Thoughts as we approach the top of the market?
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Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
9y@David J. Bigger Pockets is a magical island in which the word "correction" is forbidden. You may get kicked off the island for mentioning it. Me, too, now that I have engaged with you.
We are not buying at the moment and have not been for a while. Assets are overpriced and I don't want to be the last one holding the bag. I advise my clients to be patient, be disciplined, and get dry powder ready for the buying opportunity to come. The people with cash on hand when the bargains appear again are the ones who will truly get rich. When people reach out to me to join my investment platform, I get them on the phone and tell them, "I'd love to have you in my platform, but if the money is burning a hole in your pocket and you must invest now, I am not the guy for you. If you are prepared to wait 12-24 months for when the buying opportunity comes again, then we can talk."
One of my best friends is a fund manager here in New York. He took his job right when the financial crisis hit and he was overwhelmed for several weeks. When he came up for air, we got together, and I asked him, "Why were you so busy? Were you selling everything to stop losses?" He looked at me like my hair was on fire. "Selling? No. We were buying like crazy. There were so many bargains." He's a devout follower of Warren Buffett, who says, "Be scared when other people are greedy; be greedy when other people are scared."
There is a lot of greed on Bigger Pockets these days, and a lot of FOMO (Fear of Missing Out). People who have watched from the sidelines as other people got rich are now rushing to cash in, fearful that the market will pass them by and they will never get into the game because they will be priced out forever. I know this feeling. Before I was a professional investor, I was a lawyer who bought my home at the very top of the last bubble, because I was afraid that if I did not move, prices would go even higher. I bought and lost 25% of the value of my apartment within a few months. It's come back, but if I had waited, I could have bought a bigger apartment for less money, and more appreciation on the upswing now. I think there are a lot of people rushing to buy right now who are going to regret their decision in 12 months time.
If you are scared, that means your instincts are correct. Listen to your gut.
You're not the only one worried about the imminent downturn. Two days ago, the National Real Estate Investor published an article entitled, Pullback Continues in the Investment Sales Market for Apartment Properties". The sub-headline was "Sales of single properties are slowing, suggesting broad correction in the market." (By single properties, they mean properties not part of a portfolio.)
126 Replies
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
@David J. Bigger Pockets is a magical island in which the word "correction" is forbidden. You may get kicked off the island for mentioning it. Me, too, now that I have engaged with you.
We are not buying at the moment and have not been for a while. Assets are overpriced and I don't want to be the last one holding the bag. I advise my clients to be patient, be disciplined, and get dry powder ready for the buying opportunity to come. The people with cash on hand when the bargains appear again are the ones who will truly get rich. When people reach out to me to join my investment platform, I get them on the phone and tell them, "I'd love to have you in my platform, but if the money is burning a hole in your pocket and you must invest now, I am not the guy for you. If you are prepared to wait 12-24 months for when the buying opportunity comes again, then we can talk."
One of my best friends is a fund manager here in New York. He took his job right when the financial crisis hit and he was overwhelmed for several weeks. When he came up for air, we got together, and I asked him, "Why were you so busy? Were you selling everything to stop losses?" He looked at me like my hair was on fire. "Selling? No. We were buying like crazy. There were so many bargains." He's a devout follower of Warren Buffett, who says, "Be scared when other people are greedy; be greedy when other people are scared."
There is a lot of greed on Bigger Pockets these days, and a lot of FOMO (Fear of Missing Out). People who have watched from the sidelines as other people got rich are now rushing to cash in, fearful that the market will pass them by and they will never get into the game because they will be priced out forever. I know this feeling. Before I was a professional investor, I was a lawyer who bought my home at the very top of the last bubble, because I was afraid that if I did not move, prices would go even higher. I bought and lost 25% of the value of my apartment within a few months. It's come back, but if I had waited, I could have bought a bigger apartment for less money, and more appreciation on the upswing now. I think there are a lot of people rushing to buy right now who are going to regret their decision in 12 months time.
If you are scared, that means your instincts are correct. Listen to your gut.
You're not the only one worried about the imminent downturn. Two days ago, the National Real Estate Investor published an article entitled, Pullback Continues in the Investment Sales Market for Apartment Properties". The sub-headline was "Sales of single properties are slowing, suggesting broad correction in the market." (By single properties, they mean properties not part of a portfolio.)
I appreciate the detailed reply. That is some good feedback.
I am in the middle of a refi I will be getting about $200K cash.
1 option is to keep my cash on hand and wait for this market to turn down. Get some things on the down, ride to the bottom then enjoy it all the way back up.
Another option is just try to invest smart. I was thinking someone might say something like, any market can be good for investing as long as you cash flow and hold.
