Future problems for investors....................................

[Troy Forney]

Maybe its just me.....  Being in the Real Estate Business for 20 plus years, I am started to see some similarities of the last bubble.  Now I am not saying we are in a bubble.  I don't know.  They are a lot of factors to consider and lots of signs are present, but if I had to go from my gut only, I would say yes.  The logical mind does tend to consider all the data on shortages and low interest rates, and droves moving from Illinois etc...  Whether you go with your instinct, gut or logical thought, It doesn't matter.   What I do know is this.  I have seen a lot of deals coming across my desk of people over paying for investment properties.  I look at the numbers and think, that doesn't even meet the 1% rule or .80 for that matter.  I think its going to be a couple years, but there are going to be some investors in trouble.  And yes they are taking mortgages.  

[Chad McMahan]

Originally posted by @Troy Forney:

Maybe its just me.....  Being in the Real Estate Business for 20 plus years, I am started to see some similarities of the last bubble.  Now I am not saying we are in a bubble.  I don't know.  They are a lot of factors to consider and lots of signs are present, but if I had to go from my gut only, I would say yes.  The logical mind does tend to consider all the data on shortages and low interest rates, and droves moving from Illinois etc...  Whether you go with your instinct, gut or logical thought, It doesn't matter.   What I do know is this.  I have seen a lot of deals coming across my desk of people over paying for investment properties.  I look at the numbers and think, that doesn't even meet the 1% rule or .80 for that matter.  I think its going to be a couple years, but there are going to be some investors in trouble.  And yes they are taking mortgages.  

All valid points. However, At least in Sedona, over the last several years those that have held off from investing have missed out on gaining 30-100% total appreciation + 10-25% annual cash flow. 

[Mike Dymski]

I'm just going to continue to buy housing that people can afford in decent locations.  The rest is just noise (and things we can't predict or control).  Plus, adding value in this market is very profitable.

[Troy Forney]

Believe me I have been looking, but I have not found a property that meets my criteria in over a year. 

[David Dachtera]

Originally posted by @Jay Hinrichs:

Originally posted by @Bruce Woodruff:

Originally posted by @David Dachtera:

We ARE, however, in a housing shortage

When you say 'housing shortage', are you referring to certain areas, or the country as a whole? In other words, is there enough housing in the USA to house all the people in the USA legally?

I'd bet there is and therefore there is no 'housing shortage'. Makes me laugh when people complain about housing shortages just because everyone wants to live in the cool cities, but can't afford to.....

EXACTLY  there is no shortage.. many of the rust belt mid west cities will have between 5 to 20k vacant homes thats a fact.

but they are not in areas were most owner occs want to live.. its the domain of cash flow investors.

there is a shortage of NEW nice affordable housing.. no question about that.. 

Where people want to live is where they can actually buy a decent, move-in ready home and not get bid right out of the process. 

Are there tons of undesirable homes out there? Does the name "East St. Louis" mean anything to you?

Two years ago, I did a road trip downstate for another investor to "secure" a list of tax sales properties he'd bought from someone else. Of the 19 properties on the list, only five were habitable, three had squatters and the rest were tear downs in blighted areas.

When people say "housing shortage", we're talking about habitable homes which buyers would consider "move-in ready", not tear-downs, rehabs and fix-ups ("handyman specials").

D'ya ever notice all the unfinished subdivisions now languishing in various courts and forms of proceedings? What happened with those?

Even so, some of those  unfinished subdivisions are "coming back to life" as start-up builders and other developers seek to cash in on the shortage by providing new construction to those who can afford it.

The housing shortage is real - has been for over a decade already. Those who doubt that simply haven't done their homework.

[Jay Hinrichs]

Originally posted by @David Dachtera:

Originally posted by @Jay Hinrichs:

Originally posted by @Bruce Woodruff:

Originally posted by @David Dachtera:

We ARE, however, in a housing shortage

When you say 'housing shortage', are you referring to certain areas, or the country as a whole? In other words, is there enough housing in the USA to house all the people in the USA legally?

