Is the market drowning in newbies?
Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
I have been getting the impression over the past two years that more and more people are entering the world of REI.
When I started a decade ago I was somewhat of a pariah amongst friends, family and work colleges. Now days it seems that every man and his dog are jumping on the REI band wagon.
Just this past year I've seen work colleges buying them, neighbors buying them, friends of friends buying them. I even overhear people talking around the water cooler about how so-and-so are getting into the landlord bushiness. Just look at the number of new member introductions popping up here on BP everyday - it's getting hard to wade through them.
Is this the impression you are also getting and if so why do you think it is occurring?
And if you are one of these newbies why are you jumping in?
To me, it doesn't feel any different than 2003-2006. Lots of friends and neighbors who previously had no interest in RE used their good credit and savings to buy "rental" property back then, some with all cash. They all said they were in it for the long term. Buying an out-of-area property for $300K that rents for $1300 made no sense. It was obvious to me that they were betting on a few years appreciation. Some of my farms had 30% in one year back then. Almost everyone I know who did that let the properties go back to the back or sold for a loss (some had paid cash). Those same properties are mostly in the $150K range now, but prices are on the rise, with at least 1% appreciation monthly. And I'm seeing the same type of buyer wanting in again.
It's very difficult to discuss rental cash flow with this type of buyer. If I point out that PITI aren't the only costs, they cite the property condition and location. They really believe/hope they will have no repairs and no vacancies. If they agree with me that the property doesn't/won't cash flow, they'll admit that they are expecting the property to go up in value. But most can't crunch the numbers for ROI. It's kind of depressing.
To me, it doesn't feel any different than 2003-2006. Lots of friends and neighbors who previously had no interest in RE used their good credit and savings to buy "rental" property back then, some with all cash. They all said they were in it for the long term. Buying an out-of-area property for $300K that rents for $1300 made no sense. It was obvious to me that they were betting on a few years appreciation. Some of my farms had 30% in one year back then. Almost everyone I know who did that let the properties go back to the back or sold for a loss (some had paid cash). Those same properties are mostly in the $150K range now, but prices are on the rise, with at least 1% appreciation monthly. And I'm seeing the same type of buyer wanting in again.
It's very difficult to discuss rental cash flow with this type of buyer. If I point out that PITI aren't the only costs, they cite the property condition and location. They really believe/hope they will have no repairs and no vacancies. If they agree with me that the property doesn't/won't cash flow, they'll admit that they are expecting the property to go up in value. But most can't crunch the numbers for ROI. It's kind of depressing.
There is no substitute for hard work, studying and expertise. If there is fear that more real estate investors will flood the market, I am sure, as with anything, only the ones that dedicate themselves fully and diligently to learning and becoming knowledgeable about the subject will did the good deals and continue to be profitable. Everyone wants to buy hot high flying stocks and assets, but few are really willing to pop open the books and research fundamental analysis. It's a fad or something to "get into" for most people.
Robert Steele - I think this might be more appropriate: Are the newbies drowning in this market?
I think it is a problem for sure. I think it has bad ramifications, perhaps K. Maria is alluding to some.
I think there is speculative pricing that comes from newbies. Compounded with misconceptions of what adds value and does not. I think this also fuels the mindset that all the good deals are drying up. Which I also find speculative. Out of area investing seems to be on the rise which means reliance on third party property managers is on the rise, how do you know who is good and who is bad if your new?
Also I think it is important to segment the newbies into sub-categories. There are those who wish to become principal owners and then there are those who are trying to cash in on the concept of wholesaling. To some degree it seems as if there is an increase in the use of Guru and seminar investing strategies. Not sure which comes first, the seminar or desire to be in the industry.
To some extent, there is a cavalier nature to some of this. Many folks want to sprint before they even crawl. Folks who don't own or manage any asset and want to jump into large multifamily property or are more worried about being able to get past the 10 owned and financed properties before they even own one.
HGTV has made everyone a house fixer and flipper. Now there is even a Property Wars show which is a bunch of folks purchasing at auction. All of these shows give the illusions of wonderful profits and easy work to some extent. The show gives a 'potential' profit but never actually gives a bottom line net number, which many times I look and say they really didn't make any money.
I think as illustrated above in the watercooler conversations. You only need to have the inclination to become an REI guy to become a self-prescribed public expert. A couple of Guru courses or seminars and you are the authority to you lesser experienced friends. The blind leading the blind, unfortunately.
Can a newbie get into the market and become successful? Yes, of course. Will that happen over night? No, not even close. Will you lose money along the way, yes, for sure. Are newbies prepared for this type of reality check? ....it doesn't seem so right now.