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
@David J. It depends on a few things, like what your objectives are and how long you want to hold. If your hold period is the rest of your life, you will probably be okay whenever you buy, as long as you generate enough cash flow to cover all expenses, including capex and vacancy, during the down periods. The problem really arises when the downturn comes after either (a) people invested for appreciation, (b) they overleveraged to generate returns, or (c) both. Whatever you do, you need to plan for the downturn and make sure that you are covering all of your expenses and not coming out of pocket. This is much easier when you buy at the bottom of the market than at the top.
I am sure that someone will say any market is good as long as you cash flow and hold. Just make sure that you factor in the bad times too. And you need to be extra-disciplined at a time like this, because people's tendency is to lose their discipline and start making assumptions that are too aggressive in order to make the numbers work. I saw a good example of this yesterday where someone was offered a deal in which the exit cap rate was two points LOWER than the entry cap rate - which is crazy! Conservative underwriting principles require you to use a HIGHER cap rate on exit under normal circumstances, but using an even lower cap rate than the current historically low cap rates borders on the fraudulent in my mind.
- Investor · San Jose, CA · Member since 2017 · 343 posts · 102 votes9y
@David J. - I agree with @Jonathan Twombly and I am on that train along with two of you. Market is cyclic what is important for you at this point of the cycle.
One of my investor friend who owns 1000 properties ,during last Christmas break decided to find out properties which are not performing well. Since Jan he has his whole machinery trying to sell those 43 properties, 26 gone and 17 more to go. On purchase side he only bought one and that too is seller financed.
Roll your dice and enjoy the ride.
Good Luck
Vivek
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
I find it funny that posts about the impending correction get no traction here. The other day I posted about how several articles in trade publications were talking about the correcting coming or already being here, and they got almost no engagement at all.
Now that's the surest sign of all that the bubble is about to pop - fingers in ears: "I can't hear you! I can't hear you!"
Another sure sign of a bubble about to burst - lots of articles in the press about how it's not about to burst.
- Homeowner · Orem, UT · Member since 2014 · 25 posts · 11 votes9yIt's always a guess. In my opinion, (I'm in Utah) he market here is set to continue to grow for several more years. Yes, we have reached 2008 price levels, but with the growth rate here, shortage of homes (builders are selling out before even building), job growth, low unemployment, etc... not to mention a smaller scale tech boom out here, I'm confident with purchasing a rental to add to my portfolio. It's always speculation. I could be wrong, but I'm looking for long term buy and holds, so I'm hoping that even with a market correction I will be ok in the long term.
- I agree with the sentiments to keep powder dry and wait for the opportunity. I disagree that the opportunity will be as soon, however. I think the next opportunity may be closer to the 3-5 year range. The fed strategy to focus on raising long term rates by stopping bond reinvestments will be the trigger IMO. As the roll off rate increases, the risk of decline will as well. Once the decline starts, then you have to figure out when it is close to bottom. It's fun to guess, but none of us really knows.
- Investor · San Jose, CA · Member since 2017 · 343 posts · 102 votes9y
@Michael Rodrigues - Let me try to see if this helps, I bought in 2011 @40% of the 2005 peak price. I could have bough the whole street, it appeared as if whole town was for sale. I was prepared for house to be vacant for 1 - 2 years, 30 - 50% further decline or at worst foreclose.
Fast forward recently I bought a property from auction, reserve price was $98K , last minute some rookie entered and I had to up my price to $107K that was my final price. Luckily rookie stopped @106K. House appraised @130K. Checking last 20 years of price history on zillow house is holding it's value in last 20 years.
There are investors paying 25- 30% over the market price since they see houses less than price of Tesla.
As long as you have a game plan you will be OK in short term and long term.
Good Luck
Vivek
- 9yJeremiah MaughanPro MemberInvestor · Provo, UT · Member since 2016 · 130 posts · 168 votes
@David J. I purchased a few properties in 2007, right before the crash. The key was they cash flowed when I bought them. The rents took a small dip, about 5%, during the recession, so my margins did get tighter but still okay such that it wasn't a big deal. I find that too often investors by for future gains, not for present cash flow. To me that's nuts to buy on what rents might be or what appreciation might be. Several of my peers and even clients let their properties go because they were pocketing the rents and not paying their mortgage. I try to teach people to follow a "column A, column B, column C" method. Column A is your monthly paycheck that goes to service your lifestyle. Column B is your extra money for higher risk investing; money you don't need for your lifestyle, and you won't cry if you lose. That's where I buy shares in startups or rentals that need to be fixed up. Column C is stabilized, set it and forget it investment. That's where rentals that are cash flowing, stocks paying dividends, etc live. The mistake people make is when they try to use column C to pay for column A. I just made sure to maintain discipline and never touch column C. For me, the rent money wasn't for me to live on but for me to service the debt and build a reserve for the next purchase opportunity. For those of my peers that did that, we all came out unscathed with a much higher net worth than we had in '07.
