Hot Market? What's Your Strategy?

15 Replies

New investor here in MN and I just kind of wanted to try and get a discussion going from a number of investors regarding your view points on investing in a fairly hot market and economy. From a variety of podcasts I've listened to I hear about people always buying regardless of whether the market is "hot" or "not" but I'm under this impression that a majority of buyers are simply over paying. 

With that being said, I think this is a great lesson as a new investor to learn the value of staying patient and waiting for the right time. Now I'm not referring to trying to time the market because very few, if anyone can do that but just learning the value of staying patient as my goals are to buy and hold rental properties.

Overall, my new game plan is to continue to learn and practice running analysis on properties and to work my but off at my job to have enough cash for when the market does cool off a bit to purchase 1-2 properties. Just wanted to hear what other people do during hot market cycles like the one we are currently in. I know there are a lot of pieces to a topic like this but just wanted to get a discussion going. Thanks!

Patrick.

I live in Los Angeles and not only is this market hot but it is also very expensive.

Therefore I invest 100% our to state. It is the only way for me to cash flow on rental properties without putting $250k down on a single family home.

I buy single families out of state and put $15k down and cash flow $200-250/mo.

Originally posted by @Antoine Martel :

Patrick.

I live in Los Angeles and not only is this market hot but it is also very expensive.

Therefore I invest 100% our to state. It is the only way for me to cash flow on rental properties without putting $250k down on a single family home.

I buy single families out of state and put $15k down and cash flow $200-250/mo.

thats very nice cash on cash return!

@Antoine Martel I'm in a similar situation here in San Diego. How do you source your out of state SFH? Are you finding deals directly through your network, or using Turnkey-type providers?

My market is in San Diego County. SFR at retail do not cash flow. Duplex to quad at retail either have minimal cash flow or are cash flow negative.

You can try to rely on appreciation.  I personally think rent appreciation in San Diego county is very likely to continue at a high rate for the next 4 or 5 years.  But I could be wrong.  My projection for property appreciation is for it to cool off significantly for the next few years, but I could be wrong.

So I look for either below retail purchases or retail purchases that have a value add. A $50K value add is not a bad return against a 80% LTV financed buy n hold. In addition, the property after value add is likely to have initial cash flow and, if I am correct about the continuing rent appreciation, the cash flow will increase each year while my fixed financing is constant (a little variance due to escrow holding). Similar a duplex to quad at $50K below retail could have decent cash flow.

I have purchased twice near market highs (both purchases were full retail with no value add: I no longer purchase at full retail without a value add).  Both purchases lost close to 20%.  However, both purchases look like great purchases today (Purchase 1 in 1993: purchased for $167K, depreciated to ~$140K is worth ~$600K today, Purchase 2 in 2004: purchased for $741K, depreciated to ~$620K, Trulia has it North of $1M today).

My point is that sitting on the sidelines during a hot market may be safe but it may not be the smart play.

Originally posted by @Keith Meyer :
@Antoine Martel I'm in a similar situation here in San Diego. How do you source your out of state SFH? Are you finding deals directly through your network, or using Turnkey-type providers?

 Keith.

I am a turnkey provider and I think that is a great way to go. 

I find my deals through MLS, Direct Mail, or other marketing efforts.

@Dan Heuschele is right.  If you're not concerned with cash flow, and have a long term hold outlook, San Diego isn't a bad place to invest.

I joke with people all the time that ask "Why don't you invest in San Diego" (since I live here, but buy in Houston).  I tell them "San Diego is an awesome place to invest, if you don't care about cash flow".  

I say it jokingly but it's also correct.   But as Dan said, if you buy something and look back at it 10 years from now even at a bubble price it might look like a great deal.

One of the best investors I met told me "If you can finance it, buy it".  The "What" isn't as important as simply pulling the trigger on SOMETHING.  I know others will disagree but it's worked well for me. 

Someone who is saving cash to make a deal in MN work is not likely to be a player on a buy and hold deal in San Diego :)

I am spending more time working on off-market deals and looking at commercial listings. I am following the MLS but haven't seen anything in my area that has been very exciting since last winter.

@Patrick Olownia I am in San Diego so I see the same trends you are noticing. What I have learned is that most "investors" buying properties I see on the MLS out here are not looking for cash flow. They are just looking somewhere to put their money and play the appreciation game. San Diego will have its dips but overall ppl aren't going to move away from beautiful San Diego!

With that said, there are still deals to be found. My wife and I purchased a duplex and made it a great deal for us bc we were able to move into one side. We are paying less than what we were paying in rent 6 months ago bc our tenant pays down more than half our mortgage. 

