Dive deeper or wait for the wave to pass?

Question

I’ve been wanting to get deeper into REI for many years, and I have finally lined up enough equity and cash to where I’m comfortable taking the dive. While I have some sensibilities already in place from managing a property I won, I’ve been reading a ton about REI, reading many of the posts here and listing to the podcasts, honing my big picture understanding of the industry.

Some “rule of thumb” figures keep coming up. “2% rent to value”, “15-20% cap rate” …

I’ve been scouring the field nationally (calling brokers, meeting with agents, looking on MLS) and these figures seem close to sci-fi. I’d be mostly lucky to find half of that. And when I do, I get outbid at far beyond asking (which I'd be open to do if I were buying a primary, but seriously eats into the already small margins from an investment standpoint)

I’m from California, and I know the market is in a major upswing here, do you guys feel this is the case nationally? I’ve mostly focused looking in Tennessee, Oklahoma, Texas and Florida. I’m trying to keep away from the rust belt.

The last thing I want to do is start a portfolio at the peak of a market. I have a full time job so I have limited hours to develop and support a fully fleshed out marketing campaign. Should I ease up and wait for the markets to cycle down and get a stronger start position?

Greg Scott · Answer

Dori:

My vote is to move forward rather than retreat.

Why?   Many reasons.  Here are the ones that are top of mind:

- You learn by doing.  You learn nothing by "not-doing".  Wouldn't it be better to be much smarter when the cycle starts into the next upturn?

- Buy & hold is very forgiving.... if you have cash flow.    I had several properties I bought in 2008 that subsequently lost 1/2 their value.   But, they had cash flow so I was under no pressure to sell.   5,6, 8, 10 years later, they recovered all the value plus.  I've now sold off all of those at handsome profits.  Shorter-term real estate, like flipping, can be like catching a falling knife.  It is easier to get hurt.

- There are always deals to be found, if you look hard enough.  Currently deals are hard to find but money is easy.  In the downturn, money will be hard to find but deals will be easier.   Better to have a strong track record before the downturn.  You will be the one that can attract money.

Good luck

-

Dori Arazi · Answer

@Sam Shueh. I very much see what you're saying. And am heavily leaning in that direction. I've been looking for 4 months now across the country, including in Midwestern markets I would have never dreamed to consider before and would be -very- lucky to break the 10% ROI (cash on cash, without speculative equity growth). 12-15% seems like a pipe dream in this market. The more I look, analyze deals and study the more it seems that now is a good time to wait.

I've been following the progress on the Amazon HQ2, and the mere fact cities were designated as candidates has made them affordable investment markets. Its crazy times.

Ivan Barratt · Answer

@Dori Arazi great post question. I'd say there's great opportunities in every market however if you're not educated on how to play at this point in the cycle you should sit on your dry powder for a while.

There's a lot of dumb money in the market that will get transferred in the next correction. :)

Kevin Fox · Answer

Hey @Dori Arazi

I wouldn’t let yourself get discouraged just yet.

While you’re totally right that you have a better shot of finding a unicorn than you do finding a 2% rent:value or 15-20% CAP in coastal SoCal - the market here is quite unique.

Purchases with rent:value ratios of ~.65% or better and cap rates from 4.5-7% in the SD market tend to equate to fantastic long term investments.

The LA market will almost certainly have slightly different figures, but I would have to imagine they are much closer to those  than the suggested national rules of thumb.

Dori Arazi · Answer

Thanks @Bart Hedgcock! That’s exactly my plan besides getting to know the area sadly. I’m in LA. There is nothing in Southern California that I can get intimately familiar with with a full time job (thatbid worth investing in at least). So it has to be out of state, and using remote statistics is a level removed sadly.

I did a lot of deals in San Diego after the crash and I knew the market like the back of my hand. I’m not sure how to leverage that aspect of things  in my current scenario.

Ali Boone · Answer

It completely depends on what you are wanting to do and achieve. The major no-no for a peak market is investing for appreciation. But you can certainly still invest for cash flow.

https://www.biggerpockets.com/renewsblog/2014/06/2...

You won't be able to do it in California, but investing out-of-state is the option for that...as you know.

So cash flow is key in this situation, and then location and property quality are important factors so you can sustain that cash flow.

Happy to help- can talk numbers, cash flow, markets, etc. if you ever want help!

Sam Shueh · Answer

CA real estate value is almost at a top it might move up a notch or two or just stay put before the trough ......

If the ROI is less than 12-15% an equity manager will tell you staying with something liquid and headache free. You can open Roth IR/A and use it for rental, flips later. If you can operate positive cash flow with multifamily in urban areas please do so. One example is wait for Amzn Hq2 nomination.

The worst example is someone did not want to pay capital gain tax sold their San Jose, CA home (converted to a rental) traded 5-1031 homes scattered in Midwest and southern states buying the cheapest homes. Right now they have 3 in trouble not getting rent or getting in shape. I told them to trade down to 2 small ones in major job center where homes do not depreciate-coastal cities. They are kicking themselves for not listening.

Dori Arazi · Answer

@Ivan Barratt, thanks for the input. The more time goes by the more I think that's going to be the stance I take. I rather be collecting the dumb money during the next correction than being a part of that distribution pool. Would be great to get a feeling of how to play this sort of market for the long term investing "career" and to better be prepped for the next ramp up.

Kevin Fox · Answer

It would be my pleasure!

I saw your colleague request and just shot you a response back.

Vista’s rental prices went up 5% in the past year alone!

Dori Arazi · Answer

@Kevin Fox, I have a property in north county (Vista) I purchased in 2009 that has gained a large amount of equity, though in  9 years the rental comps have not shown any significant rental increase.

I've you're open, I'd be very happy and interested to discuss things in more detail.

Dive deeper or wait for the wave to pass?

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