This is Not the Real Estate Environment for Rookie Investors

[Kevin Hill]

I don't want to announce the sky is falling and be a Debbie Downer, but in my opinion, now is NOT the time to be investing in real estate for rookie investors, especially flips. I keep seeing a lot of posts from newbie investors about investing in their first deal and I'm worried for them. I am in North Jersey (Bergen County) and this is what I am seeing in my area.

COVID-19 has only decreased available housing inventory during the pandemic causing a spike to home prices and demand. I keep reading about the residents who want to escape from New York City and New Jersey is one destination for them. Houses are routinely gone within a week now with multiple offers at full or over the list price. This is not a good time for an investor (especially one without experiences in different economic cycles). This is not sustainable with the high rate of unemployment, mortgage delinquencies, homeowners going into forbearance, Sheriff foreclosure sales currently on hold to at least October now, increased requirements for mortgage qualifications, small businesses going out of business, and a likelihood that children will be at home again in the fall for distance learning, restricting parents' ability to work.

Overpaying for the property, delays in securing contractors/finishing the renovation, towns slow in completing Certificate of Occupancy/permit inspections, delays on getting the title work done, etc in a market that could turn on a dime is a recipe for disaster. Yout can't do a BRRR strategy if you don't have any equity after the flip is complete.

Be very careful out there. Get a mentor, hire an agent who is really looking out for you and not just trying to close a sale, and be patient. The great deals will be coming once we enter into a down cycle. Real estate is cyclical and cycles typically run 7-10 years and we are at about year 9 in North Jersey. Down cycles don't last as long, so pile your cash and be ready to strike when the good buying opportunities are here again!

[Daniel Haberkost]

@Kevin Hill I like where this is coming from and see quite a few great points throughout the thread.

The way I frame it, it’s not that new investors shouldn’t get started, it’s that investing from a place of financial strength should be emphasized now more than ever (or perhaps it always should and we’re just more aware of it). You don’t want to be the over leveraged newbie who has no equity in their properties and minimal reserves.

If you have significant cash on hand, equity in your properties and make substantially more than you spend each month you can weather the (potential) storm. So it really comes down to not forgetting about the basics.

A few people have already said this but having multiple exit strategies is essential as well. I’ve made offers on several flips in the last couple of months BUT was prepared to hold them as rentals if needed.

I hear all this talk about how there is so much uncertainty in the world right now, but isn’t that always the case? Aren’t we just more aware of it now? The future is always uncertain..... which is why we buy from a place of financial strength, keep cash reserves, have multiple exit strategies and avoid over leveraging - that’s it.

-Dan

[Anna Swartz-Lopez]

It depends on your investment strategy and your exit plan. Circumstances have certainly made it more difficult to make a good investment, and personally I would not be flipping right now, but if your strategy is more long term, you may find that now is a good time to invest. I think that as COVID drags on and landlords become increasingly frustrated, that many current owners will be looking to sell. If you are in the right position, and you are willing to deal with the increased tenant issues because you are looking at the long term, now may be the perfect time to invest. It all comes down to the circumstances of the deal, and what the investor is willing to put up with. 

[Kevin Hill]

Originally posted by @Toure Brady:

@Kevin Hill wondering what you’ve seen on Tik Tok in regards to creative lead generation?

Investors are posting creative videos about their methods for finding deals, the numbers on their deals, and telling stories. Tik toc is gaining older users now, not just teenagers posting dance videos. If you use hashtags like #realestateinvestors you'll find their videos. Its a good tool to create the videos then cross post them on Instagram, Facebook etc. It adds an element of entertainment and increases attention. Gary Vaynerchuk has been hyping it too as a useful tool for entrepreneurs. 

[Joe Cassandra]

If you can buy a house for 70=75% of ARV, you should be fine no matter what happens in the market.

Only issues you would run into: 

...you screen bad tenants, they don't pay...government won't evict

...you have a short term shark loan and banks won't refi you out in 6 months because the economy has gotten worse (and it likely will) --- make sure you have good credit

...you don't have adequate reserves to weather any repairs

"Oh, that's a lot!" 

