Can I Stop Looking for Deals Now?
Investor · Nashville, TN · Member since 2015 · 429 posts · 143 votes
Obviously, there is some sarcasm there.
Generally speaking though, there seems to be the consensus that in the next 2-5ish years, there will be some sort of market correction.
In that same breath, it seems like there is ALWAYS this underlying pressure (not really the word I'm looking for...) to KEEP BUYING DEALS, almost regardless of what the current state of the market is. Of all of the podcasts I listen to (mostly about multi-family investing) and people I talk to, I've only heard one person say that they aren't buying right now, intentionally.
Now clearly, a 'deal' is something that cash flows or will make profit from day one.
I'm not saying skip over a true DEAL.
What I'm asking though, is if there are experienced investors who've been through more than one full market cycle, that have periods of not buying ANYTHING, even if there 'are deals out there'?
We could have a crash that starts tomorrow or we could die on the sidelines while we wait for the crash.
It's always a good time to invest. Strategy might change, action will not.
I have heard that Nashville is hot! Do you guys have any local economists who do forecasting? There are a few guys in our market who do yearly forecasts and I find that really valuable. Its only an opinion but a highly educated one. Might be worth finding a local economist.
@Lisa Thoele I'll have to do some digging and see if there are any around. That sounds like a good legitimate resource to hear from!
Hi @Mark Douglas, I am in the same boat as you, but instead of just looking for another deal, I am searching for my first deal. I am constantly learning through podcasts, books, and networking, and I feel this inner pressure to just jump in and get that first deal, but am also cautious because of the market. I have met many investors through local REINs that have moved on from the Nashville market and into neighboring areas (Chattanooga, Memphis, Knoxville). I believe there are still deals out there, it is just going to take a lot more hustle than surfing the MLS. I think, at least in my case (looking for a small multi family to house hack) I will have to go off market through driving for dollars, direct mail, door knocking, etc. to find a true DEAL.
We could have a crash that starts tomorrow or we could die on the sidelines while we wait for the crash.
It's always a good time to invest. Strategy might change, action will not.
Great point! @Luka Milicevic
@Lisa Thoele Nashville is a hot market for sellers. It's a Sellers Market. High demand, low inventory. With our population growing at about 100 people a day, we can't build houses fast enough. Then there's East Nashville. Minutes from downtown. Houses are sitting on the market for 6 months! The investors are asking way too much. I'm a realtor and wholesaler. I'm new to the wholesaling biz but I'm learning it's taking a lot of hard work. Sellers think their home is worth SO MUCH more than it actually is. If it was easy, everyone would do it. Wholesalers used to spend about 1-2 thousand before they got a deal. Now they're spending 3-5 thousand. Deals are out there. They will always be out there. My personal opinion about the future of the Nashville market? I think it'll plateau or maybe even dip a little in a 2 1/2-5 yrs. It's the being able to bend to what the market is doing and learning to be a creative investor.
Obviously, there is some sarcasm there.
Generally speaking though, there seems to be the consensus that in the next 2-5ish years, there will be some sort of market correction.
In that same breath, it seems like there is ALWAYS this underlying pressure (not really the word I'm looking for...) to KEEP BUYING DEALS, almost regardless of what the current state of the market is. Of all of the podcasts I listen to (mostly about multi-family investing) and people I talk to, I've only heard one person say that they aren't buying right now, intentionally.
Now clearly, a 'deal' is something that cash flows or will make profit from day one.
I'm not saying skip over a true DEAL.
What I'm asking though, is if there are experienced investors who've been through more than one full market cycle, that have periods of not buying ANYTHING, even if there 'are deals out there'?
I asked your questions to my mentors who've been through multiple cycles and they told me that they don't try to time the cycle, they knew from the start they were holding for the long term. They invested in places with strong fundamentals (SoCal, DFW) and rode out all the downturns. One of them did say that when it was more expensive, they could buy less properties, and when it corrected they would tap their existing properties and buy like crazy via HELOCs. The SoCal guy said, "you're never going to lose if you find a deal and keep it for the long term, don't focus so much on short term fluctuations."
@Ben McCall completely agree about needing to roll with the market! I am not, nor do I have any plans on ever investing in the Nashville market...i already have a similar situation here in Portland!! I was juat suggesting local econimists have been a good resource on helping me to decide how to position myself to take advantage of what could be coming in my local economy. Wishing you great success!
