Invest now or wait to see if market tanks?

92 Replies

@Jonathan Hulen It is great you realized a selling gain, but I fear you lost more than you gained:

1. You sold a duplex for massive gain without 1031 exchange, so you are stuck paying taxes instead of rolling tax free gains.

2. Based on when you purchased the duplex, I am assuming you had a low interest loan on the property, like high 3% or low 4% loan. You just gave up that cheap money and will be stuck with 5%+ loans. A better strategy would have been to tap the equity in the duplex for a second position HELOC. That would have kept your low rate and given you access to more cash. It also would have prevented the tax issue from item 1.

3. Waiting on the side line assumes there will be a crash or buying opportunity, which history shows is a rare event as @Russell Brazil pointed out. So you sit on the side lines for what, 5 years, 10 years? Interest rates will being increasing and prices are rising in most markets, so you are taking a big gamble. 

4. Let's say there is a crash; how do you know you will have the courage to go "all in" when we are at the bottom of the market. You can't predict how you will respond. Most investors ran scared back in 2010. Nobody knew where the bottom was and with super high unemployment, people were hoarding the cash they had. I don't think you predicted the top, so what is the likelihood you will be able to predict the bottom?

5. You are no long a real estate investor without properties. That means any acquisition costs, like traveling to look at properties cannot be written off. You gave up a massive tax benefit, which is the ability to expense things.

6. Let's say you choose to sit on the side lines, where do you park your cash to make sure it is safe and gets a higher return than in your duplex? 

The longer I stay in this business, the more I believe that "dollar cost averaging" should be applied to real estate investing. An investor should always be buying in good and bad markets. The time value of real estate is more important then the cyclical timing. 

You would NOT, but lots of other people are either willingly or reluctantly to do so.
Personal forces are always at work, whether the market is going up or down. e.g. divorce, two parties would like to separate the asset ASAP, so sell it quickly; mortgagers become delinquent, before they're foreclosed on, they want to sell ASAP so that their credit won't be hit hard, when investors show up and offer cash to close quickly, this is a win-win situation, etc.
Things like this are constantly working in the market, this is usually where flippers and wholesalers find their great deals from.
Just like Brandon Turner and David Greene says, good investors buy from distress.

Originally posted by @Ran L. :

I would definitely not sell my properties at 20% below the market price to a buyer.  

I wonder who would want to sell it 20% below the market price.  

Originally posted by @Jay Hinrichs :
Originally posted by @Greg Gaudet:
@Ran L.

I have a rental property under contract right now for over 20% below market value. That's the main principle the BRRRR strategy is built on. In this case the seller just inherited it and he just wants to get rid of it quick without dealing with listing, showings and back and forth offers. I made an offer before he had a chance to list it and it's a win win, we're both getting what we want.

Another deal I did this year was 30% below market value. That one was a foreclosure and I only had one other bidder to beat at the court house.

When I refi/heloc these two in a few months I should be able to pull out more money than I even originally invested in the downpayments and just keep collecting cash flow.

My point is that properties sell for 20, 30, 40, even 50% or more below market value every day. That's how wholesalers make their livings! And flippers, and BRRRR investors, etc.

But yes I agree, especially in today’s market I would want a record high sales price if I were selling.

Thank God for motivated sellers!!!!!!!

was the property you bought on Maui or another island or state.. ??

But Jay I should add these deals have gotten so much harder to find just over the last few months... I'm kind of kicking myself for all of the deals I passed up in 2017! (and 2016, and 2015, and I actually just closed my first deal this year. I was stuck in analysis paralysis for most of my life up until now.

Originally posted by @Jonathan Hulen :
I sold my duplex and I’m sitting on a pile of cash. Moving forward I will implement the BRRRR strategy to get up to 10 properties, recycling as much capital as possible. I’m excited to move forward in my REI career, but also apprehensive because it seems the market may be headed down. I don’t want to buy before a crash and sabotage the refinance. Should I wait?


Which market are you talking about?  Real estate is not a national market.  It's only regional in some areas and mostly hyper-local.  

I would absolutely ignore the advice of anyone who tells you definitely to wait or definitively to buy.  I've read through most of the responses and some good investors, whom I read and respect on here, responded with definitive yes's and no's.  That is unfortunate.  You need to understand where you are investing and why before you make your decisions.  Many parts of the country entered and exited housing crashes or corrections at very different times.  It is true that many parts of the country are at or above and some are well above their peak pricing from pre-2007.  So, it is understandable that buyers in those areas are very skeptical.  Yet, in other parts of the country pricing is well below peak pricing that actually occurred post 2007 and did not start adjusting back down until after oil pricing began to crash again after 2014.  During that 7-year run-up, while the rest of the country was in melt-down, some parts of the country experienced oil booms and housing priced went through the roof.  Smart investors, who have paid attention to the exact market they are investing rather than listening to big declarations about the national real estate market, have done very well.

My advice would be to pay very close attention to the exact market you want to invest. If you want to go away from Torrence, then literally there are hundreds of micro-markets and opportunities where you can make money and build a 10-property portfolio on the BRRR strategy. They may not all be in the same market, but a patient and smart investor can absolutely execute your strategy depending on which markets they were interested in.

Bst of luck - 

Some investors with thoughts of a correction lock in gains, and use principles with IRC 453 (installment sale) to redeploy the capital beyond the 180-day timeline required in a 1031 exchange. A couple clients hope to purchase when the market is at a discount to what it sold for. This strategy is often marketed as a Deferred Sales Trust.