I'd bet there is and therefore there is no 'housing shortage'. Makes me laugh when people complain about housing shortages just because everyone wants to live in the cool cities, but can't afford to.....

EXACTLY  there is no shortage.. many of the rust belt mid west cities will have between 5 to 20k vacant homes thats a fact.

but they are not in areas were most owner occs want to live.. its the domain of cash flow investors.

there is a shortage of NEW nice affordable housing.. no question about that.. 

Where people want to live is where they can actually buy a decent, move-in ready home and not get bid right out of the process. 

Are there tons of undesirable homes out there? Does the name "East St. Louis" mean anything to you?

Two years ago, I did a road trip downstate for another investor to "secure" a list of tax sales properties he'd bought from someone else. Of the 19 properties on the list, only five were habitable, three had squatters and the rest were tear downs in blighted areas.

When people say "housing shortage", we're talking about habitable homes which buyers would consider "move-in ready", not tear-downs, rehabs and fix-ups ("handyman specials").

D'ya ever notice all the unfinished subdivisions now languishing in various courts and forms of proceedings? What happened with those?

Even so, some of those  unfinished subdivisions are "coming back to life" as start-up builders and other developers seek to cash in on the shortage by providing new construction to those who can afford it.

The housing shortage is real - has been for over a decade already. Those who doubt that simply haven't done their homework.

out this way we plowed through the hangover sudivisions years ago..  or some call them pipe farms.. there were some incredible deals in 2010 on dirt far out weighing most any other investment just on  buy it for X sell it 7 years later for X.  

[Patrick M.]

My properties cash flow very nicely with below market rents (I cannot keep up with the skyrocketing rents that increase every month).

Bubbles are a boogie man that don't concern me.

[Bruce Woodruff]

Originally posted by @David Dachtera:

The housing shortage is real - has been for over a decade already. Those who doubt that simply haven't done their homework.

 We define a housing shortage differently. For you it is if someone cannot find a decent house where they want to live. My point is that not everyone gets to live anywhere they want. If you want to live in SoCal and can't afford it, then sorry, move to another state. There is no inherent right to live and work wherever you want to, Not anymore. Sorry.

Add up the number of habitable housing units in the USA, then total the number of people needing a place to live. I'd bet there is a housing surplus....

[Dave E.]

@Troy Forney I agree on the big picture. Things just don’t make sense right now, and whatever it is, is not sustainable. There has to be some sort of correction in the near future. Whether that is a big correction, or a small one. And whether it’s in 2 months, or 2 years. Just hard to say.

I’m still chasing deals, but am also being very cautious in my underwriting.

[Chris London]

• Speculation = Guessing what the market will do next.
• Facts = calculating actual cash flow on a deal.
• Motivation = my cash in the bank at 0% interest during rapid inflation.

[David Dachtera]

Originally posted by @Bruce Woodruff:

Originally posted by @David Dachtera:

The housing shortage is real - has been for over a decade already. Those who doubt that simply haven't done their homework.

 We define a housing shortage differently. For you it is if someone cannot find a decent house where they want to live. My point is that not everyone gets to live anywhere they want. If you want to live in SoCal and can't afford it, then sorry, move to another state. There is no inherent right to live and work wherever you want to, Not anymore. Sorry.

Add up the number of habitable housing units in the USA, then total the number of people needing a place to live. I'd bet there is a housing surplus....

"The market" - the people looking for their family's first / next home - would likely disagree with you. 

[Steve K.]

Originally posted by @Randy Horner:

@Rick Albert I won't even touch a deal at 1%. I don't know why in the world anyone would under 1%. I like 1.5% and up. I'm picky an patient and will wait

I've seen the best overall returns on properties that were .5-.7% on purchase, whereas those that met or exceeded the 1% rule looked better on paper/had better initial cashflow but provided worse overall returns. These returns have come from appreciation and rent increases primarily because the .5-.7 properties are in desirable locations, had more value add/ initial equity capture opportunity, less turnover, better tenant base etc. Anything meeting the 1% rule in my market is usually in a bad location and won't perform as well overall as lower cap rate assets will. 