@Mark Douglas There are deals to be found in every market cycle. Real estate is an illiquid investment. Even in a hot sellers market, it can take 1-3 months to go from deciding to sell a home and getting the closing check. Most of the deals I do are with truly motivated sellers who can't wait that long or for some other reason don't want to sell through the traditional route and are willing to trade equity to avoid it.
That said, be careful in analyzing your deals, and don't get caught up in the hype and pay more than you should because you baked appreciation into the numbers. If you're buying rentals, do a sensitivity analysis and make sure you will cash flow even if vacancy increases or rents drop.
We could have a crash that starts tomorrow or we could die on the sidelines while we wait for the crash.
It's always a good time to invest. Strategy might change, action will not.
I love this and completely agree.
@Mark Douglas There are deals to be found in every market cycle. Real estate is an illiquid investment. Even in a hot sellers market, it can take 1-3 months to go from deciding to sell a home and getting the closing check. Most of the deals I do are with truly motivated sellers who can't wait that long or for some other reason don't want to sell through the traditional route and are willing to trade equity to avoid it.
That said, be careful in analyzing your deals, and don't get caught up in the hype and pay more than you should because you baked appreciation into the numbers. If you're buying rentals, do a sensitivity analysis and make sure you will cash flow even if vacancy increases or rents drop.
Very true and I agree. As long as you're buying for the right price then you'll be safe.
I completely agree with @Andrew Herrig 100%. There are opportunities in every market and at any time. Some periods they scream out at you because they're everywhere. Other times, you have to dig deep and hustle and/or analyze tens or over a hundred deals to find one that matches your criteria.
Here is my logic for times such as now:
1. Don't invest for the short-term. Focus on long-term buy and hold
2. Have clearly defined investment criteria that suits your goals (e.g. target cash flow return, value-add opportunities, equity appreciation resulting from value-add, etc.)
3. Spend time analyzing deals until one fit your criteria (sorry, there's no easy bullet. In times such as these you have to be extremely diligent and picky about what to invest in).
4. Once you find a property that fits your criteria, get your hands on it!!
5. For value-add opportunities, go ahead and do them, and get the increased cash flow from it
6. Have the property appraised and hopefully the value has increased significantly.
7. Use the equity to purchase another similar property with the same criteria or wait until the market corrects and then go on a buying spree buying deals!!
For example, I recently sold my apartment building in San Francisco because the market is hot (lots of money seeking investments and low inventory). I wanted to take advantage of selling my property at a ~3% cap rate before thousands of new units hit the market, driving down rents, and the amount of money in the market place drying up.
I am now searching to invest in several properties that add up to ~100 units in the Sacramento/Central Valley area of CA. The Sacramento market is extremely hot and everyone is trying to purchase something there, driving Cap Rates down to 5%. I've analyzed 50+ properties and most of these do not make any sense at current prices. The cash on cash return I am seeking is not even close. Plus, investors are making offers on properties site unseen which defies logic.
I've expanded my search to less competitive markets in the Central Valley where my criteria for cash-on-cash return and equity appreciation through value-add are attainable.
Once I am able to purchase these properties based on my criteria, I will purchase more like them. If I can't find any, I will continues to search and search. If the market corrects, then it's buying time!!!
Ping me if you have any questions.
@Jamie JonesIf your going to house hack then what is a deal to you? How much do you want to pay compared to how much rent each side gets. I have a duplex in Murfreesboro that you can buy if one of the tenants ever decides to move out. I do know that rents have gone up in Smryna and Murfreesboro so I doubt rents will go down. At some point values will not move up year over year but there will not be a crash like 2007 because that was caused by easy credit then the collapse of the credit markets. If mortgage rates go up that will cause the market to top out in the California market or even if rates dont go up much there will just be fewer buyers than can afford housing because incomes have not gone up as much as prices.
@Luka Milicevic coming with the dirty truth
I just want to point out Amazon is targeting Nashville for a headquarters spot. 50,000 jobs... They have to go somewhere. Ikea is also coming as well. It's organic business growth, not propped up artificially
Nashville fundamentals are fine. Every crane is rented out in Nashville for the next 3 years. Like @Devan Mcclish said, IKEA and (probably) Amazon are coming as well.
Listen to Dr. Arthur Laffer - he is an economist and right now he has a pretty positive outlook. Don't sit on the sideline!!