In all of this, it is also an important footnote to realize who benefits from this event really. It's not the newbie and it's not the REI folk. It's the banks dealing with 40% of the foreclosure inventory still. Without this slow drip of inventory into the market we would not be seeing these peaks in prices. The peaking prices begs newbie's to enter and follow the speculation. The speculation knocks out the REI folks. The properties are purchased for too high a number, repairs don't fit into the budget and we end up repeating the cycle.
All that said, an interesting show nonetheless.
Definitely beginning to feel like 2005 again. Main difference of course is that underwriting standards are much, much stricter now and today's investors will think twice about walking away from a property if the market retreats. I posted on BP months ago about all the new member introductions and speculated that it might be a contrarian indicator. So far I have been wrong about that but we definitely need to be concerned if underwriting standards loosen up!
In my experience it seems that a lot of them never jumped back into the stock market. They've been burnt too many times and are looking towards REI instead. These kind of people are usually paying all cash.
Others I think, like Dion DePaoli alluded to are being suckered in by HGTV shows which never show the bottom line. That Property Wars is a completely orchestrated show I think unlike Flip this House from the last flipping craze that ended in 2007 where they actually bought the houses and rehabbed them (then fudged/glossed over the end results).
I'm a newb.
With that said, don't forget the general population is growing.
And don't forget that BP is growing.
So even if the percentage of living persons involved in real estate didn't change, you would see a huge increase in the number of new members on BP.
Robert Steele. As a newbie, I believe that yes the market is drowning in and drowning newbies. Now more than ever people are dissatisfied with the 9-5, they are seeking and wanting the American Dream, and like you all have said they follow the hot interest at the time. TV is becoming the lives of this generation. We always see the gold, but never the work that is needed to create that spectacular ring and shine. I feel like people are just trying to do anything to make it. Stocks, Owning Businesses, REI, etc.
I do not feel people think it is just an easy game, they just want to make it. As for myself, I wanted to do REI years ago when I was in high school. I am from the rural south and the dream was not attainable at that time. Now that I am in a different place with different opportunities I feel it is the right time. I want a future for my family. I want to retire early. I want to work hard and see the fruits of my labor. Not sitting at a desk 9-5 waiting to be moved or cut at the whim of someone else. I have many more reasons, but as for me, I respect you all that have been doing this for so long. Just remember that everyone is a newbie at some point.
Yes I thought of that. But then the number of new member introductions should be the same ratio to regular posts as it was a few years ago. It's not.
So why are you getting into the game Patrick G. ?
Tyrus S. I got into REI for pretty much the same reasons. Yes we were all newbies once . The purpose of this post is not to bash newbies but trying to discern if there has been a disproportionate increase recently and if so why.
Plus it is more interesting than reading a "should I use a LLC" or "how do I screen tenants" post for the millionth time. :)
What I have noticed from many bloggers is the willingness and intent to invest as little of their own money into an investment. Plus, the willingness to overextend themselves. I recently read one blogger stating he is borrowing on the equity of his residence.
And the cycle is about to repeat itself.
Another cycle that is quickly repeating itself is within the finance industry. They are loaning money on overpriced real estate to people who have little experience to no experience. Some know just enough to be dangerous. Yet they get financing. More baffling is the loan folder contains an appraisal that somehow justifies the high price. I do not believe the reduction of the loan amount by the larger down payment is enough to cover the coming reduction in property value.
I am amazed how much people will risk just to buy a new watch or smart phone. They put their home at risk just to be able to be a ledged in their own mind.
Robert Steele. I believe there has been a disproportionate increase in many areas of investing and business. Social Security scares, low wages, job loss. Many more potential causes.
Haha! I agree much more interesting! But as a newbie to REI wanting to Landlord I can use the screen tenants posts. Not interested in the LLC, I already have one operating Corp.
Hmmm, I see your point, but after thinking about it, I think it “should” be the opposite. The person who is new to BP should theoretically have one New Member post and then have several posts in other sections. So in theory, if on average each new member created one New Member thread, and then created 10 other threads, there should be a ten-fold increase in non-New Member threads.
So either there are many people creating New Member thread and not creating other threads, or perhaps there is actually a DECREASE in newbies on BP, which doesn’t make much sense.
I’ve wanted to own real estate investments for a long time. I’m not there yet, I’ve started with a tax lien. The idea of having an investment that also provides a passive income just makes too much sense to not do it. I’m just finally in position in my life when I can get started, be it a small start.
Yes I thought of that. But then the number of new member introductions should be the same ratio to regular posts as it was a few years ago. It's not.
So why are you getting into the game Patrick G. ?
It *should* be similar with the exception of the internet evolving during that same time span. Everyone seems to have a smart phone these days which leads to everyone having more access to websites such as BP, theres even an app now.
