This Market is Broken - the whole thing
Providence, RI · Member since 2017 · 62 posts · 17 votes
This Market is Broken - the whole thing
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8yHalf of investors always think the sky is falling, and the other half always think prices can only go up. Both sides are right and both sides are wrong, and usually not for the reasons they think.
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- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Yes, in most markets if you apply a standard finance metric like the p/e ratio, the returns don't make sense to invest. Most today are buying a stressful job (landlording) and not even getting paid for it.
Rent to value ratios in my market have been too low to buy off the MLS for a long time.
In some markets the R/V ratio is still good, but appreciation will most likely be less, reducing your overall IRR.
On the commercial side, cap rates have been compressed to about the same return as AAA corporate bonds. Since when did people start getting excited about 5% or less for this amount of risk and work?
But... back to residential- inventory is low keeping prices high in most markets. There is more demand than supply and millenials are forming families. Interest rates are low, freeing up capital. Barriers to entry (new construction) are high with permitting hurdles (here in the west anyway).
A lot has been discussed about whether we are in a bubble or not. Personally I am selling way more than buying.
What are some of your thoughts as a new finance grad @Tom Conant?
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8yI think like Steve Vaughan mentioned the millennials will keep demand steady for the next couple years. I believe I just read realtor.com predicts 2018 to be another good year for RE albeit it slower that say the last 3. Personally I don’t think it matters a whole lot what the market does. If the deal makes sense buy it. I plan to buy in a good market, bad market and everything in between. The next dip won’t be as bad as 2008, lender restrictions are still to high for that. Remember back then they didn’t verify income often and stuff like that. Next dip will probably happen in 2019 or 2020 if I had to guess. Tax reform could slow the real estate market as could rising interest rates.
- Sunnyvale , CA · Member since 2017 · 373 posts · 362 votes8yWarren Buffet never looked at the economy or the stock market to make investments. He looked at the intrinsic value of the asset and it was available at a discount. Good economy or bad, our job as investors is to find those hidden gems and stay away from the hype. Walk away from bad deals and always win when you are buying (vs selling). Our job is also to manage our portfolio, which means disciplined liquidation from time to time. Lastly our job is to keep a nice healthy pile of cash, to save us during the rainy day or make opportunistic purchases as they become available.
- Providence, RI · Member since 2017 · 62 posts · 17 votes8ySteve, Thanks so much for the thoughtful response. It was the sort of verification I expected. I hate to say it but my thoughts are pretty grim. But maybe that’s the finance aide of me and not the entrepreneurial one 🤷🏻♂️ I honestly think that the metrics used to value conventional securities are somewhat accurate. We simply live in a world where 2 percent inflation is the new benchmark. While it sounds crazy to anyone with a logical mind, the market hitting all time highs every day (kind of like how a casino slot machine blinks and blasts music at you - thanks CNN and Fox!) isn’t a surprise at all. Look at the bureaucratic environment. Our federal govt has essentially rebuilt the foundation of our economy to include exponential growth. In my opinion, the only countries that would survive and actual economic crisis are the ones that have gone NERP or ZERP because of the fact that they’re growing organically instead of artificially. Don’t even get me started on wage/inflation disparity and how corps and educational institutions are allowed to rob people. But as far as real estate goes (and also, bitcoin. Bitcoin is literally the modern day tulip crisis unfolding before our eyes, wish I bought at $650.00 like I wanted to. Sucks to be a broke college kid) I think that there are way too many retail investors being fooled by these ‘successful gurus’ that hold one weekend fast tracks to ‘financial freedom’. I was born in 95 in AZ and my father way a cop, okay. When I was 5 years old he lost sooooo much money in the stock market crash around the turn of the century that we had to move to RHODE ISLAND. But I love rhody so it’s all good. But the question I beg to ask is, why was my police office father spending hours a day betting his life savings on the stock market? When he could have had a steady cash flow positive Income, benefits and retirement? Because he wasn’t truly educated in the stock market but a few books and a guru told him he could get rich? This is the problem though. The same exact phenomenon is unfolding right now in retail RE. Banks have become more strict on hard money lending criteria? Hmmm I wonder why. Maybe because the underlying assets behind EVEN THE MOST STABLE ‘assets’ are really just ticking time bombs. ‘But Tom, what about the inflation you mentioned??’ Ahh right, hasn’t the government come out and said they want to stagnate inflation and lower the federal funds rate? Yup - Ms Yellen. It just hasn’t happened yet. And why? We’re at all time highs in the market, right? The real estate market is booming, cap rates are ridiculous, right? Prices are going up and so are wages, right? So Yellem, why hasn’t that QE rate come back down? Ohhh that’s right, because the second these rates drop, so will the prices of EVERYTHING. Except what all these poor retail RE investors owe on their 20 different mortgages. Unless have built in 30% downside risk into your cash flow statements (income and balance don’t mean much) I believe that your property is vulnerable. But the hype is ‘all time highs’ baby. So I guess buy on. I do think that their are still really good investments out there, I just think they’re a lot harder to find. Gotta be a wolf, not a hyena. To touch upon the idea that millenials are now having children, yes I totally agree. I haven’t looking into age demographics but isn’t the generation above millennials massive and my generations not that large proportionate to the generation to generation growth seen in previous evolutions? On the surface that spells stagnated proportionate growth (which would play into my argument I think) to me but idk. Sooooo tell me if I’m a crazy conspiracy theorist (like I feel like I am lol) or a reasonable concerned young person with an interesting perspective🧐 Thanks for reading my ridiculous rant, Tom
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes8y
Half of investors always think the sky is falling, and the other half always think prices can only go up. Both sides are right and both sides are wrong, and usually not for the reasons they think.
