Why YOU Might Be the Fool In Avoiding a Hot Market

Why YOU Might Be the Fool In Avoiding a Hot Market

Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

It seems like every other day someone posts to the forums talking about Denver or surrounding front range cities here in CO and how "Red-Hot" and "crazy" the market is. 

I remember that was said in 2013, when I first thought about investing here. 

They said it in 2014 when I bought my first property.

They said it all throughout 2015 as that property appreciated.

They are saying it today in 2016 as I bought another.

Now, if you listen to all this market chatter, I was a fool in 2013 for thinking about buying into a hot market. I was a fool for buying in that hot market, and I'm a fool for having kept it so long.

The problem is that I made a ton of money on that purchase, and I continue to profit from it with each passing month. I am profiting on my recent purchase as well.

So am I a fool? Perhaps. Perhaps, after I write this, the market will come crashing down, and I will lose everything I've invested. Or, perhaps the market explodes to even greater heights for the next decade, never slowing as Americans uproot and continue moving to my city. I don't know what the future will bring.

But so what if I didn't get great cash flow when I bought? - Rents have gone up, and I've gotten better at managing the properties! So what if I don't have great cash flow on my recent acquisition? It could be that rents go up another 10-15% next year and all the sudden my cash flow is excellent.

The point I'm trying to make here is that no longer is it useful for folks to say things like "The Market is Red-Hot" or "The Market is Crazy here in Denver!" 

Sorry folks - it's been this way for years. The market is normal right now. Appreciation has been steady at 10-12% per year. It's foolish to think the party is over, and it's foolish to bank on it continuing. This seems great for me, because I get to buy foolishly, and it's no different an outcome than if I were smart.

The way I see it, folks considering markets like Denver have two choices - 

One, be a fool and buy into this market, knowing that you can get better immediate cash flow in other cities, and that the only way you come out ahead is if appreciation continues.

Two, be a fool and fail to invest at all or invest in a city that has far lower prospects, but far superior present day cash flow opportunities.

Who is the greater fool? I honestly don't know. Real estate investors love math, don't we? We love models with predictable, consistent, repeatable results. That makes Denver/Boulder/Ft Collins/CO Springs an anomaly. You can't predict what's going to happen next in our market. You can't predict appreciation as reliably as you can predict cash flow.

But I think it's fair to say that dollar for dollar, the folks that invested 5 years ago in Denver are doing a little better than the folks that invested in the midwest, both in equity and present day cash flow (midwest folks - feel free to challenge that point!).

The point is - don't listen to anyone telling you that the market is peaking, and don't listen to anyone that is telling you that it's going to keep going up. And, in my opinion, while it's foolish to depend on appreciation to drive your real estate business forward, it's equally foolish not to hope for appreciation and buy the slightly nicer property in the spot with much better prospects. 

So what should you do in a hot market like this one? Some folks will tell you to time the market. I don't think I'm smart enough to do that. All I can do then is the good old "dollar cost averaging" and buy properties consistently every 12-18 months, and ride the long-term prospects of this city. Perhaps I'll keep winning on purchases over the next few years, and perhaps the market comes crashing down and offering me some new deals. 

We'll just have to wait and see.

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Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y

When people say that the market is hot, they usually say that because a large percentage of the deals they analyze are just plain too expensive for them.

See this reply in the discussion

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  • Investor · Arden, NC · Member since 2013 · 87 posts · 35 votes
    10y

    When people say that the market is hot, they usually say that because a large percentage of the deals they analyze are just plain overpriced.  Here in Raleigh, its not unusual to see a duplex with plenty of deferred maintenance that rents for $600/side priced at $200,000.  Even if you pay with 100% cash, that's a bad deal. Sure, it might appreciate, it might not.  Who knows?  But its stupid to buy an overpriced property regardless of the market temperature.  

    By the same token, if the numbers work, then by all means, go for it.  

  • Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    When people say that the market is hot, they usually say that because a large percentage of the deals they analyze are just plain too expensive for them.

  • Real Estate Agent · Fort Collins, CO · Member since 2016 · 246 posts · 142 votes
    10y
    This post makes me think of what happened with my parents home in the Bay Area and the profitable amount of appreciation it has experienced over the last 20 years. Even when they bought many people speculated that the Bay Area was over priced or that the market was in a bubble. Now that my generation has long since moved out of our parents homes I have seen those who bought in the 90's selling at a massive profit. A profit that survived several market variances, downturns and whatnot. Based off of multiple factors I can see the same thing happening in Colorado...call me a fool.
  • Justin CooperPro Member
    Hard Money Lender / Investor · Denver, CO · Member since 2011 · 50 posts · 34 votes
    10y

    Love this post Scott.  I couldn't agree more.  Except that you will probably not be a fool if and when the crash comes because you are buying on sound principals (I hope!) A good deal today should be a good deal tomorrow.

  • Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y
    My grand parents ( from Lyons Colorado) lived through the depression. Grandpa had a bank and it was closed by the federal government prior to WW2. He became a realtor/ land lord. My grandmother sold realestate in Estes Park. Together they bought many properties both commercial and residential. I don't know how many cycles those properties have gone through but the last ones were sold off 6 or 7 years ago. One property sold for $425000 in the down cycle. I can't imagine what it cost (purchased in the 40's)but it had 2 houses that provided 70 or so years of income. Some body can do the math and compare 1940 dollars to 2009 dollars, and if they had all the numbers figure if it made any money or not , and maybe figure out if it was a good deal or not I suppose. But in the long run it was a winner because it paid for itself and still had value after providing all that income. What difference would it have made if he would have paid a few dollars more or less in the beginning?? As long as he bought it cheap enough for it to carry itself in those early years it really doesn't matter what he paid for it. I think it was a winner So were all the rest of the properties. They were winners because of the hold though not necessarily because of the way he bought the properties. If you hold long enough it doesn't matter what the market is like you won't loose. IMHO the market cycle is only relevant if you are in a hurry to make a bunch of money. If you are a little slower and methodical and maybe a little more persistent the cycles become less and less important. RR
  • Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    10y

    Markets always go up... except when they don't. People who bought in 2005 and 2006, because it was a hot market, gave it up and let the bank take over in 2009-2012.

    Here's a tip. Only buy things that go up in value. It appears you've seen 0 market cycle changes, so, it appears your view is biased by seeing only one direction. But it also appears you bought right, which is a major feat... one that those investors in 2005 and 2006 failed to do in their hot market....  So congratulations.

  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Chris Martin:

    Markets always go up... except when they don't. People who bought in 2005 and 2006, because it was a hot market, gave it up and let the bank take over in 2009-2012.

    Here's a tip. Only buy things that go up in value. It appears you've seen 0 market cycle changes, so, it appears your view is biased by seeing only one direction. But it also appears you bought right, which is a major feat... one that those investors in 2005 and 2006 failed to do in their hot market....  So congratulations.

     I can only speak to the market I know, which is the Bay Area. People who purchased at literally the worst time in an entire century to purchase, 2006-2007, who did NOT "give it up and let the bank take over" are all sitting on a metric boat load of equity. They are out there right now either pulling equity out to make their next move, or are just sitting pretty on some dead sexy cashflow. 

  • Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    10y

    I know an investor who went through a "correction" in NYC. The key is staying power. If you can survive the corrections, like all markets experience, then after X years the market rebounds and you end up positive. I guess not unlike stock market corrections. As long as the Bay Area doesn't end up like the textile business in NC... or like Boston for quite a while after the tech correction in 2001... your local REI should remain the envy of the country. @Chris Mason

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Account Closed:

    When people say that the market is hot, they usually say that because a large percentage of the deals they analyze are just plain too expensive for them.

    LOL!  That's funny.  I cringe when I hear someone calling others stupid.  It reminds me of the saying "If you want to be a smarta$$, first you have to be smart; otherwise, you're just an a$$."  

    Be humble.  Know your market.  Understand why millionaires and billionaires are buying low cap rate real estate.  For someone who knows his market, it's always a great time to buy, and it's always a great time to sell.  

    If one wants to wait for a good time to buy, especially for expensive markets like the Bay Area or NY, one may have to wait for a long time.  One has to understand that these markets have always been expensive and will likely remain expensive for years to come.  They go from expensive to very expensive and correct back to expensive.  If history is any guidance, the Great Recession was an opportunity once in a lifetime.  It will likely not going to happen again in our lifetime.  

    @Chris Martin, you're absolutely correct.  Scott has only been through half a cycle.  It's a little early to sing the victory song.  Buying right is a MUST to protect us from the vicious cycle when it's correction time.

    Best of luck everyone.

  • Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    10y

    @Scott Trench have to agree with @Chris Martin  here though I will say I do understand what you are trying to say and I know people who did buy in the height of the euphoria and actually have made a boatload of money here in NYC because while what they bought was overpriced at the time it has only gotten worse, maybe Denver will be the same no one knows and that is the problem no one knows.  

    What I do know is that jumping into the market just because it went up before when it looked overpriced can lead to very bad things.  As an example people were saying the tech bubble was way overpriced way before it crashed and the same for the mortgage market. I remember listening to presentations just like you see in the Big Short from everyone from college professors to fund managers. Guess what many of them ended up buying a home and jumping in at just the wrong time. It is those who jump in at the tail end when it looks like they were wrong and everyone else was right that lose the most. 

