This is Not the Real Estate Environment for Rookie Investors

152 Replies

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.

@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.

I think the concerns are valid as a newbie I'm being more conservative when running numbers and carefully following news. I've seen multiple reports where supply is very low now but demand is high (I suspect due to the low interest rate) so people are overpaying for real estate? I think the best time to really buy will be early next year and that will be due to many foreclosures unfortunately...  

A lot of the responses from people across the US somewhat prove prices HAVE TO correct. 

When prices are going up at a rapid rate...4% per month...

At some point...no matter what you say about supply and there not being enough...

Prices will be unaffordable to the majority of the job pool. 

Prices then have to crash. 

Key chart that backs this up. 

Great points by OP. Tough environment and very unpredictable. Anyone who claims to know what the future holds is full of it. I still believe that as long as your numbers work, buy the property. Especially if you buy and hold, even if the market does go down by 50% in a month, don’t sell and you don’t lose the money. If it is your first deal, ask an experienced investor to double check your numbers.

Having been on this forum for several years, probably once a month for that entire period there's a post or two about the housing bubble bursting, how we're at the top of the cycle, how prices are destined to drop, how we're facing an impending recession, etc. etc. Now, all these things will eventually happen but it's only in looking back that there's any ability to observe the actual timing of events. The bottom or tops of markets are almost never foreseeable. If they were, we'd all be stock market millionaires. So in the "get rich slow" scheme, our plan is always to look for that great deal, force equity, screen carefully and move onto the next project. We're not doing anything different now than we were a year ago and most likely a year from now, we'll be holding the same course. I don't really care what the national statistics are, I'm concerned about a particular home in my area that I know I can cash flow if I can buy it for $xxx. Anytime is a good time to start investing in real estate if it's done with care and knowledge.

I think as long as they know their market, know what they're doing, and surrounded themselves with a great team, they should be fine. I am also a newbie and started my first flip end of last year. We're in the middle of the project when COVID struck and I was worried about what will happen next. I was constantly talking to my agent but she assured me that our market is hot and inventories remain low. I've also communicated with my contractor to make sure we were doing the best we can to stay on track. We had delays in the permits and some materials so the project took longer than expected and went slightly over budget. But at the same time, when we listed the property, the comps were higher than the ARV I used when I bought the property. On top of that, we got a solid offer over the asking price so was able to recoup the extra costs incurred.

It is still uncertain what the next few months will look like but I am still actively looking for the next project. However, this time, I am more conservative and adjusted my holding period for possible delays when analyzing deals. I think the keyword is "adaptability".

Great points,Cate. 
I am in Atlanta looking for a quad. Nothing makes sense. I am unable to find something beyond 6.5% cap. Although I am more into rehabbing, I would like to start accumalating rentals. Can we connect ? It will be good to exchange notes...

 


Originally posted by @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.

 

@Kevin Hill

Hey Kevin, I reside in South Jersey (coincidence I know 😂) . I’m currently looking to become a real estate agent and start my courses next week.

My original plan was to just jump into it with a basic plan: down payment and rent it out but as I learn more things change.

So now I want to work part time as an agent and hopefully get a good enough commissions to quit my job and do it full-time.

Then once I hit that mile stone, I plan on getting another good enough commission to purchase my first property and rent it out. (My girlfriend isnt for the duplex house hacking sadly)

To your point stated above, would this be a good plan for a rookie? Because god forbid I wait on investing in real estate and people become millionaires in this crisis when I could’ve been one too.

It seems to me the longer the cycle continues beyond the normal 7-10 year time line, the farther prices have to fall before they reach a true corrected value. This is not taking Covid into account. That makes what is happening now truly scary, but I am a very conservative investor.

Just my opinion, that a a couple of bucks will get you a cup of coffee about anywhere.

At the moment, it isn't quite as risky as it was at the start of Covid.  I am not convinced this is over though so I agree that newer investors should really do their due diligence before risking money.  

Originally posted by @Brandon C. :

@Kevin Hill

Hey Kevin, I reside in South Jersey (coincidence I know 😂) . I’m currently looking to become a real estate agent and start my courses next week.

My original plan was to just jump into it with a basic plan: down payment and rent it out but as I learn more things change.

So now I want to work part time as an agent and hopefully get a good enough commissions to quit my job and do it full-time.

Then once I hit that mile stone, I plan on getting another good enough commission to purchase my first property and rent it out. (My girlfriend isnt for the duplex house hacking sadly)

To your point stated above, would this be a good plan for a rookie? Because god forbid I wait on investing in real estate and people become millionaires in this crisis when I could’ve been one too.

I don't think its a bad plan. There is a debate for Bigger Pockets for years whether an investor should get their real estate license or not. At least you'll learn about contracts, have MLS access, be able to schedule showings yourself & have lockbox access, and have access to MLS statistics so you can research markets and activity. BUT, I don't think its an ideal time to become an agent, but I got licensed in 2008, a terrible time for residential real estate. Just keep in mind it might take you awhile to get your first sale and you'll have startup costs like E&O insurance, MLS fees, board dues, etc. Make sure you join a brokerage that offers good training because what you learn in real estate licensing school doesn't train you on how to be a good salesperson.



 

Refinances are taking about 2 months on average for us here in the mid-west. This means to me, that if you are looking to buy a renovation today, its going to take closing(? Days) + renovation time + refinance (60+days) So your looking at a longer than normal time to refi. Im not saying its a bad time, that's opinion and mine is probably as bad >/<, as anyone else's. But, right now there is a backlog and the banks swamped with refi's on primary residences Its going to take longer to get your equity back if not for any other reason than slow refi

A lot of it comes down to education. A part of that education is learning how to understand the market and the cycles it goes through. @Kevin Hill , you have a great grasp of that.

