Factual or Realtor Sales Pitch?

Question

Hi BP Community, I need some help validating the following:

Realtors/Mortgage brokers are saying that now is the time to buy investments SFR or Small Multi-Family because when rates go down everyone will be buying. However, 95% of these investments don't pencil out, small COC Margins or even negative COC.

Are investors buying on the notion that RE will appreciate with no COC or negative COC today?

Russell Brazil · Answer

I buy year in and year out regardless of market conditions. Ia it easier to buy now than 2 years ago because rates are higher? Absolutely. Does that hurt with the rate Im paying? Absolutely. But Ive moved to putting 35% down to compensate. But Id much rather pay list or a little over at 7%, rather than $125k over list at 3%.

Shiela R. · Answer

@Vlad B. all the experts like Bill Bronchick will say no investor buys banking on appreciation, solely.  Feels similar to gambling. And negative cashflow is a non starter.  That being said, putting more down like @Russell Brazil suggests to compensate for higher rates is also what I am doing for purchases of long term rentals currently. But every market is unique.  Real estate is valued block to block.  My market has very high demand and low inventory. I would not purchase in a market where inventory is increasing with new builds, fyi.   Saw several shirts lost in the early 2000s from over leveraging in markets that were overbuilt.

I'm purchasing some SFHs for my non profit and it's been tough to compete against multiple, cash offers but it is possible and if the numbers work, take action as @Kerry Baird said:)

Bjorn Ahlblad · Answer

To me the most important thing in REI is not the interest rate it is being forced to sell. If an investor gets foreclosed on or can't make it through a dip. That's when people lose their shirts. So always plan your money and arrange for lines of credit when you do not need the money. I have had a heloc for 25 years and have used it as needed.

In the 90's we had the dot com bust, mostly affected Silicon Valley where we lived, and we almost had to sell a property to generate some cash. Most we could have got was 225-240k, and our equity was maybe 50% of that. We almost sold it. But instead we hung on, found some money elsewhere, and later sold that same property in 2015 for 1.2 million. So, learn to underwrite and never be forced to sell!

Doug Smith · Answer

I posted this chart a couple of days ago, but I'll post it again. Real Estate is incredibly stable and, historically, has climbed consistently. There are minor corrections periodically in average sales prices, but that's only if you're selling the asset. If you're holding, you historically should be A-OK. During the last big "crash", if you bought at the top of the market and sold at it's lowest point, that was a 19% hit, but if you sat on it and collected your rents, your value actually climbed over time. The stock market and other investments were way, way more volatile than that with a much bigger downside. The big difference between getting a positive cash flow now vs 18-24 months ago is you'll have to put a bit more down now than you did before. An no point since the Fed started housing prices, including the last big crash, would you be down money if you held more than 6 years (on average). If you're holding super-short-term, you might see a dip, but historically you're good if you're holding. You simply need to make sure you're putting enough down in this interest rate environment to make you COC positive. Regarding interest rates, they are actually not high historically...people just got used to artificially low rates over the past couple of years.

Alex Olson · Answer

Real estate is also micro. Some markets are hotter than others and homes are still selling really fast because people want to live there because of great market conditions. KC is one of them.

Kerry Baird · Answer

@Vlad B. Real estate is local, don't forget.  Prices haven't done diddly in the teeny farm town where I grew up, and I won't buy there as population is in decline.  In the cities where my houses are located, we have a large enough population base, diversity of employment and brick/block houses for longevity of investing.

I have rules of thumb for the market in which I buy and the kind of property I buy.  Demographics come into play, and jobs are critical, as I want a diversity of employers so the tenants can pay their rents.  If your local area doesn't float your boat, find another market.  Then develop your own avatar tenant and investment type.  Lastly, take action.

Vlad B. · Answer

@Russell Brazil thank you, very helpful advice.

Factual or Realtor Sales Pitch?

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