These Days, Everyone’s an Investor: Why the Tides Will Turn (& How to Profit From the Fallout)

by | BiggerPockets.com

If you’re anything like most real estate investors (or hopeful, someday investors), you are amped up to find your next (or first) great deal. The only emotion that rivals the intensity of your excitement is the overwhelming discouragement of not being able to find anything that makes sense to buy! The competing emotions of excitement and discouragement swirl around your brain, creating a bipolar environment that can make even the most iron-willed investor go crazy.

This is real estate investing in 2017.

It wasn’t always this way—at least, not from what I hear. While there have always been those investing in real estate, my understanding is that for the longest time, it was really a relatively small group of people who were pursuing it seriously. Real estate investing isn’t like other forms of investing. It’s not quite as difficult as buying a business to run, but it’s definitely more complicated and involved than just pushing a button on a computer to buy some stock. There is a knowledge base and skill set necessary.

That’s why websites like this one exist—to help people build up that knowledge base and to sharpen that skill set.

For a long time, there was a select group of people who gained the knowledge and learned the skill set, and they were the main players buying rental properties. These people were willing to deal with the headaches of managing tenants, making repairs, and negotiating with lenders. In exchange, they saw healthy, long-term equity growth—and hopefully a little cash flow to go with it. They tapped into this not-so-well-known-asset class and profited handsomely from all the ways it can build wealth. If you didn’t know one of these people to teach you the game, you either learned through the school of hard knocks or you never got started.

As most people aren’t willing to learn from that school, there were a lot less real estate investors competing for the inventory!

Well, those days are gone—in some ways, probably for good. While this doesn’t mean you can’t find good deals (you definitely can), it does mean you would be wise to understand what changed, how we got to this place, and what may be changing in the future. If you can understand the past, you have a better chance of being prepared for the future. I want to help you with that.

Allow me to present some recent phenomena that have led to what I believe is an exaggerated interest in real estate. This exaggerated interest has led to more competition than a healthy market should bear. We see it affecting many parts of real estate. Single family housing is definitely one of them, but large scale commercial investments and note investments are getting it even worse! If you’re frustrated with the amount of competition out there right now, take a minute to think about some of the reasons why it may be higher than it normally would be.

Stupid-Low Interest Rates

Due to government intervention trying to spur the economy (the type of behavior that always leads to some form of correction in some way), we are currently living in a period of interest rates that are, quite frankly, stupid-low. Through programs such as Quantitative Easing and the FED keeping the prime rate low, interest rates have been incredibly low for a pretty significant period of time.

While at first glance this may seem like a great thing for those of us buying real estate, there are other, hidden problems with an environment like this, and the consequences can be pretty significant. From what I can see, low interest rates have affected real estate investing in two major ways. The first:

Making Loans More Affordable

This is the more obvious effect and therefore the one most of us think of first. With the government working hard to create low interest rates, mortgage rates for homes are kept low as well. This makes homes more “affordable” for someone trying to buy them, as a lower interest rate obviously leads to a cheaper house payment. Good thing, right?

Well, maybe not—at least not all the time. The more “affordable” low interest rates make housing, the higher a price sellers can ask for their homes. Buyers can afford these higher prices because their mortgage payments are so much lower with these incredible low rates. Win/win for everyone, right?

This is only a win if interest rates never go up. You may have happily paid $300k for a property with a 4% interest rate on the mortgage. However, if interest rates jump up to the 8-10% range (a historically more healthy range, according to many economists), you may find yourself having a much harder time selling this property to someone else. The person trying to buy it will have to pay you less in order to get their payment close to the same amount you are paying with your 4% mortgage rate. Not a great thing for you if you want to sell and make money on the deal.

These low rates also make down payments much less important. With rates this artificially low, you can borrow so much money and not see your payment increase very much. This creates very little incentive for people to save up a lot of money to put down on a house to keep their payment low. There was a time when having a large down payment served as an advantage to your investing business. Now, not so much. As an investor, you may find yourself competing with those trying to buy a primary residence and able to put just 5% down. Most banks require you to put 20-25% down. This allows others to buy more than you can and still afford the payment with ease.

This same principle applies to all-cash buyers. Having a lot of cash to buy a property with is a big deal if interest rates are high and home prices get pushed down. It’s much harder to work this to your advantage when money is cheap to borrow and those with lower incomes qualify to borrow more money because the debt service on this money is so cheap! Low interest rates level the playing field in many ways, but this isn’t always good if you’re an investor. Investors look to take advantage of whatever they can, and level playing fields can take away some of our advantages.

Making real estate more affordable makes it easier for more people to get in the game and therefore decreases your chances of finding a better deal. With more people eligible to play, you have more competition on the field. This isn’t good when you’re all competing for a limited number of properties.

refinance

Creating an Unhealthy Thirst for Yield

The other (and more significant) problem with low interest rates are the impact they have on those trying to save money in the bank or invest in other, lower risk investment vehicles. By making interest rates so stupid-low, the government has really punished those who were good at saving or planned to live off the interest of their savings. Let me explain.