    Thats not to say you are wrong for all I know in 5 years Denver, despite looking like its overbought, will be even higher just like NYC is today. There are certainly arguments that support this stance though I may not agree. However, I do think the logic you are using is beyond flawed and if you used it in every market it would lead to ruin. End of the day without the benefit of hindsight investing is about process and odds and in my opinion its not the right thought process  and pure odds (meaning if you had enough observations and did it all over the place) would lead to bad outcomes. 

    As for dollar cost averaging that only works over very long time periods its rougher to do in RE than stocks because of the larger dollars involved and it assumes your bankroll lasts long enough to hit the bottom. I assume that came from books and sadly none of those books account for numerous factors such as the fact that if your broke you can't buy at the lows anymore nor can you do so if you get so beaten down that you stop buying. It also typically looks at an index for studies about dollar cost averaging. An index doesn't have tenants that are broke because the economy turned down and move out in them middle of the night, it doesn't have pending refi needs, it doesn't have to pay contractors in between etc. 

  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    10y

    A hot market is one where a person earning the US median income of around $60,000/year can't even get their foot in the door on the most inexpensive real estate because it is way too expensive.

    A hot market is one where you have to literally take losses for years on end with the hope that when you sell, you will have made enough to cover your losses and get a nice profit based on appreciation. 

    A hot market is one where you have to darn near have Gladiator style bidding wars to even buy a house. 

    Keeping these things in mind, I do not live in a "hot market". I have never lived in a "hot market".

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    You can buy a property, and another dude could buy the same exact model, right next door, closing on the same day, and it is possible that he is a fool and you are not. So what's the difference? The terms (price, financing, etc.). If you purchase under the right terms, you should be insulated to a large degree from any reasonable short term fluctuations in the market ... to me, that is the very definition of the "right terms". If your business model depends on the market going up 10-12% next year for you to make a profit, you did NOT buy it right IMO. Alternatively, if you purchase under the "right terms" and your business model doesn't depend on this and it happens anyway then BONUS, but if it doesn't happen (or the opposite happens) you still make money. Heads you win big, tails you win small, but the house always wins, and you're the house. If you can't stack the deck in your favor in this manner, then don't play the game.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Anthony Gayden:

    A hot market is one where a person earning the US median income of around $60,000/year can't even get their foot in the door on the most inexpensive real estate because it is way too expensive.

    A hot market is one where you have to literally take losses for years on end with the hope that when you sell, you will have made enough to cover your losses and get a nice profit based on appreciation. 

    A hot market is one where you have to darn near have Gladiator style bidding wars to even buy a house. 

    Keeping these things in mind, I do not live in a "hot market". I have never lived in a "hot market".

    Keeping these things in mind, SoCal has never NOT been a "hot market", even in the great recession. But a skilled investor here can still avoid all of what you described and consistently make money in here without speculating ... I know because I've seen me do it.

  • Scott TrenchPro Member
    OP
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    10y

    Hey now, I'm not singing the victory song, and I don't believe that I'm buying random, foolish properties with poor terms. I'm buying properties that eke it out on cash flow, and "cheat" by doing the work myself, saving me tens of thousands of dollars, and I believe that rents would have to fall 20-30% before I start losing money, I've got tens of thousands set aside in my operating account, AND I am a big saver in regular life, so I could easily cover the mortgages if things went poorly for an extended period. 

    I'm just saying that I refuse to let the naysayers tell me that this market is too hot to buy in. It might be at its peak, or we might be right in the middle. All I'm saying is that I'm going to make sure that I am conservatively financed and I'm going to keep on buying properties. If it continues to pop up, GREAT - I win and big appreciation kicks in. If it crashes and burns, oh well, I'll weather the storm, oh and by the way GREAT - I'll buy more property at lower prices...

    I'm just saying that if you are scared of the market cycles you can't win.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Scott Trench:

    Hey now, I'm not singing the victory song, and I don't believe that I'm buying random, foolish properties with poor terms. 

    Great ... sounds like you are properly investing, then. Wasn't implying you are a fool ... I even made the other dude the fool in my example :) In addition to positive cash flow margin, I like to be in such that prices can also go down 10-20% without me losing money (including 10% transaction fees to sell) and in fact believe the equity cushion to be more important than the cash flow cushion. Plan A - hold as a cash flow positive rental + long term appreciation; Plan B - Sell at profit. Buying right helps both Plan A and Plan B, but I prefer Plan A because it allows me to pick up the quick nickle (forced appreciation), the slow dime (cash flow), and the really slow dollar (appreciation) all along the way, and all with little to no taxes. Heads I win big, tails I win small.

  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    10y

    @Scott Trench it has gotten harder to find good deals relative to how it was a few years ago. Of course people willing to be creative and work for it can always find a deal. The average Joe entering rental properties today is paying high retail. The hot market has driven prices up partly because it has encouraged more people to invest. All markets are self-correcting. You should assume the market rents will go down 10-12% next year. I am not telling you that they will, but I m telling you periods of growth do not last forever. 