District Invest Group545 Reviews - Providence, RI · Member since 2017 · 62 posts · 17 votes8yThanks everyone, I love this discussion. Thank you for taking part. Sam and Caleb, to follow up your responses, I would agree that a good deal is a good deal and that there are still good deals out there for people who do their due diligence (that’s a mouthful). But what happens when the money owed on a property becomes higher than the intrinsic value of a property as growth slows? Contractions in this invested of a market is very scary in my opinion. Remember how big money was taking their money out of the market as we were hitting all time highs every day for the past year? Well guess what, I read an article the other day about how they’re putting their money back in now. While that sounds like a hedge maybe or they really do think this market is made of steel, I don’t know. But what it looks an awful lot like is when I use my Bovada sports gambling account to bet against the crowd. So in the RE world, we have people like us on this forum discussing these things and thinking about the best deals while, gurus everywhere and I literally mean everywhere (there is probably a get rich quick guru in your city in the next month) are convincing people that they can make money on almost any deal. That is what scares me about the intrinsic values of these houses. People think a 5% coc return is perfectly fine when I 10% correction would put them in the red. This time the problem is much more organic than 2008 in my opinion. How do you bail out a bank when the people have no tax money to bail them out with?
- Providence, RI · Member since 2017 · 62 posts · 17 votes8yRussell. Thank you for the insight. Wouldn’t you agree it would be wise to attempt to figure out when each side is going to be right? Some might consider that gambling, but I call it being analytical. I would love to hear your thoughts. Thank you, Tom
- Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes8yI love everything that Sam Josh said. Yes, I think that was quite a rant, but I don’t disagree with most of it. I think that as Sam Josh said, we don’t really have a crystal ball but all we can do is be disciplined in continuing to find deals at a good price. If we are disciplined then when everything crashes spectacularly we will be ready to scoop up all the deals.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8y
the other issue with this thread or line of thought is timing the market. You can’t time the market and shouldn’t try to. The people looking for 2008 to happen again will be waiting a long time for it, and those who simply stay in the market over the long haul will be fine.
The market will almost always go up given a long enough period of time. Those who get killed in crashes are those who liquidate at bottom prices. In real estate make sure you have sufficient reserves and don’t over leverage. If you do that you should be fine
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes8y
Originally posted by @Tom Conant:
Russell. Thank you for the insight. Wouldn’t you agree it would be wise to attempt to figure out when each side is going to be right? Some might consider that gambling, but I call it being analytical. I would love to hear your thoughts. Thank you,
Tom
If two Nobel Lureates can not agree on the rationality of markets, Robert Shiller and Eugene Fama, two completely rational human beings and the smartest men in their field, then I do not see the point in trying to figure out when the completely unrational sides of this debate when they might be right or wrong. Any bull or bear will simply have confirmation bias on anything they read on the subject.
District Invest Group545 Reviews - 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Russell Brazil on top of that its all regional... what happens in one part of the country IE booming market another part could be falling through the floor.. its a big country with big states and ever moving economy and business interests... I think its interesting to see for example the rust belt cities re inventing themselves.. seems most have bottomed and are coming back up.
Easton PA Bethleham PA prime examples.