[Greg M.]

Originally posted by @Bruce Woodruff:

Originally posted by @David Dachtera:

The housing shortage is real - has been for over a decade already. Those who doubt that simply haven't done their homework.

 We define a housing shortage differently. For you it is if someone cannot find a decent house where they want to live. My point is that not everyone gets to live anywhere they want. If you want to live in SoCal and can't afford it, then sorry, move to another state. There is no inherent right to live and work wherever you want to, Not anymore. Sorry.

Add up the number of habitable housing units in the USA, then total the number of people needing a place to live. I'd bet there is a housing surplus....

Seems like @David Dachtera wants to ignore your point as it doesn't fit his narrative. Fact, there are enough affordable homes for people. Fact, most people don't want to live in them because they aren't in the cool areas. These are not tear down homes, but solid livable homes not in the ghetto.

There are places in California where you can buy a decent home with awesome views and/or on/near the water for a couple hundred thousand dollars. I'm not talking out in the middle of nowhere, but decent sized cities. But the trendy entitled people don't want to live in these areas. They deserve to live in Los Angeles or San Francisco. It's a status symbol. They need a Starbucks every quarter mile and an Apple Store within 2 miles of where they live. They want to live close to the beach. These ultra-desirable areas don't have enough homes for everyone who wants one. That's why they are $3+ million homes. Can't afford it. Boo-hoo f***ing-hoo. Try living in some of the other 160,000 square miles of this state.

[Steve K.]

Not going to speculate on bubble or no bubble but I agree that the basic rules of underwriting are changing. Two big factors I'm seeing are dramatic rent increases which will bail out some investors with loose underwriting criteria, but at the same time expenses are also increasing like crazy (especially property insurance, taxes, cost of materials and labor, appliances, etc.). Interesting times we are living in/investing in. Rent increases and appreciation seem to be the name of the game in my market currently. It seemed too expensive/like we were in a bubble years ago when I first started, especially on a rent to purchase price ratio basis, but I sure am glad I didn't let that stop me then!

[James Barnes]

Not sure I agree with a "crash" per se. Slow down..yes. Homes in my area are still flying off of the shelves. Investment properties are still flying off of the shelves at prices I personally cant make work. More risk adverse investors seem to be making these deals work...and ultimately are getting rewarded with appreciation while more sound/by the book investors are sitting on the sidelines.  

It definitely makes me re-evaluate what a "do-able" deal for my company is and makes me question the tried and true math that all of us have been using. I.E. Am I really okay with making a 30k profit for a flip? If you're not, you are going to get beat by alot of others that are..

I'd rather have a chair when/if the music stops but that mentality also forces me to miss deals. 

My last flip was incredibly over budget due to rising electrical(3x) and lumber prices (2X), luckily appreciation during the hold time bailed me out and we made a very nice profit. So, I WAS that investor that beat everyone out, overpaid and still made out. I didn't know I was taking that risk at the moment but it worked out. Seems like that's what is happening with current over payers.

[Rick Albert]

@Randy Horner

Do you calculate the 1% fro the purchase price or purchase price + rehab?

[Randy Horner]

@Rick Albert purchas plus rehab. My last deal was a quad. 300k purchase, 30k rehab 5k rents. 1.5%.

[Joseph Cornwell]

@Troy Forney 1% or higher deals are alive and well in Cincinnati, Ohio. They generally just need some cosmetic improvements or raising rents to market rates. However, the rent ratio for me is not a great metric to use. As others have mentioned, areas that have 1-2% rent ratios are general higher crime, lower income, and lower appreciation. The past few years though prices and rents have skyrocketed here like most markets. 

[Troy Forney]

 In NW Indiana 1 and 1.5 ratios were easy to find in B areas.  You could even find 1.5 to 2 in B and C areas.  Recently the word has gotten out about what a great area this is to invest.  Now even 1% deals are gone unless you go to D areas, which we don't do.  I have been considering investing in other areas further away.  