    It is too complicated to predict the market. We do know that historically home values see expansion in 5-8 year cycles. Periods of flat line or decline can be as long as 15 years. Where do you think we are in the growth cycle? Arguably we are nearing the end. Some will argue, "but, but it is different this time". Maybe it is.

    If you can weather the storm it doesn't matter what happens. Those who are highly leveraged are at more risk. It is that simple.

    So the question is who will be destroyed in the next crash? The one thing all those destroyed in the last crash had in common is that none of them thought they were overextended. All of them thought they were invested in a great local market and none of them thought a market shift could take them out. 

    Only time will tell who the fools are.

  • Investor · San Marcos, TX · Member since 2015 · 272 posts · 360 votes
    10y

    I don't really believe in a good or bad market or even a hot or cold market. There is just the market and market cycles. Saying it is a bad time to buy real estate is like saying it is a bad time to buy stocks. The act of buying stocks is neither bad nor good, because it depends on what you are buying, and when you are buying it. The same concept works for real estate. There are certain signs that the market is changing cycles and a cycle could lead to a correction. Predicting the real estate market takes a lot more brain power than I have, so it is not worth the time to even try. The biggest advantage that you have over stocks is that you can stress test most real estate investing decisions.

    Anyone with even a bit of financial knowledge can create a spreadsheet that allows you to change variables to test how a deal will work when different stressors are applied. A stress test can show you the outcome of different exit strategies. Do you test a deal to see what happens if the value drops 20%, the rent drops 20%, vacancy increases by 300%? It is very easy to do, but I imagine a lot of people do not do it.  You can easily find data that shows what happens during different real estate cycles. Personally I want to know what will happen if the rug is pulled out from under me. 

    If I cant find a renter for five months what will that look like?

    If I have to drop rent to be competitive what will that look like?

    If I cannot sell for my ARV what will that look like?

    If you know the answers to questions like these then you are a lot less likely to get hammed by a sudden market change. Real estate is better than the stock market because you have control, why in the world would you not use that control for maximum advantage. 

    Invest with a 99% certainty that you do not know what will happen but 99% prepared for what could happen. That does not mean shy away from risks it just means knowing your risk. If you invest that way then what the market does is almost irrelevant, because you have likely included the result into your plan. There is an infinite number of causes but a very finite number of effects. Prices go up or prices go down, demand goes up or demand goes down, supply goes up or supply goes down, it is easier to get capital or it is harder to get capital, interest rates go up or interest goes down etc etc.

  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Scott Trench:

    It seems like every other day someone posts to the forums talking about Denver or surrounding front range cities here in CO and how "Red-Hot" and "crazy" the market is. 

    I remember that was said in 2013, when I first thought about investing here. 

    They said it in 2014 when I bought my first property.

    They said it all throughout 2015 as that property appreciated.

    They are saying it today in 2016 as I bought another.

    Now, if you listen to all this market chatter, I was a fool in 2013 for thinking about buying into a hot market. I was a fool for buying in that hot market, and I'm a fool for having kept it so long.

    The problem is that I made a ton of money on that purchase, and I continue to profit from it with each passing month. I am profiting on my recent purchase as well.

    So am I a fool? Perhaps. Perhaps, after I write this, the market will come crashing down, and I will lose everything I've invested. Or, perhaps the market explodes to even greater heights for the next decade, never slowing as Americans uproot and continue moving to my city. I don't know what the future will bring.

    But so what if I didn't get great cash flow when I bought? - Rents have gone up, and I've gotten better at managing the properties! So what if I don't have great cash flow on my recent acquisition? It could be that rents go up another 10-15% next year and all the sudden my cash flow is excellent.

    The point I'm trying to make here is that no longer is it useful for folks to say things like "The Market is Red-Hot" or "The Market is Crazy here in Denver!" 

    Sorry folks - it's been this way for years. The market is normal right now. Appreciation has been steady at 10-12% per year. It's foolish to think the party is over, and it's foolish to bank on it continuing. This seems great for me, because I get to buy foolishly, and it's no different an outcome than if I were smart.

    The way I see it, folks considering markets like Denver have two choices - 

    One, be a fool and buy into this market, knowing that you can get better immediate cash flow in other cities, and that the only way you come out ahead is if appreciation continues.

    Two, be a fool and fail to invest at all or invest in a city that has far lower prospects, but far superior present day cash flow opportunities.

    Who is the greater fool? I honestly don't know. Real estate investors love math, don't we? We love models with predictable, consistent, repeatable results. That makes Denver/Boulder/Ft Collins/CO Springs an anomaly. You can't predict what's going to happen next in our market. You can't predict appreciation as reliably as you can predict cash flow.

    But I think it's fair to say that dollar for dollar, the folks that invested 5 years ago in Denver are doing a little better than the folks that invested in the midwest, both in equity and present day cash flow (midwest folks - feel free to challenge that point!).