When I hear from new investors, it seems like they believe investing fits inside a nice box. Gotta do a flip and then use that profit to buy rentals. This is the perfect time for rookies to decondition themselves from that mindset and develop tools they can use later on.

@Ryan Howell and @Kevin Hill both had awesome insights:

- Why not house hack a property by renting out the other room or unit?

- Do a live in rehab to that same property or another one when you rent your first one out?

- Get even more creative by acquiring those subject to an existing mortgage or with a lease option.

- Develop and implement lead generating activities by using social media and your web site (Carrot FTW)

All of this takes education. Wholesaling in Greenville NC has been slower for us, so this is exactly what we’re doing. Focusing on creativity and marketing is key at this point in time.

Nice post but I unfortunately have to disagree as have a few others.  To generalize and say that this is not a good environment for new investors is simply not true.  I agree it's a risky environment for flippers but for buy and hold investors it's a great time to pickup rentals from tired landlords and distressed sellers.  

Especially if you know how to properly buy property right and leave yourself with 30%+ equity there is plenty cushion there to weather the Covid storm.  Also as you mentioned, people are scared to buy and make long-term commitments so it's a ripe time to own rentals because the pool of renters has grown.  

I'm teaching investors how to BRRR so with the proper guidance this is a great buying opportunity. I will say that if rookie investors DO NOT KNOW WHAT THEY ARE DOING then ANY environment can be potentially disastrous for them not just our current situation.

Thanks,

Ehab

@Kevin Hill Awesome post!This pandemic is not a recession.The unemployment numbers are a misnomer,although they are accurate the minute either a vaccine is in place or this goes away the economy will return quick.With financing rates at all time lows there is not a better time to get in and get long term financing in place.This is how the rich get richer buy low whether it’s the stock market or real estate.

As always any investment is a risk,but in my area real estate is a great long term investment.

Thanks

Originally posted by @Chad Lanting :

@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?

Do NOT get caught up in a bidding war. Run your numbers and stick to them. There ARE still deals to be found, but they are few and far between. If someone doesn't HAVE to move, they're not listing their property. Now is an excellent time to be a seller, and not an awesome time to be a buyer. I have one client I wrote 5 offers for before one was finally accepted - and the only reason it was accepted was because the listing agent was lazy and didn't put it on Showingtime until the seller demanded it. (He was scheduling the showings himself, and never answers the phone. Sigh.)

You can still continue to educate yourself, learn your market and be prepared to act when you find that deal. Driving for Dollars is still valid, sending targeted letters can still yield results - many landlords ARE getting scared and may be wanting to sell their "dog" properties before the second wave hits. A dog isn't a dog to everyone. 

But when a property pops up, do your due diligence, do it quickly, and take action. 

@Joe Cassandra History repeat itself but we should understand that recency bias often make us think that the exact same results will happen but expect variation. The prices will drop but probably not to the level we saw in 2009-2012 as the banks are much more selectively in their mortgage qualification process.

A drop about 20-30% could be expected but the recovery will be much slower than our current bull market. We need to prepare no appreciation for 10 years into the ROI calculation.

House hacking for first-time homebuyers/RE Rookies is the move right now! Take those low interest rates! City in MD I live in is home to many young professionals, nurses, doctors, specialists, entrepreneurs, etc. Rental market is still looking good, as this demographic is generally still financially sound. Have been suggesting to some flippers to potentially think about turning the project into a long term rental, if they can't finish renovations within the next few months. 

Thanks @Mindy Jensen for your thoughts. I read an article today about pending home sales surging while inventory is significantly less from previous year. I'll definitely be continuing to educate myself as things continue to unfold.

Good article for a NEW investor or for a wannabe "investor".  This is not the time to be in the market if you do not have solid experience.  It is true that each market is different, but what I am seeing (in multiple markets) is that ANYTHING of quality or even something that would be a very minor DIY rehab is going for list price or over.  The DOM is measured in days, not in weeks.  A few were in contract within hours of listing.  Good news if you are selling, not so good if you are buying and horrible if you are new and do not have an understanding of what needs to be done post-sale.  You MAKE money when you BUY!  Don't forget that.  
With that said, for the experienced investors this could prove to be a decent time, of course, depending on the deal.  I like others, invested during the Great Recession.  People thought I was crazy buying during a time of panic, bank closings and hysteria.  Crazy like a fox because I had the experience to separate the wheat from the chaff.  Now, my friends and business associates wish they had invested vs. "saving" there money.  With that said, I see the market this way.  First, this is NOT 2008!  WAY different mechanics.  Gone are the days where you could buy a house for the price of the land. [Fun times they were]  Second, there is a deal every day and you just need to find it.  This is where a team and experience kicks in.  I always have multiple exit strategies, never get over leveraged nor emotional.  I place an offer and if it does not work out, I move on.  I also believe that if you are not embarrassed by your initial offer, you offered too much.  What I am personally doing is looking for properties that have gone stale or for properties that will not qualify for a FHA mortgage.  DOM greater than 35 days is a good starting point.  Most retail customers want turn key or near turn key (paint a wall, change a faucet type of buyer).  I also know exactly what will rent quickly and for what rental rate in the areas that I am in.  In addition, many times I actually have a "wait list" of interested tenants, so I can often pre-rent a unit before it is even rent-ready.  I have already closed on two very solid investment properties that are now being rented.  Point being is that there are deals out there, it will just take time, expertise and a trusted team to find them.  If I were a rookie or newbie that is not well capitalized, I would be sitting on the sidelines waiting, watching and saving money so you won't get over extended if/when you buy.  A newbie can get burned harder in the current environment vs. a more standard RE environment.