This is Not the Real Estate Environment for Rookie Investors
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!
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Real Estate Agent NJ (#0894817)
- 201-214-1349
- http://www.LiveBergenCounty.com
Bad time or not, we’re cautiously entering the game. We’re located north of the Seattle area and are watching, learning and doing our research. I don’t have any issues with purchasing now if the numbers pan out, equity is there and the rent is right. We’ve weathered equity loss through market bubbles before and with a buy and hold strategy it’s all relative.
RE market is crazy HOT, example I offered to buy a house for the asking price($679k) I was out bidded within 12 mins($690k) and that offer was out bidded($715K). Man At that rate I won't be able to buy a home for myself hahaha let alone get into REI. Just have to save up more money and bust my butt. "I can't, but how can I".......
@Jonathan Valdes do you have a milti family property? did you finance?
@Peter H. - To your question "When would be a good time for a "rookie investor" to enter the market?", the first thing I would ask you is what is/are your goal(s)? Are you looking to buy and hold, flip, buy, rent on a lease-to-purchase, land banking, development, commercial...invest for cash flow, appreciation or both? My second question would be have you started to assemble your team (mentor, banking, Property Manager, attorney, CPA, handyman, appraiser..)? With out a team, even Babe Ruth would have failed. Third, have you identified your target area and target market? By target market, I mean the type of renter are you marketing towards (students, retirees, couples, Sec-8, luxury...). Lastly, what is your tolerance for risk as well as what type of cash reserves do you have?
Like in many things in life, there is no one answer. What works well for one person will be a disaster for another person. Just one word of caution, if you are new (less than 2 deals in your life, not counting the purchase of your home), then I would tread lightly in this market. The markets that I am in are anywhere between hot and crazzzy! Seen this before and it will happen again and again. Deal are out there, you just need to really grind them out and be really specific on your DD, rely on your trusted team and have accurate financials. Just remember, it is better to not do a deal than do a deal that you wish you did not do.
Best of luck to everyone.
@Ryan Howell that's my plan ( around the end of 2021) to househack a fourplex w/ FHA. I'm in the saving up as much as possible stage right now , can you suggest what else i should be doing RIGHT NOW ? I cant afford a mentor
Originally posted by @Joseph M.: "Deal are out there, you just need to really grind them out"
I read this so much and don't understand the "grind them out"? How would one find such a deal when everyone else is looking for that same deal? You mean cold call, drive around for distressed properties, off the market? I know you can lead one to the gate, but the one led has to open said gate.
Investing in real estate is very much about problem solving. There are extra challenges due to COVID, so that is the big thing. There is also added volatility. The market is being propped up by government spending and loan deferrals. Underneath it is unemployment, mounting consumer debt and permanently closed businesses. There is going to be an effect on housing and the risk is where you are when it happens. My best advice is don't be greedy. If you are doing a flip, price it to move. If you are renting properties, price it to rent fast. You don't want to be the one without a chair when the music stops.
@Joe Colemen - What is meant with "Grind them Out" is you have to keep looking and a lot of times you have to look in areas that are not as evident that there is hidden value there. I am not talking location, I mean in the deal. Example would be you look at a SFR and see that the floor plan can support either another bedroom or could make a 1/2 bath into a full bath. That type of added value sometimes is not evident to the average buyer. A real world example: I looked at a 2-unit property with a detached 2-car garage and workshop in the rear of the property. To everyone that looked at the property, they saw a workshop and messy garage full of the owners crap. Tenants had outside parking areas. I saw almost 800 sq.ft of prime living space! After verifying with the county (always check zoning & permits by the way), I bought the place. I immediately "rehab'ed" the 2-car garage and workshop into a brand new 760sq.ft. 1B/1bath open floor plan apartment. Now I turned my 2-unit into a 3-unit with-in a few months. The cost was 1/10th the cost of buying another property of the same size. I also get the same rents as I would have if I had bought a separate property. I also have, collectively, a MUCH more valuable property. That is looking for value where other do not see value, hence the grind.
I hope that helps.