    The point is - don't listen to anyone telling you that the market is peaking, and don't listen to anyone that is telling you that it's going to keep going up. And, in my opinion, while it's foolish to depend on appreciation to drive your real estate business forward, it's equally foolish not to hope for appreciation and buy the slightly nicer property in the spot with much better prospects. 

    So what should you do in a hot market like this one? Some folks will tell you to time the market. I don't think I'm smart enough to do that. All I can do then is the good old "dollar cost averaging" and buy properties consistently every 12-18 months, and ride the long-term prospects of this city. Perhaps I'll keep winning on purchases over the next few years, and perhaps the market comes crashing down and offering me some new deals. 

    We'll just have to wait and see.

    Just for fun;

    I remember in 2000 when everyone was saying the market was hot.

    I remember when I bought my first house in 2003, and everyone said the market was really hot.

    I remember in 2005 when everyone said the market was to hot, but no end in sight.

    I remember in 2007 when everyone said the market was crazy hot, but don't worry it was going reach new hights.

    I remember in 2009 when everyone lost their shorts, shirts, and rowing paddles as the market crashed.


    I remember, selling all my real estate in 2005, because everyone else wanted in. I remember buying new real estate in 2009 to 2010, because everyone wanted out... Once again, everyone want's in, and I'm getting out.

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    Perhaps fool is the wrong definition here. Maybe potentially and substantially less profitable investment fits better. Chasing the highest initial cash flow on paper rarely beats the solid historical markets with long term fundamentals and short most times. There are a host of common sense reasons for this and mostly revolving around exact locations. Cheap things are rarely good and good things are rarely cheap. Real estate investing is no exception generally. This 2% mobile home investing returns theory/mantra and reinforced by BP consistantly probably does more harm than good for most investors on average. Thanks Scott!

  • Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Anthony Gayden:

    A hot market is one where a person earning the US median income of around $60,000/year can't even get their foot in the door on the most inexpensive real estate because it is way too expensive.

    A hot market is one where you have to literally take losses for years on end with the hope that when you sell, you will have made enough to cover your losses and get a nice profit based on appreciation. 

    A hot market is one where you have to darn near have Gladiator style bidding wars to even buy a house. 

    Keeping these things in mind, I do not live in a "hot market". I have never lived in a "hot market".

     Who said that someone earning $60,000 should be allowed to get into the door to buy real estate? A lot of people who earn $60k/year buy PIGS in Indy and Ohio.

    Also, you can get into real estate with way less than $60k. Like Grant Cardone says "Quit being a little b****!" :) Go make it happen.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Levi T.:
    Originally posted by @Scott Trench:

    It seems like every other day someone posts to the forums talking about Denver or surrounding front range cities here in CO and how "Red-Hot" and "crazy" the market is. 

    I remember that was said in 2013, when I first thought about investing here. 

    They said it in 2014 when I bought my first property.

    They said it all throughout 2015 as that property appreciated.

    They are saying it today in 2016 as I bought another.

    Now, if you listen to all this market chatter, I was a fool in 2013 for thinking about buying into a hot market. I was a fool for buying in that hot market, and I'm a fool for having kept it so long.

    The problem is that I made a ton of money on that purchase, and I continue to profit from it with each passing month. I am profiting on my recent purchase as well.

    So am I a fool? Perhaps. Perhaps, after I write this, the market will come crashing down, and I will lose everything I've invested. Or, perhaps the market explodes to even greater heights for the next decade, never slowing as Americans uproot and continue moving to my city. I don't know what the future will bring.

    But so what if I didn't get great cash flow when I bought? - Rents have gone up, and I've gotten better at managing the properties! So what if I don't have great cash flow on my recent acquisition? It could be that rents go up another 10-15% next year and all the sudden my cash flow is excellent.

    The point I'm trying to make here is that no longer is it useful for folks to say things like "The Market is Red-Hot" or "The Market is Crazy here in Denver!" 

    Sorry folks - it's been this way for years. The market is normal right now. Appreciation has been steady at 10-12% per year. It's foolish to think the party is over, and it's foolish to bank on it continuing. This seems great for me, because I get to buy foolishly, and it's no different an outcome than if I were smart.

    The way I see it, folks considering markets like Denver have two choices - 

    One, be a fool and buy into this market, knowing that you can get better immediate cash flow in other cities, and that the only way you come out ahead is if appreciation continues.

    Two, be a fool and fail to invest at all or invest in a city that has far lower prospects, but far superior present day cash flow opportunities.

    Who is the greater fool? I honestly don't know. Real estate investors love math, don't we? We love models with predictable, consistent, repeatable results. That makes Denver/Boulder/Ft Collins/CO Springs an anomaly. You can't predict what's going to happen next in our market. You can't predict appreciation as reliably as you can predict cash flow.