Every investment is going to have risk. 

Putting your money in the stock market right now as stocks have gone sideways for a month (meaning, they could be setting for a drop...but volume is low which is normal for summer...so there's no telling)

I agree buying properties on spec to flip quickly with a higher ARV than comps said could pay off, or could blow up in your face.

But that's obviously what happened in 2008.

[Robert Villelas]

@Kevin Hill I personally want to thank you for your insight. I am an art director for a very long time and I realized that living paycheck to paycheck is not the way to live. I decided to self teach on making that change. I came across a YouTube video of Brandon and David. I know a few ppl in real estate,but It peaked my interest After seeing this video and other investment books that mentioned REI. I started reading about it more sucked me in. I bought the pro and BP books. I am studying more about this field in the meantime.

I feel you are correct in waiting because of the state we are all in. In the meantime I’m working on my credit score, getting educated, and saving. Once things start opening up I’m in a better position to jumping in. I’m not afraid to go for it. But like investing on the stock market know when to buy and when to sell.

[Susan Maneck]

In my opinion is that the best time to invest is going to be around the beginning of next year when the foreclosures come through. Yes, we will be profiting from others misfortune but that is the way is it generally is with real estate. 

[Phillip Davis]

I am a firm believer that anytime is a good time to get into real estate but I will caveat that by saying not for every type of real estate or without help. I think with proper knowledge around you with mentors, lenders, agents, and experienced investors you can almost always make a good investment with a buy and hold property bought at a discount. I do think that flipping does have seasons though, and unless you are already experienced and have a great team you should probably be treading lightly right now with the housing market and financial markets being so spoked. Just my two cents, no one knows where this will go we all just have to study history, see the trends, listen to much smarter people than ourselves, and make our best-researched plan!

[Jon Pierre]

Since the bubble bust of 2008, here in The Greater Seattle Area, we have had a better than average economy. Out pacing most other states thanks greatly to some large local companies.. Boeing, Amazon, Microsoft, Google, etc. etc... This better than average economy has made many people, Investors, flippers as well as myself feel that we were protected from anything economically going bad in the rest of the USA. 

I would tell people who were worried about a recession or a slow market that "It does not matter what the rest of the country is doing, we are in our own world here, they can go belly up and we will always be alright". Self Sustaining....... But then guess what?? COVID 19.

So, our economy is still doing great. As a matter of fact homes in the upper scale of $750 - $1.2 mil are doing better than ever thanks to the low interest rates. The homes on the $250K-$400 I think have slowed a lot. After all, that is the price range that buyers are now layed off. 

Now here is what I see coming and here is what I am doing (as well as a great many flipper and investor friends of mine). ..... . ..... . .....

We have been listing as many of our rentals as we can. We have been putting all of our condos up for sale vacant or not. This started back in early March for us, a few others took a bit longer to catch on but they also are following suite. 

We see a large increase of foreclosures in the not so far off future. The govt cannot forgive and will not forgive the mortgage debt that is coming due. There will be more foreclosures coming and with that brings lower prices whether it is at auction or from sheer desperation by the seller. 

The rentals in Wa are already slow and many people that do apply truly do not qualify. Since March, we have listed all vacant homes and we have been listing all the condos we have whether they are vacant or not because there is always a buyer and the condos carry a much larger overhead when vacant thanks to very high HOA fees. We are not underselling. We are not having a yard sale and discounting anything. We are still getting very good prices but not as well as it should be. Maybe 5% less than it should be and no bidding wars. The last 3 sells this month only received one offer each.

We have been stock piling the cash ready to pounce when the market hits and in the mean time we are flipping carefully. But not the lower end properties which typically have such a large buying pool. Nope we are flipping the higher priced properties which there is no problem finding qualified buyers for. They are the people that were not layed off. They have good secure jobs or get to work from home or maybe they are retired. 