@Robert Villelas you are not alone!! I will be purchasing a 4plex around the end of 2021 in the Greensboro ,Nc area and i am using this time to save , and increase my credit score which i have increased it already by 60 points, I will be using the househack method via FHA
@Jon Kelly
This forum has been very insightful. I fall into the newbie category. I’m just starting off and live in Brooklyn and wanted to purchase in New Jersey. This was my goal prior to COVID. The market is crazy I just pulled my bid from a property in East Orange. I went 60k over asking. I will continue to educate myself with bigger pockets and jump into a smaller market. Still working and holding onto my cash reserve. Thanks for all the advice from the forum.
I like your post. The market today indeed can change on a dime, as you say. It is not a normal market.
On one hand, Covid has kept a lot of homes off the market and there is shortage of product. A few hundred thousand buyers are out there, facing this market.
On the other hand, there are significant spikes in loan delinquencies and forbearance. Layoffs in other sectors are starting (airlines is an example).
There is uncertainty in the economy, and hence real estate.
I am a firm believer that there are opportunities out there...But I look around and see that houses are being purchased like crazy here in Los Angeles...Is Warren Buffets advice about being afraid when everyone is "greedy" and being "greedy" when everyone afraid applicable in this instance ? I don't mean to call anyone greedy or afraid....its more of a figure of speech.
Originally posted by @Joseph M.:@Dan Goeckel - "There is something to be said for getting in the game but there is more to be said for being patient." You hit the point on the head, especially for a new investor. Every market that I am in hot to VERY hot. Complete seller's market and prices are increasing/appreciating. While there are good deals to be found, you really need to be on your game and be able to act fast. The ability to that, IMHO, comes with lots of actual RE experience. Anyone can buy a property, not anyone can make a property a successful long-term investment. I believe in the idea that you make money when you buy. There are many ways to do that of course (buy/rehab, find new use, add value, current rents under market...).
With that said, if I were a new investor, I would continue to 1) conserve cash, 2) secure funding with as many banks as possible, 3) focus on building your "team" and educating yourself and lastly 4) continue to look and walk properties. In this market, it will not be super easy due to the limited inventory and given how fast properties go pending. It will be a grind, but there ARE deals out there, just just need to grind it out. Just be cautious.
I have one investment property but I haven't bought in a while. Even if I had, this would still be my strategy.
Originally posted by @Ismael Martinez:I am a firm believer that there are opportunities out there...But I look around and see that houses are being purchased like crazy here in Los Angeles...Is Warren Buffets advice about being afraid when everyone is "greedy" and being "greedy" when everyone afraid applicable in this instance ? I don't mean to call anyone greedy or afraid....its more of a figure of speech.
I feel like this is a FOMO market. Like before 2008, although the reasoning is different. Now.. OMG, there is no inventory, we have to snap something up for higher than the list price because times are uncertain. Before 2008... OMG, we need to buy now so we don't get priced out.
@Rachel S.
You hit the nail on the head ....
@Kevin Hill I think now is a great time for rookie investors to review their investment strategy and explore opportunities such as new construction. As you have pointed out, it’s about supply and demand. New construction strategy is a viable solution to meet the overwhelming buyer demand and feed the new investor itch to get started. I wholeheartedly agree that investors should have an investor friendly Realtor on their team. The deals are still there; we may have to create some on our own, but we can’t stop. Continued success to all! #rainmaker4life
@Kevin Hill I would never say newbies should stay away. However, I think everyone needs to be at high alert. My partner and I bought a property we wanted to rehab and flip at the end of last year.
We finished the rehab in March just as everything went down. Fortunately, we bought well enough that the property could cashflow. That is what matters. We had two exits.
Trying to BRRRR it now because it is a small property. We are packaging it with another property we are currently rehabbing.
My point is that nothing went as planned per usual in real estate. However, we are now on plan C or plan D still making money with the property.
Newbies can stay but you better plan like there is no tomorrow. Otherwise there won't be.