    But I think it's fair to say that dollar for dollar, the folks that invested 5 years ago in Denver are doing a little better than the folks that invested in the midwest, both in equity and present day cash flow (midwest folks - feel free to challenge that point!).

    The point is - don't listen to anyone telling you that the market is peaking, and don't listen to anyone that is telling you that it's going to keep going up. And, in my opinion, while it's foolish to depend on appreciation to drive your real estate business forward, it's equally foolish not to hope for appreciation and buy the slightly nicer property in the spot with much better prospects. 

    So what should you do in a hot market like this one? Some folks will tell you to time the market. I don't think I'm smart enough to do that. All I can do then is the good old "dollar cost averaging" and buy properties consistently every 12-18 months, and ride the long-term prospects of this city. Perhaps I'll keep winning on purchases over the next few years, and perhaps the market comes crashing down and offering me some new deals. 

    We'll just have to wait and see.

    Just for fun;

    I remember in 2000 when everyone was saying the market was hot.

    I remember when I bought my first house in 2003, and everyone said the market was really hot.

    I remember in 2005 when everyone said the market was to hot, but no end in sight.

    I remember in 2007 when everyone said the market was crazy hot, but don't worry it was going reach new hights.

    I remember in 2009 when everyone lost their shorts, shirts, and rowing paddles as the market crashed.


    I remember, selling all my real estate in 2005, because everyone else wanted in. I remember buying new real estate in 2009 to 2010, because everyone wanted out... Once again, everyone want's in, and I'm getting out.

    Good for you ... it sounds like you were successfully able to time the market. Just for fun, though, the issues I see with this approach are:

    1) When you time the market, you have to be right twice, when to sell and when to get back in ... if you miss one or both of these, you could end up costing yourself money.

    2) Selling RE is expensive ... you have federal and state capital gains, Obamacare tax, realtor fees, escrow fees, transfer fees, repair expense to make ready, holding costs while it is vacant and on the market, etc., etc.. Transaction fees alone often top 10% ... so let's say you sell at the top of the market ... you not only have to time it right, but you have to successfully predict that the market will drop by at least 10% (in this example, or maybe more, but rarely less) just to break even on your transactions, and much more to justify the added risks of these extra transactions. 

    3) If you buy right, regardless of timing, you'll have a "margin of safety" to weather the storm of short term market fluctuations anyhow. 

    So I can personally see a strategy of buying more in a down market vs. an up market, but not trying to sell at the peak if your existing portfolio is performing and has adequate cushion. Thoughts?

  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @David Faulkner:
    Originally posted by @Levi T.:
    Originally posted by @Scott Trench:

    It seems like every other day someone posts to the forums talking about Denver or surrounding front range cities here in CO and how "Red-Hot" and "crazy" the market is. 

    I remember that was said in 2013, when I first thought about investing here. 

    They said it in 2014 when I bought my first property.

    They said it all throughout 2015 as that property appreciated.

    They are saying it today in 2016 as I bought another.

    Now, if you listen to all this market chatter, I was a fool in 2013 for thinking about buying into a hot market. I was a fool for buying in that hot market, and I'm a fool for having kept it so long.

    The problem is that I made a ton of money on that purchase, and I continue to profit from it with each passing month. I am profiting on my recent purchase as well.

    So am I a fool? Perhaps. Perhaps, after I write this, the market will come crashing down, and I will lose everything I've invested. Or, perhaps the market explodes to even greater heights for the next decade, never slowing as Americans uproot and continue moving to my city. I don't know what the future will bring.

    But so what if I didn't get great cash flow when I bought? - Rents have gone up, and I've gotten better at managing the properties! So what if I don't have great cash flow on my recent acquisition? It could be that rents go up another 10-15% next year and all the sudden my cash flow is excellent.

    The point I'm trying to make here is that no longer is it useful for folks to say things like "The Market is Red-Hot" or "The Market is Crazy here in Denver!" 

    Sorry folks - it's been this way for years. The market is normal right now. Appreciation has been steady at 10-12% per year. It's foolish to think the party is over, and it's foolish to bank on it continuing. This seems great for me, because I get to buy foolishly, and it's no different an outcome than if I were smart.

    The way I see it, folks considering markets like Denver have two choices - 

    One, be a fool and buy into this market, knowing that you can get better immediate cash flow in other cities, and that the only way you come out ahead is if appreciation continues.

    Two, be a fool and fail to invest at all or invest in a city that has far lower prospects, but far superior present day cash flow opportunities.

    Who is the greater fool? I honestly don't know. Real estate investors love math, don't we? We love models with predictable, consistent, repeatable results. That makes Denver/Boulder/Ft Collins/CO Springs an anomaly. You can't predict what's going to happen next in our market. You can't predict appreciation as reliably as you can predict cash flow.