Now I know that it has always been said that "hold all the properties that you can afford to hold and it will come back and increase in value in the long run." -- and YES IT WILL !! But..... why not sell now while the prices are still high and pick up foreclosures on the other end when it comes. I don't think it will be another 2008 at all, but why should I sit on properties that can bring in cash to buy the discounted ones next year? It is not that we need the cash, but it is that we will be essentially trading up by selling now and buying F.C. at a discount.

Before the foreclosures start coming, people will start selling to keep one off their credit report and we are already seeing it. My phone has rang twice while typing this, concerned people considering selling their home to avoid the foreclosure that they see coming.

So to the new investor, please take this with a grain of salt and a jigger of Patrone' tread lightly and understand your market. In addition.. if you are new at this, please do not involve your family members financially. There are many other ways of getting financing without the gamble of possible financial misery of a loved one. -- Good Luck - Jon

[Mike H.]

Originally posted by @Sam Lewis:

Very well said @Kevin Hill. Down here in Maryland we expect the same thing come November (ish). I agree, as most flips take 6 months to complete, I would NOT want to be wrapping up a flip in November.

Maryland has quite a bit of cushioning from the massive amount of federal contracting. DC takes all the tax payer money across 50 states and pours it all across Maryland and Virginia... 

Originally posted by @Alexander Felice

I heard real estate values can only go up! ;) ;)

Haha right? It goes up 3% a year no matter what I heard... (s)

Hey Sam why do you think November ? 

[Sam Lewis]

@Mike H.

Foreclosures will start to pile up... its a ticking time bomb

[Alejandro Espinosa]

@Kevin Hill you are right, I have been looking for a 2 family house for me to hack and it's impossible to get a property at the listing price, many people are over paying just to get the house. However in reality, some new Yorkers are the okay paying more due to the high prices in NYC, whick in turn, I think it's creating an inflation in prices in commuter towns. Amazingly enough a 2 family home in Union city just got sold for 750k. Also, this opens some opportunities for smart flippers, who can turn a property quickly enough for the current market. But it's hard to see what will happen in the next six months as people learn to live around COVID-19 and while a vaccine gets develop. Let's see what happens. Thanks for your post , it really helps rookies like me keeping our feet grounded.

[Kevin Hill]

Originally posted by @Jon Pierre:

Since the bubble bust of 2008, here in The Greater Seattle Area, we have had a better than average economy. Out pacing most other states thanks greatly to some large local companies.. Boeing, Amazon, Microsoft, Google, etc. etc... This better than average economy has made many people, Investors, flippers as well as myself feel that we were protected from anything economically going bad in the rest of the USA. 

I would tell people who were worried about a recession or a slow market that "It does not matter what the rest of the country is doing, we are in our own world here, they can go belly up and we will always be alright". Self Sustaining....... But then guess what?? COVID 19.

So, our economy is still doing great. As a matter of fact homes in the upper scale of $750 - $1.2 mil are doing better than ever thanks to the low interest rates. The homes on the $250K-$400 I think have slowed a lot. After all, that is the price range that buyers are now layed off. 

Now here is what I see coming and here is what I am doing (as well as a great many flipper and investor friends of mine). ..... . ..... . .....

We have been listing as many of our rentals as we can. We have been putting all of our condos up for sale vacant or not. This started back in early March for us, a few others took a bit longer to catch on but they also are following suite. 

We see a large increase of foreclosures in the not so far off future. The govt cannot forgive and will not forgive the mortgage debt that is coming due. There will be more foreclosures coming and with that brings lower prices whether it is at auction or from sheer desperation by the seller. 

The rentals in Wa are already slow and many people that do apply truly do not qualify. Since March, we have listed all vacant homes and we have been listing all the condos we have whether they are vacant or not because there is always a buyer and the condos carry a much larger overhead when vacant thanks to very high HOA fees. We are not underselling. We are not having a yard sale and discounting anything. We are still getting very good prices but not as well as it should be. Maybe 5% less than it should be and no bidding wars. The last 3 sells this month only received one offer each.