When I was just out of college, I was able to open a CD at my bank for a 6% return. This meant I was earning $500 a month on the money I put into the CD. This $500 covered the rent I was paying to rent a room from a partner at work. I was more than happy with this arrangement and satisfied with my return. I probably would have kept my money in there for a very long time—except interest rates dropped to near zero, and suddenly I wasn’t making jack squat on my savings.

I’m not the only person who went through this. In a healthy economy, people have healthy options from which to choose that earn a return on their money—vehicles like CDs, money market accounts, treasury bills, bonds, etc. While none of these are considered aggressive investment strategies, they are good for parking money in to be kept relatively safe and are very low maintenance. For a lot of people, this is all they really need. Give them a 6-7% return on money in one of these investment vehicles, and they will be thrilled with that return, considering it requires no work, no headaches, no learning, and not much risk.

Related: Markets Are Tough: Should We Brace for a Bubble or Continue to Invest?

Take that option away, however, and you create a sort of desperation to get a return.

Enter real estate as a replacement option.

The point I’m getting at here is there are, in my opinion, a lot of people investing in real estate, be it directly or indirectly, not because they always wanted to be a landlord, but because they don’t have much choice. This thirst for yield has created a sort of real estate vampire that has to prowl around looking for something to satisfy its thirst! Vampires aren’t known for making great life decisions.

Think about it. Real estate is something we all love, but if you could get the exact same returns without having to go through the hassle of locating, rehabbing, and managing an asset, wouldn’t you take that? Of course you would! Now, what if you could get half of the return you’re used to for zero work? Would you consider taking that?

A lot of people would, especially if they were close to retirement, had lower expectations, and were not interested in learning a whole new knowledge base and a whole new skill set.

With this new, low interest rate environment we have now, those people don’t have a choice anymore. One half a percent return on your money in the bank isn’t going to cut it when you’re living on a fixed income. You need more than that. So what do you turn to? Real estate investing.

Now, some of these people start looking for properties to buy and to compete with you and me. While this may be the most obvious impact they are having on your business, there are actually other ways they are affecting the real estate investing market. A big one is in syndication deals.

Are you one of those people who used to see tons of cheap foreclosures in your area, and all of a sudden they just disappeared? Weird, right? Well, maybe not. Huge hedge funds, seeing the great opportunity for yield that real estate investing can provide, have jumped into many markets over the last 5 years and bought up massive amounts of inventory. These hedge funds pack some serious punch in the way of investor dollars they are throwing at these properties.

Who do you think is funding the hedge funds?

Older people with a lot of money in the bank thirsty for yield, that’s who.

It’s not just single family houses, either. Have you ever gotten really excited about the idea of buying a big commercial property with hundreds of doors and managing just one property instead of several? Awesome idea, right? I agree—until, of course, you actually go and try to buy one right now!

Cap rates in some areas are plummeting just as fast as interest rates. The large multifamily market is scalding hot, and it’s very hard to find anything resembling a good deal on the open market. Why, you ask? Consider how many people are looking for a place to park their money and get a decent return.

If you are someone with a decent chunk of change in the bank and need somewhere for it to earn you a decent return (say, 6-8%), your easiest option is probably to give it to someone putting a syndication deal together. If you are someone putting a syndication deal together and need something to buy with all this money, the easiest option is to buy one big ol’ property and spend it all at once. This is part of the reason why the multifamily apartment space has gotten so competitive and good deals have been so hard to find.

The fuel behind all of these syndication deals and hedge funds is the abundance of money sitting in accounts unable to earn a return there. It’s created a hunger that wasn’t there before for normal people, previously uninterested in getting involved with real estate, to join the market.

great-property-manager

Technology/TV

Today’s technological advances are also responsible for the growing popularity of real estate. Years ago, you had to go look at a property yourself or pay someone to go take pictures of it (then develop the film) if you wanted to see what it looked like. Now almost any house you want to see is spread amongst tons of websites!

Not only are pictures available, but so are property taxes, neighborhood scores, home price estimates, etc. Never before has it been easier for the casual Curious George to feel like they have enough information at their fingertips to jump into investing. This has helped fuel both the thirst and the curiosity of many who never before would have considered real estate investing as a realistic venture.

And it’s not just the internet. Real estate shows are exploding in popularity as well! HGTV is becoming a powerhouse, as show after show with the name “flip” somewhere in the title are taking off. There are home flipping shows in every market imaginable, shown over several different TV networks, all portraying real estate investing as fun, easy, and always profitable. These false portrayals of how RE investing really works have boosted the confidence of many who never would have dreamed of getting involved in real estate investing.

People with zero idea of how to run numbers want to get into house flipping solely because they enjoy interior design. People who have never worn a tool belt see Tarek and Christina or the Property Brothers swing a hammer in one shot to knock down a piece of a wall and think it looks “fun” to flip a house. Those of us who have actually done it know how ridiculous this sounds. But to those who have only seen it on TV, the whole thing seems much more reasonable to undertake than ever before.

TV and the popularity of real estate investing shows have done a lot to create false confidence and bolster the curiosity of the casual viewer.