- Providence, RI · Member since 2017 · 62 posts · 17 votes8yI totally understand what you guys are saying. I get that you can’t time markets and there is no sense in trying to predict the next 2008. But do you not agree that there is quite a bit of unsustainable RE investment out there? I know that most people on BP would be able to withstand many degree of financial stress. Your portfolios are padded with cash flow positive investments that can hold up to 50% decline in rates. But what happens to the thousands of joes and Judy’s out there that were tricked into thinking RE will give them the life they’ve always dreamed of? Now don’t get me wrong, anyone can be successful in Real Estate. But there is a reason not everyone trades stocks and not everyone has their realtors license. This stuff takes time and knowledge of markets, right? Maybe I am confused because I am applying financial metrics used to measure the value equities and other securities to real estate specific scenarios. Thanks Tom
- Providence, RI · Member since 2017 · 62 posts · 17 votes8yAnother question of mine then would be, as experienced investors yourselves, do you find that good deals are becoming harder to find? Or are they simply just existent in other places? To quote that song my mom likes, when one door closes one more always opens, or something like that. Thanks again for all the feedback! Tom
- Rental Property Investor · Somerville, MA · Member since 2011 · 101 posts · 19 votes8y
Originally posted by @Tom Conant:
Another question of mine then would be, as experienced investors yourselves, do you find that good deals are becoming harder to find? Or are they simply just existent in other places? To quote that song my mom likes, when one door closes one more always opens, or something like that.
Thanks again for all the feedback!
Tom
Tom, thanks for starting a great thread. I would say that I am moderately bearish at this time. Deals are definitely becoming harder to find here in NE. The reason that I am moderately bearish is because I am a contrarian by temperament, recognize that market cycles last 7-10 years, and this unbridled growth will come to an end at some point. Whether it's a downturn or a crash remains uncertain, however I will say that I preparing for any downturns by:
1. Building 6 months of cash reserves for all my properties (buy and holds)
2. Not embarking on any capital spending/improvements (can wait till later)
3. Being very careful with offers (50%-60% LTV)
My view is that even if I am wrong (and I do hope I am wrong) about a future downturn, I will have significant capital amassed to rest easy at night.
- Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes8y
@Tom Conant I think that it is tough to evaluate real estate with stock metrics for a couple of reasons.
1. most people don't buy stocks with loans, which changes the formula
2. a large portion of long term stock gains come in the form of dividends which are almost always lower than even mediocre rental property investments as a percentage of asset value
3. if there were to be a financial downturn depending on the area there may well be more people looking to rent homes because they can no longer afford to own thereby keeping rent prices more stable. In the same scenario people would cut back on consumer spending thus requiring many stocks to either pull back on dividends until the market improves or dip into their reserves to keep investors happy.
Just my two cents
- Providence, RI · Member since 2017 · 62 posts · 17 votes8yJahan Habib Aaron Klatt ahh so that’s how the tagging works. Great input guys. I see what you mean by being more bearish yet still investing. I guess in a sense you’re still following your valuation tools, just offering much lower consideration in proportion to the market value of the underlying asset. I think that is the way to go. It’s also interesting to see how you believe NE real estate has stagnated.Haven’t done my research yet but I a few of these different posts have me thinking places like Portland Maine, Worcester mass and New Haven CT may be good places to investigate for low ball high potential investments? Thanks again everyone, Tom
- Rental Property Investor · Somerville, MA · Member since 2011 · 101 posts · 19 votes8y
@Tom Conant Precisely. I guess you can say that I am a lot less aggressive with offers, do not feed into the mania of "have to buy now or else will be priced out."
I would say that cap rates/cash flow are lower in southern NE because places like Boston Metro/Fairfield County, CT are doing well and there is greater investing activity. The deals are definitely out there, however require some extra leg work (more property evaluations, offers etc.).
Portland ME, Worcester MA, and New Haven CT are all good areas to look into. I would say that you should spent a few days in each city investigating neighborhoods, talking with RE professionals etc. Good luck!
- 8yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
The future does not belong to the pessimist
As @Russell Brazil said some people think the market is always about to crash, some people think it will never crash. Real estate markets are regional, and tangible. You make it sound like the whole thing will topple and nobody will have a house to live in. That's just not the way it works.
Most people are expecting a likely correction of unknown timing, and unknown impact. So that's the best anyone can predict: "Something negative might happen, sometime in the future".
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Real estate is local. Many investors buy properties and in locations that are less susceptible to national market forces (and others add significant value through rehab or NOI improvements).
Many real estate investors had little impact during the last crash. My market values likely went down but my rents were fine...actually went up a little. All cycles are different though.
- Providence, RI · Member since 2017 · 62 posts · 17 votes8y
Woahhh @Mike Dymski. That's a curveball. See, I would have thought that with a market downturn your rental rates would go down but depending on where your properties are you could find investments with lower/inverse betas to the market would be a good way to mitigate portfolio risk. Also, @Jahan Habib that is precisely why I started this thread. I'm new to this so I can't afford the downside risk that most the investors on here can but I am also worried that I am going to miss the train so to speak.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes8y
Originally posted by @Tom Conant:
Woahhh @Mike Dymski. That's a curveball. See, I would have thought that with a market downturn your rental rates would go down but depending on where your properties are you could find investments with lower/inverse betas to the market would be a good way to mitigate portfolio risk. Also, @Jahan Habib that is precisely why I started this thread. I'm new to this so I can't afford the downside risk that most the investors on here can but I am also worried that I am going to miss the train so to speak.