We have been stock piling the cash ready to pounce when the market hits and in the mean time we are flipping carefully. But not the lower end properties which typically have such a large buying pool. Nope we are flipping the higher priced properties which there is no problem finding qualified buyers for. They are the people that were not layed off. They have good secure jobs or get to work from home or maybe they are retired. 

Now I know that it has always been said that "hold all the properties that you can afford to hold and it will come back and increase in value in the long run." -- and YES IT WILL !! But..... why not sell now while the prices are still high and pick up foreclosures on the other end when it comes. I don't think it will be another 2008 at all, but why should I sit on properties that can bring in cash to buy the discounted ones next year? It is not that we need the cash, but it is that we will be essentially trading up by selling now and buying F.C. at a discount.

Before the foreclosures start coming, people will start selling to keep one off their credit report and we are already seeing it. My phone has rang twice while typing this, concerned people considering selling their home to avoid the foreclosure that they see coming.

So to the new investor, please take this with a grain of salt and a jigger of Patrone' tread lightly and understand your market. In addition.. if you are new at this, please do not involve your family members financially. There are many other ways of getting financing without the gamble of possible financial misery of a loved one. -- Good Luck - Jon

I love that strategy Jon! Sell high, buy low!

[Kevin Hill]

Originally posted by @Alejandro Espinosa:

@Kevin Hill you are right, I have been looking for a 2 family house for me to hack and it's impossible to get a property at the listing price, many people are over paying just to get the house. However in reality, some new Yorkers are the okay paying more due to the high prices in NYC, whick in turn, I think it's creating an inflation in prices in commuter towns. Amazingly enough a 2 family home in Union city just got sold for 750k. Also, this opens some opportunities for smart flippers, who can turn a property quickly enough for the current market. But it's hard to see what will happen in the next six months as people learn to live around COVID-19 and while a vaccine gets develop. Let's see what happens. Thanks for your post , it really helps rookies like me keeping our feet grounded.

$750k in Union City for a 2 family is crazy! I saw this one on Zillow today in Union, only 1 bedroom in each unit and listed just under $1 million!! https://www.zillow.com/homedetails/516-518-27th-St-Union-City-NJ-07087/38942178_zpid/

[Tony Rees]

@Jon Pierre

Great insights and love seeing your methodology. 

[George Pauley]

If people are moving out of NY headed for NJ, and causing price inflation in NJ, doesn't this imply the opposite should be happening in NY?  Point here is that different markets behave differently.  I feel confident that there is indeed opportunity in some markets.

You can't time markets.  So don't try.  I bought my first investment house in 2008.  It took me almost a decade to get rid of that turkey.  But I learned and moved forward and, today, consider myself pretty successful.  You gotta pull the trigger some time.

[Tawanda Thomas]

I agree. I know in the Baltimore market properties are going fast. You definitely have to know what you're doing and have your team in place to make quick moves. 

re

[Lesley Resnick]

I am dumbfounded.  This may be the moment that people on BP have been dreaming about for years.  Many people have been talking about the great deals that they would find if only it was 2009 again.  They have been rooting against the home team and the economy.  Never considrering their tenants may stop paying and liquidity could dry up.  

Where is the bravado that was prevalent last year?  

For one person to win big someone has to lose big.  Something has to go horribly wrong to create this types of ananmolies.  This is not zero sum game.

It is an unusual time, volume of properties on the market are way down, prices are up and competition is everywhere.  My contractors are too busy for my preference.  The city permitting is a mess.  Financing properties is expensive and difficlt while the fed is loaning money for zero percent.

Bottom line, this is not a housing led problem.  I do not believe the fed will allow the mass evictions or foreclosures we saw in 2009.  The big winners were Blackstone and the other funds.  If you have 50m in cash you could buy them in thousand packs for pennies.

I am still open and doing business, I am still buy and hold, flip, wholesale.  I have not changed my criteria, I am not going to take a deal that does not fit my model.

[Mark F.]