I'd highly recommend reading Howard Marks new book, "Mastering the Market Cycle: Getting the Odds on Your Side." It's a great discussion on cycles and helps develop a framework in which you can develop strategies about how to move forward based upon what you are seeing in the market.

@Ken Virzi That affordability is a protracted problem. Investors are the ones buying property versus owner occupied. We are looking for owner occupied fixer borrowers where we can help them find, fix and convert SFR to ADU and rent out the other half via AirBNB. This makes a SFR at $750k affordable. We made an offer on a moderate fixer in OC and had 28 overbid offers above us. So I think if prices decline I think investors are just going to buy to hedge their bet against the stock market.

@Daniel Schiller So you are telling me that if I sell this 8plex back on the market I would sell only for 330k again? That is pretty laughable. If market value is what we pay why do we have tax assessments and appraisals, and wholesalers. Market value is always subjective. What I pay for a property is purchase price, and that is the only FACT.
@Russell Brazil Saying it that way does make alot of sense but precedent has been set that big banks think they can't fail. We also have had as strong as a run as any in our history. I personally agree with you we are not looking at a crash but more a slowdown or correction but not based on this logic.

@Rob Massopust , yeah the ADU thing is pretty interesting I know there are quite a few contractors in L.A that specialize in them now , or converting garages to living space.

Have to get kind of creative in SoCal with the high prices in order to make things affordable. Of course not everyone wants to deal with AirBNB guests on their property , but it's a trade off. 

You said if prices decline investors will buy , but last time the market went down many got scared to buy because they didn't know how much more prices would drop and also lending tightened up so even if many investors wanted to buy they weren't able to secure the financing to buy. I imagine once prices drop again , lending will tighten up again. 

Nowadays there is quite a bit of credit available..not like 2009-2012 or so. 

For ADUs , what are you typically seeing per square foot to build them?


@Joseph M. The adu helps homeowners that want to stay long term and or have family members in household. Many multi generational buyers look for these too. Airbnb is tricky some cities allow it some do not [ie Anaheim very strict], most owners if they do it under the radar. If you are a 1st time buyer and can convert a house to an adu or guest unit you get the income to qualify. ADU's are not cheap and cost about $50k for an existing structure conversion and $100k+ for add on unit. For size they range from 200 to 1200 sq ft.

I think last time there was an overreaction on part of the lenders and the investors. It was much harder to buy because the lenders basically shut down because they were afraid of the sub prime. We dont have that same problem now, so many properties are bought all cash, and conventional buyers have to qualify and put a decent down payment.

@Jonathan Hulen good points. I think one more point is really know your fundamentals and have a birds eye view of the larger picture. If you look at bigger trends, demographics, interest rates, housing starts, job growth etc and see the patterns and places in the path of progress and invest with fundamentals in mind. Buy something that cash flows and it is hard to go wrong combine that with catching the cycle at the right time for each micro market and you should do well. Often times we say the market is overvalued etc, like you were saying each market is local. I sold my last property in 2015 convinced the market was overvalued but it went up 40% more, I should of studied the fundamentals more and projections not just that particular properties value but the larger picture. It took me all year this year to find another property. 

I am cautious in 'my market', I see the house prices 10%-20% higher compared to just 2017. I also see articles like below every week. With this much caution, hopefully not a crash but a small correction/soft landing in 2019-2020.  

@Casey Rolland   , big increases like that aren't sustainable. 

Yeah there have been quite a few articles recently talking negatively about the housing market. The mainstream media influences people for sure , so if more and more media comes out saying the housing market is bad or about to crash that's going to influence things.

Here is one Wall Street Journal just put out 4 hours ago , also many people just read the headlines. 

Housing Market is Faltering and Strong Economy Offers No Cure

One today from Fox Business 

Housing market exhibiting weakness

One from yesterday

Fannie Mae is 'pessimistic' about the housing market in 2019

@Joseph M.   Thank you so much for the links! I don't subscribe to WSJ any more...can you copy/paste the the whole article and post it here?  

I also don't watch Fox (Does that tell you anything about me?! LOL.... I don't have cable subscription and I do live in a 'blue' state. Although I am getting tired of extreme blue in this state...I get tired of people who are at the both ends of extreme) but the commentator answered a question I had in my mind that I couldn't answer for a week. I met my realtor a week ago for dinner and he mentioned that there are 3 realtors to 1 house on the market in the county he was serving.  We had too many interesting topics to discuss so I didn't get to ask why not so many houses were on the market despite the rising house prices?? Well the Fox commentator answered the question. The rising interest rate!  Whether we are buying/selling, this is going to affect us down the road. I am planning on selling and then buying so it's going to be interesting navigating this changing water. 

Again, Thank you for the links!  

@Todd Powell It's not about really the market but more the network. There are challenges in my market as well but I network this market as hard as everyone so naturally you find the deals easier the more you devote to it. If I still lived in California I would be investing there. Doesn't mean I won't go out of state especially for larger deals but for an asset under 1 million I prefer the home field advantage.

@Jonathan Hulen Find a market where you can get at least 10% net caps, set up your team, and start buying . Up or down 5- 10 15% is irrelevant, ( though if you have the right team you should be buying properly )  you are in it for the cash flow  and the markets always come back. To many analyze things to death and never do a deal, analysis paralysis   .

Good luck and all the best . 

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