Originally posted by @Jolanda Thomas:@Kevin Hill I think now is a great time for rookie investors to review their investment strategy and explore opportunities such as new construction. As you have pointed out, it’s about supply and demand. New construction strategy is a viable solution to meet the overwhelming buyer demand and feed the new investor itch to get started. I wholeheartedly agree that investors should have an investor friendly Realtor on their team. The deals are still there; we may have to create some on our own, but we can’t stop. Continued success to all! #rainmaker4life
In my opinion, recommending new construction for a newbie is awful advice. In my area, new construction homes are very expensive and out of reach of most first time investors, secondly, the market is on the verge of turning in many areas and the house might lose value before its even finished being built, raw land often has to be bought with cash only, and construction loans are very expensive.
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Real Estate Agent NJ (#0894817)
- 201-214-1349
- http://www.LiveBergenCounty.com
@Kevin Hill rookies are being squeezed out. Banks are scrutinizing loans, they have all but eliminated construction loans, some smaller investors are getting hurt on rent collection cans can’t evict.
Larger investors with a diverse portfolio are somewhat protected, at least around here. The little guys with one or two doubles and 1-2 tenants not paying can equal half their revenue not coming in.
With low inventory, no construction loans, and rent collection issues, smaller investors and or “rookie” investors are feeling the squeeze regardless as to whether they made a good investment or not.
Originally posted by @Matthew Irish-Jones:@Kevin Hill rookies are being squeezed out. Banks are scrutinizing loans, they have all but eliminated construction loans, some smaller investors are getting hurt on rent collection cans can’t evict.
Larger investors with a diverse portfolio are somewhat protected, at least around here. The little guys with one or two doubles and 1-2 tenants not paying can equal half their revenue not coming in.
With low inventory, no construction loans, and rent collection issues, smaller investors and or “rookie” investors are feeling the squeeze regardless as to whether they made a good investment or not.
Good points! That's the problem with investing in 1-4 family homes, you really feel it when a tenant doesn't pay and you have to be able to afford the mortgage without their rent payments.
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Real Estate Agent NJ (#0894817)
- 201-214-1349
- http://www.LiveBergenCounty.com
@Kevin Hill great post! Definitely agree. Most lenders aren’t even lending to first timers and that’s why. COVID or not, real estate prices were bound to decline, its cyclical. There are many people enjoying this late surge in pricing, but it will change, and you need to PLAN for the worst case scenario. Will it be terrible? No, all signs point to a small down turn. But, if you’re not being cautious about your projections , you shouldn’t be investing. And one bad deal at the beginning of your investing career can ruin you. Warren Buffet is known for saying 9999 no’s for every 1 yes. Great time to exercise that diligence in my opinion.
@Fred Mompoint East Orange is a great place to invest, but the taxes can be pretty high and the inventory is about as tight as Ive ever seen it. Continue to learn about new areas, save cash and then get back out there when the time is right, good deals can be found even in this market, but it isnt easy
Originally posted by @Joseph M.:@Joe Colemen - What is meant with "Grind them Out" is you have to keep looking and a lot of times you have to look in areas that are not as evident that there is hidden value there. I am not talking location, I mean in the deal. Example would be you look at a SFR and see that the floor plan can support either another bedroom or could make a 1/2 bath into a full bath. That type of added value sometimes is not evident to the average buyer. A real world example: I looked at a 2-unit property with a detached 2-car garage and workshop in the rear of the property. To everyone that looked at the property, they saw a workshop and messy garage full of the owners crap. Tenants had outside parking areas. I saw almost 800 sq.ft of prime living space! After verifying with the county (always check zoning & permits by the way), I bought the place. I immediately "rehab'ed" the 2-car garage and workshop into a brand new 760sq.ft. 1B/1bath open floor plan apartment. Now I turned my 2-unit into a 3-unit with-in a few months. The cost was 1/10th the cost of buying another property of the same size. I also get the same rents as I would have if I had bought a separate property. I also have, collectively, a MUCH more valuable property. That is looking for value where other do not see value, hence the grind.
I hope that helps.
Thank you for clarifying this, all of this knowledge helps me as I'm move closer to becoming a REI. Now I've added more to my search listing.