(not sure if a link is kosher here....if it's not I'm sure @Brandon Turner will yell at me)
https://www.entreleadership.com/podcasts/213-dr-arthur-laffera-return-to-pros
@Henry Perez just curious what kind of net cash flow/profit are you expecting on a 100 unit Central Valley property? You're trading some nice blue chip property for cash flow, I am assuming?
As I see it, I'd be reluctant to trade prime real estate, even if the cash flow is (relatively) weaker today. Let's say you kept your SF property (and what I presume is a prime location for you peninsula property) long term. Certainly you'll get a lot more appreciation, vs Central CA. Any market downswings will be less, and rebounds will be earlier and higher as well. And of course the cash flow will increase as well, following the appreciation. Plus you keep the low prop 13 protected tax base, and you'll be dealing with the best professional tenant base all along.
With the central CA trade, sure you're bound to get more initial cash flow. But you're probably dealing with a class C building and consequent tenant base. And you're more prone to boom/busts.
I've contemplated similar moves and feel it's worth thinking long and hard about that kind of trade. Be curious about your take on it.
@Amit M. The rent control on the building was absolutely killing me. The building was four flats, and the entire sq ft. of the buidling was 6,600 sq. ft. One flat was a 4/2 and their rent was over $1,200. The tenants have been living there since 1991. Plus, with the SF Rent Board allowing only 0.5 ppt or 1ppt of rent increase a year, that's not adding much to an already low number. The other flats were 4/3 and 5/2 and i was only getting $2,200 max on them. These other three floors had tenants who've been living there since 2000. These tenants will end up being multi-generational and have no intention of ever moving out.
I hired a lawyer and very delicately brought up the subject of a buyout. None of them were interested. Other owners in my vicinity ended up forking over close to $250K to buy out each of their tenants. For $50K each, I would have bought out each of my tenants, but not at $250K a pop.
My building brought a TON of interested buyers and investors. But most of them walked away when they noticed the tenants were going to be multi-generational and that buying them out would take significant capital ($750K-$1M).
Because of severe rent-control, i would not be receiving much in terms of long-term appreciation (especially since none of the tenants intend to ever move out). The building now was valued the same as before the 2008 financial crisis. The very low rent-controlled rents was literally becoming a nail sealing up my coffin.
As a result, I was able to sell the building at a sub-3 cap rate. To put it in perspective, what I will get on a cash-on-cash return basis on a large multi-unit property in the Sacramento-Fresno range will dwarf the gross rent I received on an annual basis from the SF apartment building.
As a Finance Director at a soon to be IPO tech company, every set of numbers I analyzed told me the same story...sell the building. Add to that the building was built in 1900 (it survived the 1906 earthquake) and it was becoming a significant constant money pit because on-going maintenance required.
@Henry Perez What neighborhood was your building in? Yes, the tenant vs LL contention has increased exponentially in SF since the recovery. And now buy outs are regulated as well, which is a negative. As a consequence almost no 3-6 unit. Uildings are getting converestex to TIC plays.
Bummer that you got no play from your tenants. Usually there will be at least one low hanging fruit- the guy that will take the cash. Someone's gotta move at some point. That's why I am what neighborhood this bldg was in. Also the flats being large, they can feel like a home, as opposed to smaller units, which some tenants inevitably out grow.
Also, how do you know they planned for the kids to take over? Did they say this explicitly?
Those are the worse kind of tenants. Plus sometimes they rent the rooms out, and make a profit above the stabilized rent. Yeah, I'd never buy a building that was as entrenched as that.
What about your peninsula one? RC there too?
@Amit M. The unit was in the Inner Mission. I was counting on at least one tenant who i thought was low-hanging fruit, but to no avail. He was hip as to what was going on in regarding buyouts in the Inner Mission.
I was told by a couple of the main lessees off the cuff last year before the topic of buyouts was even brought up that their intention was to have their teenage children continue living there as they would not be able to afford housing. I was also told that they planned on living in the flats until they passed away. Once I heard this I knew I had to sell the building. It made no financial sense continue owning it.
And yes, I'm pretty sure in two of the flats the main lessees were subleasing it and making a profit above the stabilized rent.
The other property is a SFH in San Bruno. We lived 4 houses away from the PG&E explosion and were home at the time it occurred.