I am a newbie and heres why I wanted to get into REI. Since college Ive been working as an environmental engineering consultant and my clients are all over the northeast. Unfortunately due to the tools and equipment I need flying isnt an option. This leads to many days of driving from the Philly area to all areas of NY, Conn, RI, VT and NH(also plenty of nights stuck in a hotel room in the middle of nowhere). During these long stretches of driving I generally end up stuck in my own head which is a dangerous place to be. I always see for sale signs in my travels and one time I looked a bit deeper into owning a particular property out of curiosity. It wasnt feasible at the time but I started educating myself about the process.
At one point a few years back my company decided to upgrade our office digs. The company purchased a building for cheap because it needed repairs. They decided that it would be better to just gut the place and build it specifically for their tastes, they would still spend less than purchasing a property in better condition. Our bosses brother was a General Contractor and being a young guy I was asked to assist him. This is when my curiosity really took off.
Its been about 2 years since that time and I have continued to read as much as I can about the subject, figured out what I want my niche to be and have spent the last year running numbers on practically every property that has shown up within my niche. Im now in a position where I feel comfortable(as much as possible anyway) in beginning my pursuit.
Disclaimer: I have never paid for a Guru service and while I enjoy the HGTV shows I know the numbers are nowhere near accurate.
I have always believed education and experience is critical to enduring success. It also makes life easier.
I had an acquaintance approach me to invest in his idea to build a new grocery store in a Colorado town where the closest one was about 20 miles away, one way. My first question before reviewing the business plan; Have you ever worked in a grocery store? The answer was No. My next question was; What experience do you have in the grocery or retail industries? The answer was None. I then reviewed the business plan. His lack of education and experience in the grocery business and the business world screamed off the pages of the business plan.
A good story for those who are new and those who think they are experienced in the real estate business. The blogs are screaming you need to work for and with very experienced people and seek far more education. Please.
It is not zero-percent loans that caused the most recent decline in the real estate business, it is the people who took out these loans. I know licensed real estate agents who have been in the business for years who took out these loans and encouraged buyers to do the same or apply for zero-down loans or obtain loans to the fullest extent of their capabilities. Those are professionals?
I'm new in the sense that I finally have the funds to invest. I was a part time real estate agent right out if college, and I still remember one property that was a great investment, but I couldn't afford it at the time. During law school, my landlord put our duplex up for sale- at a great price, but again, I had no funds. Now that I'm an attorney, I've finally saved enough to invest, I'm trying to find deals. Unfortunately, I live in the DC area, and things are expensive here, so I've started looking in less expensive areas (either up and coming parts of the city or Baltimore). I'm willing to take my time and learn- I'm not looking to get rich quick.
I also consider myself a newbie.
I entered into the world of REI by accident. Back in 2009 we had the opportunity to buy the home of our dreams. But we didn't want to sell our other home at such a low price. So we rented it. After learning a fair bit quickly (involving courts, lawyers, dead beats...) we are ready to jump in on purpose.
There really aren't that many other resources that can provide long term passive income.
Yes I see this trend myself. I noticed it abut a year ago.
I believe it is a combination of low returns on other investments, the crash is far enough in the past that the fear of continues falling is greatly lessened, and people are realizing that prices are low relative to affordability and rents,and now is a good time to buy.
Ned Carey, you beat me to that comment. I think low interest rates are really at the root of it. It's cheap to get money to borrow, and if you already have money you need something with yield to put it in. 5% CoC might look good to some people right now. Cap rates in my neighborhood are 4%.
Unfortunately (or fortunately), many newcomers will soon realize how much more difficult RE is than they thought. That, combined with rate hikes over the next few years will probably reverse the trend.
Michael
Agree with Ned Carey in that many newcomers believe they will get higher returns on their investments through RE.
RE is a very rewarding field and I've only been in this business for 3 years directly (owning properties) and 7 years indirectly (managing my father’s properties) but if there's one thing I can say, it's definitely not easy. There will be ups and downs but I believe those who are truly committed and are able to overcome any loss and keep going will have great success.
And hence we have real estate cycles that we can all take advantage of if we have a longer range perspective.
Similar to the above comment, we could see a buying opportunity from burnt out landlords in a couple of years.
In fact one hedge fund is already puling out http://video.foxbusiness.com/v/2431023704001/hedge-funds-dump-housing/ The host implies becuase they are not making money. The Guest says because they can resell for more than they paid. Take your pick. - Ned
The facts are, everyone starts somewhere! For many years people saw themselves priced out of the market. How many times have you heard, "if I knew then what I know now"? Well, people were able to get a do over, and they're doing it.