[Rick Albert]

Originally posted by @Bruce Woodruff:

@Troy Forney I think you're right....people are overpaying for properties now. And then there are people like @Rick Albert that say even if you buy an inflated property you'll still be ahead if you hold long enough. True. But you left a s**tload of money on the table and I don't like doing that. 

 I don't think anyone likes leaving money out there if the market takes a dip.  However, we also don't want to discourage beginner investors from jumping in as long as they take the necessary calculated risks.  I was fortunate to buy my first place in 2015 when the market was just starting to pick up and could ride the appreciation train.  Even if the market takes a 10% dip, I'm still ahead.  Not all of us were able to start their investing journey decades ago (generally speaking).

[Bruce Woodruff]

Originally posted by @Rick Albert:

Originally posted by @Bruce Woodruff:

@Troy Forney I think you're right....people are overpaying for properties now. And then there are people like @Rick Albert that say even if you buy an inflated property you'll still be ahead if you hold long enough. True. But you left a s**tload of money on the table and I don't like doing that. 

 I don't think anyone likes leaving money out there if the market takes a dip.  However, we also don't want to discourage beginner investors from jumping in as long as they take the necessary calculated risks.  I was fortunate to buy my first place in 2015 when the market was just starting to pick up and could ride the appreciation train.  Even if the market takes a 10% dip, I'm still ahead.  Not all of us were able to start their investing journey decades ago (generally speaking).

I agree with you on your main point......no insult was intended. Just pointing out that there is certainly money 'left on the table'. Doesn't mean you shouldn't buy what you can when you can....and a deal is always around the corner....

[Rick Albert]

@Bruce Woodruff

Agreed! The deals are there, you just have to be creative.

[Bruce Woodruff]

Originally posted by @Rick Albert:

@Bruce Woodruff

Agreed! The deals are there, you just have to be creative.

 Yessir.....Also putting in more elbow grease will get you a long way when the market is tight....

[Michael K.]

Originally posted by @Troy Forney:

Maybe its just me.....  Being in the Real Estate Business for 20 plus years, I am started to see some similarities of the last bubble.  Now I am not saying we are in a bubble.  I don't know.  They are a lot of factors to consider and lots of signs are present, but if I had to go from my gut only, I would say yes.  The logical mind does tend to consider all the data on shortages and low interest rates, and droves moving from Illinois etc...  Whether you go with your instinct, gut or logical thought, It doesn't matter.   What I do know is this.  I have seen a lot of deals coming across my desk of people over paying for investment properties.  I look at the numbers and think, that doesn't even meet the 1% rule or .80 for that matter.  I think its going to be a couple years, but there are going to be some investors in trouble.  And yes they are taking mortgages.  

I think so long as people are buying based on positive cash flow and fundamentals we are still ok, even if it doesn't make the 1% rule. We need to put things in perspective that for the past ten years we have been in a pricing ditch. Some areas are only just now passing their 07-09 highs. Once people begin buying solely on the speculation that prices and rent are going to increase then we have a problem on our hands. Over the past month, a lot of speculation in the stock market has been taken off the table with some of the highest-flying stocks getting a long over-due haircut - and it looks like we may be going lower from here. Not sure how that will impact the housing market but usually these things rise and fall together. But, so long as inventory and interest rates remain the way they are, it's hard to see any immediate collapse in home prices. We're more likely to see a cooling-off as interest rates rise to counteract inflation.

[Michael K.]

Originally posted by @Jonathan Klemm:

@Troy Forney - I feel like you might see some similarities but not being caused by the same issues.  The last bubble was caused by the mortgage industry.  In this case, (in my opinion) real estate is helping keep the economy together.  I know here in Chicago, many investors are moving towards Indiana because of the less expensive inventory and lower taxes.  Which will only continue to drive up prices over in Indiana

Jonathan, I own some properties in Miller Beach, a collar community of Gary. Property taxes have close to doubled in the most recent tax bill.