@Henry Perez Yes, yes, the mission- literally ground zero for the most intense Landlord-tenants battles in SF! I know, I live and own several properties in the mission. The 2000's was a great time to invest in here. I remember the good old days of causally being able to buy out tenants for $10k :) or being able to build/expand and no neighbors complained. This last market boom, where besides "affordable" housing, people were protesting Google shuttles (one character even had a Google bus piñata, and proceeded to smash it during a protest), I knew things were changing. Literally every tenant in the mission, English speaking or not, old or young, now knows that their RC flat is a gold mine. And all the activist groups now swarm around any potential development or attempted Ellis Act eviction and derail them as well.
Luckily I'm on the other side of the equation- I already made my investments here, and all this craziness and nymbism is limiting growth and tenant turnover, but adding value to my properties by restricting supply. The mission is mostly done for value added apartment investing. It's either for high end flippers or well off home/condo owners buying retail. And pray tell you find the multiunit that is all vacant, you'll be paying a very high price for it- what pacific heights was selling for pre boom. Times have changes in the mission, that's for sure.
I can see how you fell stuck with this property. How long ago did you buy it? I assume that you made a good profit on the sell side at least.
I like @David Song observation. Not a market now where rising tide lifts all boats like when buying in 2012 and you could make some mistakes while still winning big. Maybe more than ever listen, learn and if you are an accredited investor, look into value add syndication deals with experts who have been through various cycles. You will see they are investing in the strongest markets, have great broker networks / access to deals which is critical in a highly competitive market, can raise significant capital to take advantage of scale, more disciplined / conservative underwriting models, have simple well thought out business plans to increase the properties value, using fixed rate 10yr loans to take advantage of still incredibly low rates historically speaking and use more sophisticated tool sets to help understand how fluctuations in occupancy, rents, etc may impact their models. You can earn and learn w/intention in more passive method while you look for more reasonable opportunities or entry points for your active capital.
I worked for Dr Laffer back when I was getting my economics degree at Vandy, and that guy is absolutely brilliant. He also invests his own money based on his predictions, so that always gives me more confidence in someone.
That aside, my partner and I spent 5 hours yesterday staring at the data and talking about the market. Seeing as we are in some phase of construction on dozens of for sale homes right now, we cant ignore the market and just play the long game.
Here were our key takeaways.
1. Absorption will be a problem. Austin is the only city building more new units per capita than Nashville. Austin is at about 8 units per 1000 people, Nashville is around 5.5, and everyone else is below 4 with most below 2.5.
2. Growth is still happening, but it is price constrained. 100 people a day move here which on average is 50 households. Of those, half make less than 55k per year, and effectively can't buy anything over 250k. These folks bid up the cheap properties as there is an abundance of demand at that price range. Most new construction is higher, though. Growth will not likely bid up the 350k+ houses, since they are delivering more of those than the real demand and prices have risen to the point of excluding much of the potential market. There is an affordability issue here at the high end, but tremendous pressure on the low end (which makes it hard to find good rentals).
3. Investors have more appetite than home owners. Buyers get caught up in hysteria too, but investors excel at getting frothy and driving up prices to the point where no one makes any money. This is more so true on the development side than on the rentals side, and I'm sure plenty of landlords have been outbid for cheap houses by people who wanted the dirt. Talking to realtors and looking around town makes it clear, everyone and their mother is in this business now days. Unfortunately, many people are taking razor thin deals that are just begging to blow up in their faces. This investor rush has driven a lot of our run up aftificially, masquerading as population growth.
In conclusion, I don't buy into the market collapse idea, but I also think the correction has already begun. Certain neighborhoods and price points are sitting for a while right now. I believe that many houses being built now will sell for slightly less than projected. Some lower end neighborhoods will be discovered and shoot up in value. Some will stay flat. I'm confident that houses under 200k will never be less expensive on average than they are today, though. I just don't see a 10%+ reduction in overall prices in Nashville in the near future, short of skyrocketing interest rates or the complete nationalization of health care.
The tide will rise and save all of us developers in 10 years, but being early is the same as being wrong. On the rental side, the people passing up the 150k properties that rent for 1200 are also going to pass up the 200k properties renting for 1500 in 4 years. In such a strong growth market, you have to either be like Devan and Luka and look for deals under every rock at considerable expense of time and money, or you have to be counting on long term appreciation as the city grows. If cash flow is your game and you are just getting started, then that's why God made Memphis.
To echo some earlier points, this is not a forgiving market to learn in, but the long term growth is there. If you can afford to own basically anything for 10-20 years, you will be a happy camper with no skill or luck required. If you want to find 2% rentals, you pretty much need to be the best at finding deals or be willing to add a ton of value. Sorry for the long post, but thought it might be helpful.