This is Not the Real Estate Environment for Rookie Investors

152 Replies

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!

Great post - one of my first mentors told me "with every deal you do, make sure that you have MORE THAN ONE exit strategy!"

So if you're doing a flip, that thing better double as a rental if it doesn't sell. I'd personally want to do cheaper/lower risk flips if I were a flipper right now. Where the rent/price ratio was such that I could easily turn it into a cashflow positive rental if needed. 

@Kevin Hill very well put!

And to think I met you almost 4 yrs ago Kevin. You had showed me a home in Ridgewood, it was a small 2 family across from the county park. You were knowledgeable then and still are now.

I consider myself to be a rookie investor. With just 1 property under my belt. But it has been a struggle, especially when trying to get private money for the rehab. I fell victim to fraud and lost money. Then COVID hit me. Now it’s about putting the puzzle together and staying afloat through these terrible times!!

Thanks @Brian Ellwood ! I remember you @Jonathan Valdes , thanks! Yeah, you have to be careful out there. Unfortunately, some people's ethical behavior gets even worse when the market is hot. Stay with it and surround yourself with good, ethical people.

I hear you vis a vi getting permits and inspections etc done.. IN Portland OR its just insane the time delays and those that have taken on HML thinking 6 to 9 month turns are going to run long.. its taking that long to just get plans approved.

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

I tend to agree with this sentiment, this is a seemingly easy time for new investors but they don't realize how many tailwinds are helping them and how much pain they will experience when those tailwinds slow. 

Lots of investors are stroking their ego for making 15% returns, but on a market that's up 20%!!! 

Be careful out there friends. 

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)

@Kevin Hill I completely agree with and appreciate where your coming from in your message, but I disagree completely with your summary. 

I was investing in 2009,10,11... Now people say "oh man those were the days, wow that was a great time to invest" yeah NOW people say that but in 2010-12 all I heard from people was how horrible it was to be investing, the worst time ever, that I needed to wait for the market to "get back to normal" and all the fear speak that your saying and so many others are saying right now just like back then. 

Fact is a shifting market is the magic hour for innovators, it's when we bloom and success is like a rocket ship. For those who got used to how things were, dare I say a bit lazy on things, yeah this would be a rather big disruption and I wouldn't like that either. 

And just like back then, their is no "getting back to normal", there will be a new normal, and new market leaders. It's what happens when paradigms shift, and they are shifting. 

Working with Pro's is a good hedge BUT those "Pro's"(myself included) can only preach from what we know which comes from what we did, as in past tense, market past tense, and our best advice may be the wrong thing for the future market. When I started flipping, doing redemption's, doing various strategies, I was coloring outside the lines, there was no check list, I was writing the map as I went, it took a lot of guts and some smart's. 

So yeah, not easy for people to start but let's be honest it never is easy, but now it's a bit easier for that innovator and harder for the "franchisee" mindset. 

Definately a sensitive environment. Ambition is never a bad thing in real estate but like you aluded to, get educated and be patient. 

Good points @James Hamling ! We all to adapt to the conditions and think outside the box for sure in times like these, but many times history repeats itself in the real estate cycle. After foreclosures dried up, I have had to shift my business focus and marketing techniques until the next wave of foreclosures happens. Best thing a newbie investor can do is come up with new methods for lead creation. I see some creative things being done for real estate on Tik Tok believe it or not. I embrace new technologies, as some parts of real estate are still behind the times. 

@Kevin Hill , being a new investor, I appreciate the advice provided in your post. I see some more experienced investors @Jay Hinrichs and @Alexander Felice I recognize on this thread. What extra steps of caution are some of the more experienced investors taking? I have heard that strategic investors can make money in different stages of the cycle, so what sort of shifts are people taking to their approaches? Are some people putting investing in RE on hold, just waiting for more indicators of a down cycle to show up?

@Kevin Hill

Record unemployment while stock market going gangbusters, meanwhile daily there are “how do I finance 100% of a house without good credit?” threads... what could go wrong?

Instagram has become equivalent to the late night informercial for real estate “educators” that make their $ primarily off being a “brand partner” or “coaching” not real estate investments and they’re hocking whatever this week’s flavour of acronym is as a complete functional business plan.... and thousands of people are falling for it.

A shaky environment for flips does not mean it's a bad environment for "investing."  It indicates a bad environment for flipping, building or developing.  And it won't be the same in every market across the country.  So while every rookie should be cautious, please don't take the OP's advice - which I do believe was given with genuine concern - as admonition to stay on the sidelines.  If opportunity exists in your strategy and in your market, take it.