Bergen county investor here as well. Very hot but I'm sticking my criteria and I am in this for the very long haul. I'm more interested in cash flow and principal pay down. Prices around here only concern me if the numbers dont work. In which case I move on. 

[Alejandro Espinosa]

@George Pauley not necessarily. Not everyone is leaving the city (5 boroughs). The incoming people are usually millennials with good income and a growing family, people that need space and somewhat are tired of paying 2700 for a 850sf apartment. This is what is creating a surge in pricing in these adjacent towns to NYC

[Whit B.]

@Kevin Hill much respect but I could not disagree more in my city of Phoenix right now. Inventory is so low and demand is rising like never before. The cyclical markets of the past hinged on supply and demand. Typically the down turn comes when supply has reached over-saturation. We could not be further from over-saturation here. With rates so low it’s only further fueling the demand side with more than 10 offers on a single house being common place here.

Unless demand somehow falls off a cliff I don’t see the traditional 7-10 year cycle playing a part here. There is nothing traditional about 2008 or 2020. These events have suffocated supply and our ability to keep pace IMHO. I would not be surprised to see that we have several years of room to run before the cycle comes into play.

[Arthur D.]

If I was going to foreclose, I would try to sell while the prices are holding. 
And if the house is over leveraged, it’ll still sell for the market price, bank never looses. I believe the market will go down 10%-25% which I can take. I use 75%rule. 

[Calvin Thomas]

New Jersey is a hard State to get started in. One cannot get a multi-family to bring in the 2% rule (which doesn't exist around major metro areas in my opinion). However, if one can get around 0.75% monthly return after all expenses, then that's good in these areas.  Are we in an bubble? Maybe.  Do you have to look at the #'s and see how things play out? Most definitely.  Going over asking is crazy in the pandemic world.  Like everything, things will calm down eventually.  However, never stop learning and one cannot attempt to get ahead in life with zero risks.

[Calvin Thomas]

Originally posted by @Bob Prisco:

@Kevin Hill if buying a rental who cares about up or down 10 -15 20% Its all about cash flow and it always comes back. As long as you are getting the ROI you want, ( for me its 20% net +++ ) then who cares. Also buying props at a discount helps. Me I am buying as many as I can as are my clients,

Good Luck

OH is not NJ. When people do not have money to pay rent, but you still need to pay utilities, mort, insurance and taxes; it becomes an issue.

[Samuel Obar]

I am a new investor and currently looking at flips and BRRR opportunities in MA/RI and also in TN. I have definitely heard some concerns from others about the possibility of the housing market collapsing before the end of the year for all the reasons stated by others in this thread.

I agree that it is time to tread lightly, however I think if you make sure you are still buying low, and you are very conservative in your ARV, you should be ok. (I hope.)

That is the strategy that I am using, and while I am currently looking for opportunities, I am also mindful that I do not need to rush into a bad deal, as there will hopefully be many other opportunities soon. I don't think it is a bad time to look for opportunities that make sense, but don't fight for a property if the price goes up higher than you are comfortable with.

Just my thoughts. I am interested to see the other perspectives shared here.

[Cate McConnell]

@KevinHill, you are spot on! My husband is a RE broker with 40 years' experience and he is seeing crazy heat in our market (Atlanta, GA.) Market prices are increasing 4% or more per month, driven by low rates, FOMO and people fleeing in-town neighborhoods to get green space. Rents are NOT increasing to keep pace with our COCR targets and we are becoming concerned about renter solvency. You have to know your market!!
We are small, careful investors so white hot mania isn't for us. Meanwhile, we invest in education: attend BP webinars, read RE books, analyze at least 30 deals/month, look at different asset classes and deal structures, and save, save, save. We built a deal sheet with different target cap rates that shows us what the purchase prices need to be. When we see some softening, we'll move.
One last thing to consider: beware of looming property tax increases. Property price increases + cash strapped local governments will mean bigger tax bills. If you're flipping, maybe not a concern. But if you're planning to hold and rent, +15% or more property tax increases could erase your monthly cash cushion. We've seen that happen here from 2017-2019.