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
Originally posted by @David J.:
I am finding lots of articles about how this time it's different.
lending standards are higher,
Average equity is higher
etc etc
"This time is different." People saying this phrase is the number one most dead-on sure-fire sign that a major correction is right around the corner. People should set an alert for this phrase and short everything when they start seeing it pop up.
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
Originally posted by @Michael Rodrigues:
It's always a guess. In my opinion, (I'm in Utah) he market here is set to continue to grow for several more years. Yes, we have reached 2008 price levels, but with the growth rate here, shortage of homes (builders are selling out before even building), job growth, low unemployment, etc... not to mention a smaller scale tech boom out here, I'm confident with purchasing a rental to add to my portfolio.
It's always speculation. I could be wrong, but I'm looking for long term buy and holds, so I'm hoping that even with a market correction I will be ok in the long term.
MF and SF are different and SF is definitely a lot more local. To be honest, I, focused on larger MF properties, which have become a national market since the last recession, so what's I say may not apply to local markets for SFRs with strong local fundamentals. That being said, however, invest for cash flow no matter what. Markets can turn unexpectedly and if your investing for appreciation, that's when you will get hung out to dry.
- Homeowner · Orem, UT · Member since 2014 · 25 posts · 11 votes9yGreat advice here, Jonathan Twombly thank you.
- Developer · Little Ferry, NJ · Member since 2016 · 426 posts · 226 votes9y
This is a great thread for sure. Lots of good points to think about. I feel that the media has a BIG role in this as well, all these CNBC shows that show the "simplicity" of investing, showing 3 figures, Purchase, rehab, resell, and not counting anything else that is involved. Lots of these amateurs come in and big the prices to extremes because they just want to be in the business and "work for themselves." Another factor is that the new investors are over saturating the market and causing there to be too much inventory, having to make all the bigger guys drop their price (which most don't mind doing because they rather sell quicker and move on). That's just my .02
- Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes9y
Originally posted by @Jonathan Twombly:
I find it funny that posts about the impending correction get no traction here. The other day I posted about how several articles in trade publications were talking about the correcting coming or already being here, and they got almost no engagement at all.
Now that's the surest sign of all that the bubble is about to pop - fingers in ears: "I can't hear you! I can't hear you!"
Another sure sign of a bubble about to burst - lots of articles in the press about how it's not about to burst.
Nah
Can't live my life scared like you do
- Rental Property Investor · Chappaqua, NY · Member since 2015 · 1k+ posts · 947 votes9yJason Johnson I bought a 3 family in 2007. Except for the years where I was doing extensive renovation it was always CF positive.
- Rental Property Investor · Chappaqua, NY · Member since 2015 · 1k+ posts · 947 votes9yJonathan Twombly when you say "short everything" are talking about the stock market?
- New York City, NY · Member since 2016 · 420 posts · 172 votes9yHold on. Interest rates are going up slowly I would assume that's a good thing for patient people.
- Rental Property Investor · Chappaqua, NY · Member since 2015 · 1k+ posts · 947 votes9yJason Johnson I thought Scott was referring to the interest rate and its effect on the market. I don't like to carry debt that doesn't perform. The idea of taking out money to pay a note monthly on money that is also getting affected by inflation is foreign to me. What's that sound like -8% a year? Ouch. If you go that route and the market goes up for 6 years just make sure you don't give up and jump in, because you can be sure you'll be buying at the top. I'd like to talk about this in 5, 10, 20, 50 years see how we all feel about it then. Even if the guys above are right in a year or two, maybe next time they are wrong. Market timing is known to bite investors long term. Supposedly they buy their own line of..... develop a false sense of confidence from what I remember reading, they begin to think they can predict the future. On the options and shorts, I think of 25 years ago when I first heard about shorting. The upside is 100% of your investment. After all the stock market can't go to zero then beyond. Stops at zero. Losses could be infinite. I like the numbers the other way. That's just theoretical tho. Many investors that short give up when they are bled dry with margin calls and fees. Where's that money coming from tho? For me I would look at it this way. I'm buying for 15, 20, 30 years. If the market dips after I buy so what. Im looking at the horizon way out.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes9y
Everyone likes to think they are Nostradamus.
District Invest Group545 Reviews - Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
Originally posted by @John Hickey:
Jonathan Twombly when you say "short everything" are talking about the stock market?
It's a little bit of an exaggeration, and I'm not talking about the stock market. For advice on that, I'm not your guy . . .
A recession is coming eventually. This time is different perhaps but the results could be the same.
For the this time is different points:
Much different loans or better qualified loans.
Many locations prices are reclaiming old peaks and understand inflation adjusted that might still be 20% less than 10 years ago.
Jobs, jobs and more jobs not associated with RE or construction. That became a double whammy last cycle and might not be as bad this time around.
Actual housing shortage vs last time it was only a housing shortage for investors.
Good luck!
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