    But I think it's fair to say that dollar for dollar, the folks that invested 5 years ago in Denver are doing a little better than the folks that invested in the midwest, both in equity and present day cash flow (midwest folks - feel free to challenge that point!).

    The point is - don't listen to anyone telling you that the market is peaking, and don't listen to anyone that is telling you that it's going to keep going up. And, in my opinion, while it's foolish to depend on appreciation to drive your real estate business forward, it's equally foolish not to hope for appreciation and buy the slightly nicer property in the spot with much better prospects. 

    So what should you do in a hot market like this one? Some folks will tell you to time the market. I don't think I'm smart enough to do that. All I can do then is the good old "dollar cost averaging" and buy properties consistently every 12-18 months, and ride the long-term prospects of this city. Perhaps I'll keep winning on purchases over the next few years, and perhaps the market comes crashing down and offering me some new deals. 

    We'll just have to wait and see.

    Just for fun;

    I remember in 2000 when everyone was saying the market was hot.

    I remember when I bought my first house in 2003, and everyone said the market was really hot.

    I remember in 2005 when everyone said the market was to hot, but no end in sight.

    I remember in 2007 when everyone said the market was crazy hot, but don't worry it was going reach new hights.

    I remember in 2009 when everyone lost their shorts, shirts, and rowing paddles as the market crashed.


    I remember, selling all my real estate in 2005, because everyone else wanted in. I remember buying new real estate in 2009 to 2010, because everyone wanted out... Once again, everyone want's in, and I'm getting out.

    Good for you ... it sounds like you were successfully able to time the market. Just for fun, though, the issues I see with this approach are:

    1) When you time the market, you have to be right twice, when to sell and when to get back in ... if you miss one or both of these, you could end up costing yourself money.

    2) Selling RE is expensive ... you have federal and state capital gains, Obamacare tax, realtor fees, escrow fees, transfer fees, repair expense to make ready, holding costs while it is vacant and on the market, etc., etc.. Transaction fees alone often top 10% ... so let's say you sell at the top of the market ... you not only have to time it right, but you have to successfully predict that the market will drop by at least 10% (in this example, or maybe more, but rarely less) just to break even on your transactions, and much more to justify the added risks of these extra transactions. 

    3) If you buy right, regardless of timing, you'll have a "margin of safety" to weather the storm of short term market fluctuations anyhow. 

    So I can personally see a strategy of buying more in a down market vs. an up market, but not trying to sell at the peak if your existing portfolio is performing and has adequate cushion. Thoughts?

     I always look at it like buying stock.. You have stocks you always like, when they got on sell you buy them, and when the market is up you sell your low performers. No need to time anything, just waiting for opportunity.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Levi T.:
    Originally posted by @David Faulkner:
    Originally posted by @Levi T.:
    Originally posted by @Scott Trench:

    It seems like every other day someone posts to the forums talking about Denver or surrounding front range cities here in CO and how "Red-Hot" and "crazy" the market is. 

    I remember that was said in 2013, when I first thought about investing here. 

    They said it in 2014 when I bought my first property.

    They said it all throughout 2015 as that property appreciated.

    They are saying it today in 2016 as I bought another.

    Now, if you listen to all this market chatter, I was a fool in 2013 for thinking about buying into a hot market. I was a fool for buying in that hot market, and I'm a fool for having kept it so long.

    The problem is that I made a ton of money on that purchase, and I continue to profit from it with each passing month. I am profiting on my recent purchase as well.

    So am I a fool? Perhaps. Perhaps, after I write this, the market will come crashing down, and I will lose everything I've invested. Or, perhaps the market explodes to even greater heights for the next decade, never slowing as Americans uproot and continue moving to my city. I don't know what the future will bring.

    But so what if I didn't get great cash flow when I bought? - Rents have gone up, and I've gotten better at managing the properties! So what if I don't have great cash flow on my recent acquisition? It could be that rents go up another 10-15% next year and all the sudden my cash flow is excellent.

    The point I'm trying to make here is that no longer is it useful for folks to say things like "The Market is Red-Hot" or "The Market is Crazy here in Denver!" 

    Sorry folks - it's been this way for years. The market is normal right now. Appreciation has been steady at 10-12% per year. It's foolish to think the party is over, and it's foolish to bank on it continuing. This seems great for me, because I get to buy foolishly, and it's no different an outcome than if I were smart.

    The way I see it, folks considering markets like Denver have two choices - 

    One, be a fool and buy into this market, knowing that you can get better immediate cash flow in other cities, and that the only way you come out ahead is if appreciation continues.

    Two, be a fool and fail to invest at all or invest in a city that has far lower prospects, but far superior present day cash flow opportunities.

    Who is the greater fool? I honestly don't know. Real estate investors love math, don't we? We love models with predictable, consistent, repeatable results. That makes Denver/Boulder/Ft Collins/CO Springs an anomaly. You can't predict what's going to happen next in our market. You can't predict appreciation as reliably as you can predict cash flow.