You also have to be more creative than everyone else. Look into marketing towards Probate leads and REO's. Those are still great strategies and deals can be found if you are more persistent than the next guy. I heard recently it takes 5 points of contact to make a sale and 80% of salesmen give up after the first failed attempt. That creates a lot of opportunity for the persistent person.

Good luck with your investing! If you are looking to invest passively in deals or hear more about my marketing strategy in my local market feel free to reach out. I don't have anything to sell you lol.  

We have been reading the "hot market, sideline" posts for years.  Life is short...start telling yourself a different story about your abilities and opportunities.  You will find what you are looking for whether it's (1) that people are overpaying or (2) that some investors are still sourcing good opportunities.  Figure out how to put hundreds of deals through the opportunity pipeline...everything else is secondary.

@Mike Dymski   I look at this as   Over paying relative to what ????  relative to the price points post GFC IE 09 to 2012 were there was lots of low hanging fruit and the 2% rule was alive and well :).. I think folks have to get over this... those price points are not coming back.. unless the same issue that caused them manifest themselves again.. a total Credit freeze...  

To me we are just entering into what has always been a fairly normal market in good times.. 

and for me its always been value add will always be... 

if folks don't want to do that or have no capacity then its the old buy and hold.. and one can do that but just need to do it for decades to make it all work out given the ups and downs.. and no better time to start then now.. especially at these interest rates.

@Jay Hinrichs has made an excellent point! It is an unfair comparison if investors are only comparing relative to the 2008-2012 period. It's a bit like comparing today's stock prices to the crash between 1929-1933 or 2008-2009 and saying everything is over-valued. 

Plus, @Mike Dymski raises a good point. We keep hearing market is over-heated. People have got to put their money where their mouth is. Buy put options on real estate companies if you're that confident. 

@Patrick Olownia Personally, I would start investing in your backyard first before venturing out. As @John Woodrich points out, someone having a hard time making a deal work in MN is going to have a hard time making a deal work in most markets. 

Equity investors are always buying and selling. It is the kind of investment that requires a click from computer mouse. Homes are fixed assets and are harder to unload.  Amazon, Warrant Buffet funds people are always buying because they have been great investments with great potential.

If you buy properties in C, D area for long term at this time of the cycle for long haul that is different from buying C,D areas at the peak and try to flip. Using leverage and little down can result into multiple property losses when tenants can not afford to pay and you have little means to sustain.

You need a CPA advice to determine what is best for you. Often they advise diversification.  


I never go the obsessive concern with what the market is doing by so many investors. Thinking about it is so far outside of most of our circles of competency, that at best, its a time suck, at worst, it leads to sub optimal decision making and capital loss. 

 Sure, BoA Wal-Mart, Blackrock all care about the future path of the economy. They are big enough to hire Ph.d economists to answer their specific and unique questions. They also operate at a macro level that it matters. For the vast majority of us, the markets we invest in are so vast relative to their investments that they will be a price takers no matter what.

I don't much care about what the market (or Mr. Market if you like Ben Graham's analogy) is doing. I'll look at deals and if one comes along that I like, I'll take a swing. The great thing about investing is that there are no called strikes. You can pass on as many deals as you want for as long as you want. 

Gosh thank you guys so much for the responses! I 100% agree that I shouldn't sit on the sidelines and "wait" for the market to correct itself. With that being said... most of the houses I'm analyzing just aren't making sense from a numbers perspective and a majority of that is because I'm looking on the MLS. Seeing houses have 30+ offerings after 4 DOM is a little discouraging... and so that's why I need to change up my approach! But only having 2 months of experience has me has me a little stuck at the moment.

So going to regroup with my realtor and friend Kurt and give direct market mailing a try. I also think I should try and invest in my local market before attempting to dive into long distance real estate? But then again I haven’t started learning about that yet so I shouldn’t rule it out.

@Patrick Olownia this is an excellent question, and you seem to already know the answer.  Like others have said, you can make money in any market cycle.  The key is truly understanding your market.  

In all reality, you should always be patient.  Don't fall in love with any property or force a deal to be doing something.  Let the numbers and your analysis take the emotion out of your decision making process.  And, as you are doing, the more analysis you do (e.g., running your numbers on properties), the better you'll understand the market, and the better your probability of finding a deal that works for you.  Other than doing analysis, I'd also network your a** off.  Tell everyone you meet what you are doing and/or what you are trying to do.

Stay on the grind and the rest will take care of itself.  Happy investing!