Rents in most markets strengthened during the housing collapse actually. It was a factor of simple supply and demand. With the foreclosure crisis homeowners became renters, with an increase in renters came an increase in demand and thus rents went up.
District Invest Group545 Reviews - Providence, RI · Member since 2017 · 62 posts · 17 votes8y
Also, to everyone saying that you cannot predict market then why are you in real estate investing? Should I simply pick 100 random properties and pick one from a hat? Probably not. Because you guys say its all about finding the best deals, the notion that you cannot predict the market doesn't make sense to me. How does one find deals while also disregarding future growth or decline of the market?
My proposition is, if one was able to bet against the spread so to speak by choosing the correct properties in the correct geography, you would able to beat the average RE market performance. In finance, your not cash flow positive until you beat the risk free investment (that being the federal funds rate or similar rate I think). As mentioned before, people are getting excited about %5 cap rates when there are almost riskless investments elsewhere in govt bonds and what not. Is there a similar metric in RE that one would try to analyze and choose their markets to surpass? Is that what Cap Rates are for? I don't mean to attack anyone's views and this is purely academic, but why wouldn't someone like myself invest in a Real Estate Investment Trust that already has an extremely diversified portfolio instead of looking into the market and trying to 'beat' the market by choosing the best investment properties? Am I talking in circles like a crazy person yet?
Thanks again for all the help and support people!
Tom
- Providence, RI · Member since 2017 · 62 posts · 17 votes8y
@Russell Brazil Thanks for being so active on my thread. From a cash flow perspective I wonder if most saw an appreciation in the overall value of their properties. The underlying equity value of your tenant based properties would have gone down while demand for the rental would have gone up. Hmm its actually a very nice juxtaposition. I bet if you broke down the cash flows my doomsday downside risk numbers would be a lot less critical if they included appreciation in rental incomes and the relatively less important depreciation in equity (as it doesn't impact cash flows immediately). Thank you for opening my eyes to this. I would love to hear what you have to say in regard to my other comment.
Thanks again for all your help,
Tom
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Originally posted by @Tom Conant:
Also, to everyone saying that you cannot predict market then why are you in real estate investing? Should I simply pick 100 random properties and pick one from a hat? Probably not. Because you guys say its all about finding the best deals, the notion that you cannot predict the market doesn't make sense to me. How does one find deals while also disregarding future growth or decline of the market?
My proposition is, if one was able to bet against the spread so to speak by choosing the correct properties in the correct geography, you would able to beat the average RE market performance. In finance, your not cash flow positive until you beat the risk free investment (that being the federal funds rate or similar rate I think). As mentioned before, people are getting excited about %5 cap rates when there are almost riskless investments elsewhere in govt bonds and what not. Is there a similar metric in RE that one would try to analyze and choose their markets to surpass? Is that what Cap Rates are for? I don't mean to attack anyone's views and this is purely academic, but why wouldn't someone like myself invest in a Real Estate Investment Trust that already has an extremely diversified portfolio instead of looking into the market and trying to 'beat' the market by choosing the best investment properties? Am I talking in circles like a crazy person yet?
Thanks again for all the help and support people!
Tom
5% is not a good benchmark. Many members won't get out of bed for less than a 15-20% return. Real estate investing is too much work to not achieve outpaced returns.
The cap rate is used to value commercial real estate...it's not a rate of return metric (it's also unleveraged). Profit comes from principal reduction, appreciation, cash flow, and tax benefits and many investors use IRR (or other metrics) to calculate their rate of return.
Lastly, many investors add value with rehab and/or improving NOI and drive the IRR way up. Comparing real estate investing with something like passive stock investing would be comparing apples to oranges. Owning a piece of rental real estate is like owning a small business, with income and expenses...people are just willing pay high multiples for it (i.e. your 5% cap rate, which is 20x earnings) because it is tangible and has been predictable over long periods.
Regarding market efficiency, the real estate market inefficient. There are motivated sellers and property problems that need solutions in every market cycle.
- 8yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
Originally posted by @Tom Conant:
Also, to everyone saying that you cannot predict market then why are you in real estate investing? Should I simply pick 100 random properties and pick one from a hat? Probably not. Because you guys say its all about finding the best deals, the notion that you cannot predict the market doesn't make sense to me. How does one find deals while also disregarding future growth or decline of the market?
a person can predict the market with variance. To your original point, myself and many think there is a correction coming, but at what time and what amount and who it will effect is difficult to answer.
Your prediction is the market is broken. If I believed that I certainly wouldn't invest in real estate, or anything. I think things are going to go really well for people who are properly positioned to endure a correction of moderate variance. If things go worse than in 2008 then guess what, a lot of people will still make a lot of money.
Much of these doomsday threads are a bias of outlook. try to be more optimistic my friend ;)
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