Just this past weekend, I had 30 showings of a run-of-the-mill rental house for which I would normally have 5-6 showings. Rental inventory is extremely low in the area (I suspect due to Airbnb) and many of the listings that do exist come fully furnished (which I also suspect are Airbnbs trying to pull in some LTR while waiting for the STR market to boom again). Some people wanted it sight-unseen, which we don't allow, and others were offering escalating prices to be put in the front of the line. I wish I had 5-10 more houses to offer in the area. I would have filled them all this weekend alone.

But I'm not flipping, which is what I think OP is really talking about.  Just want to point out to the rookies that it's not horrible in every space.

I still think there are smart ways to get started...the smartest of which is a house hack followed by a live-in flip - you are still lower risk then the average home buyer.  

We are seeing the same conditions the OP describes here in Marin County which is positioned similarly to Bergen County but as to San Francisco.  Everything that is habitable is being snapped up as a flood of millennials and others are making lifestyle changes which mean a move away from the city.  As Google just announced that its work from home policy will continue until at least summer 2021, I suspect this trend will have longer legs than many presently think.

@Kevin Hill  Is there ever a "perfect" or "easy" time to invest? Don't think so. But, you have sound advice that all real estate investors should follow in 'easy" or "hard" environments. 

If you're a rookie investor, you have to get started at some point. Instead of waiting for the right time to invest, you can take the plunge now and gain experience so you are prepared for the "easy" environment (whenever that may come). You may not find a home-run deal, and you may even lose money because the rehab took 3 months longer than expected, but the experience you will gain is invaluable. 

@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

Originally posted by @Kevin Hill :

Great post Kevin! I have a similar view, which nobody can predict the future, but i dont see how all of these impacts will be a good thing.

I think the wildcard and especially for a rookie is the gov limiting landlords rights (evictions, etc.) right now too 

In my view.. the only positive is very low rates, which is likely pushing prices up too (so likely not so much of a positive unless you can find a great deal)


@ Kevin Hill, thank you for your words of caution for new investors. I see a lot of people rushing to buy right now, and it makes me a little nervous.

That being said, I think it is a great time to be a rookie investor in the sense that there is no better time than now to start. People are always looking for a reason not to take action, I want to ask what can I do today to position myself to strike when the iron is hot. Is it the best time to buy for the first time, probably not. It is a great time to learn, research, network (socially distanced) and to start some lead generation. Get your name out there now, so when a seller becomes distressed and needs to sell you can be the one to swoop in and help them out of their bad situation. 

I wasn't speaking strictly about flips. I am seeing 2 family homes selling so high (we also have very high taxes in NJ) that have no chance of ever cash flowing. And since they are being sold so high, they also don't have much chance of appreciating in value, which you can never assume it will appreciate when you buy. 2 families that only have 1 or 2 bedrooms on each floor. 

I know people are big on the BRRR strategy, but cashing out all your equity in these market conditions is crazy to me. What if you have a long term vacancy and can't pay the mortgage? It often takes 6 months or more to evict a tenant here in New Jersey. Right now, you can't even evict someone with the Governor putting all foreclosures and evictions on hold until at least mid-October (most likely will be longer). If you can find a multi-family deal that cash flows in New Jersey (1% or 2% rule is very hard to find), then pull the trigger! That good deal will most likely have to be an off market deal with a seller really motivated or not educated on the current market conditions.

Many of the foreclosures I get, the homeowner did a cash out refinance at some point when the market was good and were now $200k underwater. Many investors got their asses handed to them during the last downturn when they were overleveraged. History repeats itself. Everyone likes to say "things are different this time." I remember people saying condos in NJ will never go down in price because there is such a demand for housing. In actuality, condos were the first thing that went down and many still haven't reached their 2007 prices.

I think things are too fluid and risky right now for an inexperienced investor. I'm not saying sit on your hands and do nothing, but do your research and be ready to buy when the down market comes. That's when many riches are made.

Loving the discussion by the way, thanks for all the Bigger Pockets members for reading and the comments. Lets keep it going!

It's impossible to predict the top. I had clients (with over 10 mil + in real estate) saying we were likely at the top 2 years ago. No one really knows. I say just buy a good deal if numbers make sense regardless of the timing. 

@Kevin Hill sure it is . all they have to do is connect with a team that has done 100s and 100s and 100s of deals, handles everything and provides rental props with net caps of 10 +++ and is looking out for you .  Its all about knowledge and your team. Now buying a property from a realtor that does not care about anything except closing and getting paid, is a bad idea. Plenty of opportunities out there. I just bought a 6 unit that will be about 28% NET cap,,,,, Plenty of room for error ,

All the best