressed, and sells at a discount to the properties around it...it is not bought below market value. It is purchased for it's market value. Two people agreeing on a price is a market. All of the things that create that cheaper price affect the market value of a property.
Well said! This is exactly what I was thinking, and when I hear statements like "buy below market" it creates a lot of cognitive dissonance for me.
0 Reply
Nate R.
OP
Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes
10y
Originally posted by @Jacob Sampson:

... you said something that worries me. You said you think properties will appreciate over the next several years. This makes me think you are trying to convince yourself to pull the trigger on a marginal deal by tacking on some other possible benefits to make the deal appear better than it is. Or to justify it to yourself.
The property I'm looking at cash flows, at a rate that's consistent with the local market. Any appreciation would be a bonus and makes a successful exit possible in a few years, if I'm right. But the deal works regardless of any appreciation, if I hold it long-term (barring some kind of shock or oversupply situation that would push rents down).
I could go to the Midwest where I can get higher cash flows, but less appreciation. I'm comfortable with somewhere in-between, in an area I'm familiar with and can easily travel to see the properties. That's what I meant about appreciation.
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Jacob Sampson
Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
10y
Originally posted by @Nate R.:

Originally posted by @Jacob Sampson:
... you said something that worries me. You said you think properties will appreciate over the next several years. This makes me think you are trying to convince yourself to pull the trigger on a marginal deal by tacking on some other possible benefits to make the deal appear better than it is. Or to justify it to yourself.
The property I'm looking at cash flows, at a rate that's consistent with the local market. Any appreciation would be a bonus and makes a successful exit possible in a few years, if I'm right. But the deal works regardless of any appreciation, if I hold it long-term (barring some kind of shock or oversupply situation that would push rents down).
I could go to the Midwest where I can get higher cash flows, but less appreciation. I'm comfortable with somewhere in-between, in an area I'm familiar with and can easily travel to see the properties. That's what I meant about appreciation.
Sounds well thought out. I like the idea of investing in what you know (the area you live in/near). Is the cash flow that is consistant with the local market acceptable cash flow to you?
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Justin B.
Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
10y
Originally posted by @Nate R.:

I'm haunted by Ben L.'s comment "Don't be a retail investor!" in the podcast on rental properties. This is also common advice in real estate investment books. Always buy at a discount, or, as Warren Buffett says, with a margin of safety.
I've been evaluating some turnkey opportunities and am close to pulling the trigger on one, but Ben's admonition is in the back of my mind, watering the seeds of doubt.
Is it really that big of a sin to pay the asking price if the cash flow makes sense? I am also trying to buy in an area that I believe will appreciate over the next few years.
It's hard for me to conceive of how I can "buy below market" value in this market. If a property is below "market value", why is it even available at that price? Common sense dictates that those kinds of opportunities are ephemeral and elusive by their very nature.
This probably works with properties that need some kind of repair, or where there is value to be unlocked by some kind of zoning change, etc... I don't see how this applies to what I'm doing.
Nate,
I'll try and make it real simple for you. You always want to buy at the best price possible. You also want the best loan terms possible, and the lowest insurance rate possible, and the highest rent possible, etc etc. In general it's good advice, HOWEVER if the number works, none of that matters. If your goal is a certain amount of cash flow and you get it, who cares what the price is (within reason of course). So the bottom line is, if the numbers work, don't be afraid to buy "retail". Personally I hate that word. I have a few "turnkey" properties myself with BuyMemphisNow and I pay more for them than I would if I found them on my own. Why? Simple, I spend about 5 hours (at most) between analyzing, inspecting, and closing. Therefore based on the ease of buying them my cash flow expectations are a little lower than other methods, but I'm perfectly ok with that. So again, if the numbers fall in the range your comfortable, who cares?
3 Reply
Derek Daun
Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes
10y
I don't like the phrase "below market value". What people really mean is "below intrinsic value".
The market value of a house, the amount of money people are willing to pay, is function of many things:
- The intrinsic value
- how well it is staged
- the cosmetic condition
- How well it is marketed
- How easy is the seller/realtor to deal with
- How long are they willing to keep it on the market
- countless other factors
Imagine two architecturally similar houses for sale on the same block.
- House A has new paint, fresh landscaping, and is staged immaculately. The realtor holds an open house every weekend, and responds effectively to all inquiries.
- House B needs new paint, looks boring from the curb, has a hole in the fence, and isn't staged at all. In fact, in order to view the house, you have to set up a time for owner to leave, since they still live there and they have stuff all over the house.
The market value of house B, i.e. the amount someone is willing to pay for it, may be 30k less than House A.
The cost to make House B look like House A (including time and money) may only be 3k though. ($1500 for a rental grade painter. $300 for landscaping supplies, $200 for fence supplies, and $1000 for new carpet) I would consider this cost difference to be the intrinsic value difference. So even if you pay list/market cost, you are paying below the intrinsic cost.
5 Reply
Nick L.
Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
10y
@Derek Daun Well said. Another huge factor is the availability of financing.
0 Reply
Andrey Y.
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @David Faulkner:
No such thing as a "retail investor" ... there are "retail buyers" and "investors", and never shall the two meet in my opinion. If you are buying everything at retail and not adding any value, then where would you expect your profits to come from? There's a word for that, but investing isn't it ...
To put things into context, you happen to be in a crazy market at the moment ... and crazy markets make some crazy people do some crazy things; don't be one of them. It wasn't always this crazy, nor will it always be this crazy. In the meantime, there are ways to play a crazy market sanely. For example, get your RE license and start selling ... just plan ahead for the day when the craziness ends. If you know Warren Buffet, then you know to "be greedy when others are fearful, and fearful when others are greedy."
@Account Closed Your thoughts on this?
2 Reply
Ken P.
Rental Property Investor · Northville, MI · Member since 2013 · 263 posts · 183 votes
10y
I wish I'd bought a few more retail properties back in 2013! We bought a house that year that was freshly rehabbed by a flipper, who sold us the house for twice what he'd bought it for, at the going rate for the neighborhood. We liked it because it was totally new on the inside in a neighborhood where most of the houses were not fresh like ours, giving us a product that made a great rental and would be easy to sell.
We've enjoyed 18% cash on cash the past 3 years, and now that the market has continued recovering, if we were to sell it today we'd make over 100% return on equity. So, paying retail can work out just fine, depending on the situation.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Andrey Y.:

Originally posted by @David Faulkner:

No such thing as a "retail investor" ... there are "retail buyers" and "investors", and never shall the two meet in my opinion. If you are buying everything at retail and not adding any value, then where would you expect your profits to come from?
@Account Closed Your thoughts on this?
Sorry I thought I had already answered this. The profits come from rent growth and appreciation. Nothing wrong with improving something to get it to market value but once you have your upside that is all you have. So then you piddle away any profit with transactional costs. I'd rather be at the beach!
I lay back and get the rent growth and appreciation with no effort and it is the gift that KEEPS giving for decades to come.
2 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Originally posted by @Account Closed:

Originally posted by @Andrey Y.:
Originally posted by @David Faulkner:
No such thing as a "retail investor" ... there are "retail buyers" and "investors", and never shall the two meet in my opinion. If you are buying everything at retail and not adding any value, then where would you expect your profits to come from?
@Account Closed Your thoughts on this?
Sorry I thought I had already answered this. The profits come from rent growth and appreciation. Nothing wrong with improving something to get it to market value but once you have your upside that is all you have. So then you piddle away any profit with transactional costs. I'd rather be at the beach!
I lay back and get the rent growth and appreciation with no effort and it is the gift that KEEPS giving for decades to come.
Agreed ... once I work my tail off to get it to market value, I tend to head for the beach too rather than piddle it away in transaction cost. That way, I get the quick nickel and the slow dime both ... I work hard for that quick nickel, no doubt, but as well as profit it serves as insurance in the short term on my way to the slow dime. Without this added "insurance" from the value add, it is too risky for my personal tastes ... guess you could buy the same insurance through a large down payment, but earning it value add is easier than earning it W2 derived down payment for me.
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