    But I think it's fair to say that dollar for dollar, the folks that invested 5 years ago in Denver are doing a little better than the folks that invested in the midwest, both in equity and present day cash flow (midwest folks - feel free to challenge that point!).

    The point is - don't listen to anyone telling you that the market is peaking, and don't listen to anyone that is telling you that it's going to keep going up. And, in my opinion, while it's foolish to depend on appreciation to drive your real estate business forward, it's equally foolish not to hope for appreciation and buy the slightly nicer property in the spot with much better prospects. 

    So what should you do in a hot market like this one? Some folks will tell you to time the market. I don't think I'm smart enough to do that. All I can do then is the good old "dollar cost averaging" and buy properties consistently every 12-18 months, and ride the long-term prospects of this city. Perhaps I'll keep winning on purchases over the next few years, and perhaps the market comes crashing down and offering me some new deals. 

    We'll just have to wait and see.

    Just for fun;

    I remember in 2000 when everyone was saying the market was hot.

    I remember when I bought my first house in 2003, and everyone said the market was really hot.

    I remember in 2005 when everyone said the market was to hot, but no end in sight.

    I remember in 2007 when everyone said the market was crazy hot, but don't worry it was going reach new hights.

    I remember in 2009 when everyone lost their shorts, shirts, and rowing paddles as the market crashed.


    I remember, selling all my real estate in 2005, because everyone else wanted in. I remember buying new real estate in 2009 to 2010, because everyone wanted out... Once again, everyone want's in, and I'm getting out.

    Good for you ... it sounds like you were successfully able to time the market. Just for fun, though, the issues I see with this approach are:

    1) When you time the market, you have to be right twice, when to sell and when to get back in ... if you miss one or both of these, you could end up costing yourself money.

    2) Selling RE is expensive ... you have federal and state capital gains, Obamacare tax, realtor fees, escrow fees, transfer fees, repair expense to make ready, holding costs while it is vacant and on the market, etc., etc.. Transaction fees alone often top 10% ... so let's say you sell at the top of the market ... you not only have to time it right, but you have to successfully predict that the market will drop by at least 10% (in this example, or maybe more, but rarely less) just to break even on your transactions, and much more to justify the added risks of these extra transactions. 

    3) If you buy right, regardless of timing, you'll have a "margin of safety" to weather the storm of short term market fluctuations anyhow. 

    So I can personally see a strategy of buying more in a down market vs. an up market, but not trying to sell at the peak if your existing portfolio is performing and has adequate cushion. Thoughts?

     I always look at it like buying stock.. You have stocks you always like, when they got on sell you buy them, and when the market is up you sell your low performers. No need to time anything, just waiting for opportunity.

     Selling Stock is not that expensive. Selling Real Estate is.

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    There are opinions and facts. Fact is... for buy and hold SFR total returns ( cash flow + plus equity) since 2009, the top 3 nationally are SF, SJ and LA and since 2000 that is LA, SF and SD. If you like to research since the 90s and 80s it might be slighty different but very close story...IDK exactly. As well as there are tons of areas in the USA, mostly coastal or prime downtownish and or university style that can be equated. Location, location, location ....it is the only known simple REI part there is perhaps. I will not be surprised if Denver or a couple others make some notable facts in the future.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Matt R.:

    There are opinions and facts. Fact is... for buy and hold SFR total returns ( cash flow + plus equity) since 2009, the top 3 nationally are SF, SJ and LA and since 2000 that is LA, SF and SD. If you like to research since the 90s and 80s it might be slighty different but very close story...IDK exactly. As well as there are tons of areas in the USA, mostly coastal or prime downtownish and or university style that can be equated. Location, location, location ....it is the only known simple REI part there is perhaps. I will not be surprised if Denver or a couple others make some notable facts in the future.

    Agreed ... one comment I'd like to throw out there to get feedback on as an outsider looking in on the Denver market: The thing that would concern me a bit if I were investing there is that while yes it has been going 10-12% lately, it does NOT to my knowledge have a long term historical track record of high appreciation and rent growth like, say, SF. So, I could maybe see underwriting SF with 8% appreciation estimates (but would still want my "margin of safety" buy acquiring under market value + forced appreciation), since there is a long term historical track record to back that estimate up, but not necessarily with Denver. Now, one might argue that the fundamentals of the Denver market have changed and that supply has decreased and demand has increased and that those changes will be persistent in the future, but that sounds a lot to me like "this time, it's different". I'd be curious to hear arguments for why this time it is different with Denver or arguments as to how my logic or facts are flawed. Again, I'm an outsider looking in, don't claim to be an expert in Denver, and have no plans to invest there, so no dog in the fight ... this is more an opportunity to stir some good conversation and learn some new stuff.

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