Everyone is investing. Where to go??

Question

Hey all.  This is my first post so go easy on me. First.  Not an investor...yet;)  But in getting the courage to buy something I have a question about the state of the real estate market.  I'm currently in the Tampa market.  I wouldn't say it red hot but its pretty close.  Prices rise daily and I hear about more and more regular joes getting into the market as landlords and real estate brokers/sellers.

This has me concerned because I've heard that when everyone is going one way, you should probably go the other way.  Warrent Buffett said something similar.  Even BP's Brandon said it on a podcast.  "When you're taxi driver starts asking about real estate investing then maybe you should start to question the market."

So with that in mind, where would you invest your money??  Stay out of the market for now??  Continue to look for deals, even though they are few a far between?

Thanks for the help.

Brian Johnson · Answer

This is a good topic.  I agree with some and disagree with a few.  My past experience in buying rentals are the MLS is a great source!  The reason is anything on the MLS are people wanting to sell.  The other option is looking for off market or never been listed.  That takes a lot of effort trying to figure out which random person will sell at a discounted price.  Needle in haystack approach.

From my experience is if you want the good deal you have to buy the distressed property.  The more distress the greater discount.  You also have to have a realistic number for the repair cost.  I have been buying distressed homes for over10 years and most of the work I do myself.  So that saves me a lot of $$$.  Another thing that really impacts your total cost is your financing.  (If you are a all cash buyer for a buy and hold rental then you are doing it wrong!)  Every financial institute  is different.  So shop around and see what they have to offer.

That is my $.02

Josh D. · Answer

@Alan Davidson I'm still looking for real estate to buy but I think you have to be more creative and create value.  The days of easily buying real estate below replacement cost are long gone.  We're looking at doing small townhouse developments, partner with builders or developers with track records.  I don't think the housing market is going to crash any time soon but the high prices are what they are.  I still think you can find diamonds in the rough, off market deals.  So I'm focusing on trying to find those off market deals, looking at the MLS is almost certainly a waste of time but I still have searches set up to let me know what is going on in different neighborhoods.  Having cash is always good so you have dry powder when you find a good opportunity.

Account Closed · Answer

No, cap rate measures what you are paying for POTENTIAL NOI.   You would not pay LESS for MORE cash flow.

Tom V. · Answer

Adrian, you mentioned it's been difficult to find deals where the numbers work. I'm curious, what kind of properties are you seeking and what price range? What Cap Rate, COC, CF, and income expense ratio is your bare minimum in your market? Thanks.

Alan Davidson · Answer

@Josh D.  Thanks for the explanation.  Since you are selling most of your houses what are you doing with the cash?  Leaving it liquid? Or reinvesting in something else?

Josh D. · Answer

@Alan Davidson I understand what cash-on-cash return is but I think cap rate is a better metric because it reflects NOI relative to purchase price regardless of the type of financing that is used.  Cap rate focuses on what you are paying for the cash flow. You can always refinance a property with better terms, i.e. loan to value or interest rate but you can never change how much you paid for it .  Tampa has been a good place but we've seen a lot of price appreciation the last couple years which has pushed yields way down.  I think the overall economy in Tampa will continue to do well in the future as people continue to move to Florida but I can't find deals like I did a few years ago.  I'm actually selling most of my houses because the return on my unrealized equity (pretax) is around 4%.

Adrian Smude · Answer

@Alan Davidson welcome to BP & RE!  As others have said already if the numbers work for a buy and hold it doesn't matter what market we are in.  No one times the top, but most feel we are closer to the top than the bottom, but that could still mean we are years away from the top which means years of cash flow you could miss out on.  It has been very difficult for me to find a deal the numbers work for recently, but I'm still looking.  A very good tool to use in this type of market is lease options.  In simple if the market turns around the day you sign you aren't stuck when your lease option expires.

Alan Davidson · Answer

Josh--This is what I mean by Cash on Cash vs Cap Rate.

https://www.biggerpockets.com/renewsblog/2014/05/10/cap-rates-cash-cash-returns-explained/

Michael--Thanks for the thorough explanation.  I was telling my wife the other day that I wish we were smart enough to do the live and flip model when we were younger.  She's not having that at this point in our life.  I'm really looking to do Buy and Hold for now.

Michael Haynes · Answer

@Alan Davidson, Hello, you can try and do a study online of all the different ways to make money with Real Estate. Spend some time and look on Zillow.com using your own home address in Riverview, to see on their map, the hundred or so homes for sale. Here is the link

http://www.zillow.com/riverview-fl/

Then, try and find one that is waaay below Market Value, for some reason or other. It might be a fixer upper that nobody wants, but, has extra land that is not in the swamp. It might be a friend of a friend who is going through a DIVORCE and she wants to get rid of the bad memories at any cost. You might know a lawyer, who knows a banker, who has good deals for those who have cash and connections. Call on those 1 x 2 white plastic signs that the Wholesalers are leaving illegally on every street corner in the traffic areas of our hot as Hades Hillsborough County. Those guys know how to buy distressed properties low and sell a little higher. Then, when you find a real cheap property, that you would like to live in and you have the means to buy it, with your own cash or OPM, Other People's Money...at least in part if you have a down payment and can get a loan from the banker, BUY IT. Fix it up to look as good as you can, like the FixorFlop show on TV. File for Homestead Exemption, the first of the year as your home Residence. Live there for two years and study some more about Real Estate Investing. Keep your fingers crossed that the rush to buy land, any land on dry ground, South of Progress Village and Bloomindale continues because companies like Amazon pay outrageous prices for raw land just South of you in Ruskin to build enormous warehouse busineses

http://www.tampabay.com/news/business/realestate/a...

and that the Port of Manatee will be built out, like planned, to be a big container port for the Panamax ships that will be sailing into Tampa Bay to offload everything from China. If the wind continues to blow that way for the two years, you can sell your RESIDENCE at a PROFIT,  TAX-FREE, without having to deal with all the TENANTS and their endless problems and excuses and needs in the middle of the night. During that two years, find one other property to rent and put up with the TENANTS, until you sell your RESIDENCE and move into your rental to do this again...for the rest or your life. If you study the TAX RULES, you may find a few other ways to make legal money, tax-free. If you want to make more like this you can study how to do a 1031 Exchange, find one of the Wholesalers on BP who will get you really good deals for cash and do fix-ups and flip them until this Market Wave dies. I suggest doing them one at a time for when the Crash comes you only have one Short Sale to handle. If you really have the need to be a worn out Landlord, wait until the Crash happens and buy a trailer park.

Josh D. · Answer

I don't understand your question. What do you mean by cash on cash deal?