Related: The Best and Worst Markets for Residential Real Estate Investors, 2016

Podcasts/Books

One of the biggest boosts to my own confidence as a real estate investor came from listening to the BiggerPockets Podcast. I’ve probably listened to every single episode. Hearing how other people were buying and managing properties helped me to feel good about the way I was doing it. Hearing how different strategies worked for different investors gave me ideas for how to do things differently. Being able to listen to a podcast about something as specific as real estate investing did a ton to help me not feel like a crazy nut who really liked buying houses.

Nowadays, there are tons of podcasts about real estate investing. They aren’t all great, but the sheer amount of them alone is indicative of how crazy popular real estate has become as a genuinely realistic way to build wealth. What was once something that required you to know someone intimately involved with it has grown to something that anyone with a smart phone and an internet connection can learn about. Listening to a podcast is like having a conversation with someone who has been doing something successfully that you are really interested in. It cuts down on the learning curve significantly.

The same can be said for books—and boy, are there a lot of them. While there have always been books about how to be successful investing in real estate, I’m not so sure they have always been so readily available. Gone are the days of needing to drive to a library or go to a bookstore. You can now order a book on Amazon and have it sent right to your house. Better yet, you can order the electronic version and have it sent right to your phone. Better even than that, you can download it on a service like Audible and have someone else read it to you while you drive, run, cook, etc.!

There are so many ways to absorb the material of books now that just about anyone, even if they hate to read, can learn how to get started in this niche that was once only a realistic possibility to a small group of people.

Along the same category of books and podcasts are blogs. The internet is full of them. There are more blog posts about real estate investing than you could ever hope to read. At this point, there are very few things you could ever need to know that you can’t find information about. The increases in modern technology have made the information about how to get into this niche so readily available that now any average Joe can get started buying houses.

The Final Product

So, let’s sum this up. Real estate investing is all over the TV, being portrayed as fun and profitable at every turn. People can see it and have their interest piqued. Once it’s piqued, there are insane amounts of literature to help build on that interest—books, blogs, podcasts, etc. The information is now available to the masses, where it was once much harder to find. We have the desire followed by the knowledge.

Throw into that stupid-low interest rates, and you can see how the ability to invest gets included in the mix. People can borrow a lot of money from someone else to buy an asset and still have a relatively low payment. On top of that, there are a lot of people who I honestly feel have very little interest in or desire to be a landlord but simply don’t have much choice. With interest rates where they are, many people are forced into this asset class to find some form of return on their money at all. This creates real estate vampires thirsty for yield wandering into an asset class where they never wanted to be.

So what does this mean for those of us trying to make a long, healthy career in real estate investing?

Try to remember that the easier it is for someone to get started in something, the easier it is to quit when it gets hard.

Easy come, easy go. Many of those who are investing in real estate right now probably don’t want to be. Being a landlord isn’t the worst thing in the world, but it’s definitely not something the majority of people enjoy. They have to deal with frustrating tenants, late payments, managing contractors, city code violations, and the list goes on. There are times when it is not much fun trying to keep your properties profitable. For someone in my position, it’s worth dealing with the bad because I know I have 30-40 years of appreciation to look forward to. For someone in the twilight of their retirement, not so much! I expect a lot of these “reluctant landlords” to sell their properties and get the heck out of real estate investing as soon as they can get a healthy, fair return on their money somewhere else that requires less work and less risk.

The same goes for the hedge funds who need to repay their investors who let them borrow the money. Many of these companies will have to liquidate their inventory at some point. This is going to mean more rentals hitting the market and more opportunities for other investors to buy.

I expect to see a similar result in the large apartment complex space. Those who borrow money through syndications have to liquidate at some point. The investors expect a return. If interest rates increase, they may have their investors clamoring for their money back so they can go invest it somewhere else. It will also be much less desirable to try and refinance these large buildings at a higher interest rate when those balloon payments come due. Many will opt to sell and be done with it. This should lead to more opportunities for those who have been patiently waiting and saving money on the sideline.

side-stream-income

Related: How to Make Money in Real Estate — Whether You’re in an Up OR Down Market

Think about the true, honest miners during the gold rush of 1849. If you were a gold miner back then, it had to have been highly discouraging to see every single able-bodied man who could shake a rocker-box making their way to California to compete with you for gold. However, at a certain point, the vast majority are going to give up and go back home. That is when you are going to make your killing. Think of all equipment you’ll be able to buy for dirt cheap from miners selling what they have to pay for a train ticket back home. Think of all the land you’ll be able to buy at distressed prices from those no longer interested in owning it, as it didn’t help them strike it rich like they thought.

If you were wise, you would have saved all your money and waited for the others to quit. Buying cheap land and cheap equipment from your competition as they called it quits, you’d grow your own ability to leverage your business. Some of these people would be dejected but unable to afford a trip back East. These are the people you could hire as cheap labor to work for you. If you played your cards correctly and positioned yourself right, you could make an artificial boom work to your advantage because you are in it for the long game.

I want to encourage those of you reading this to think the same way. I know it can be tough finding deals right now. In some markets, you could have thrown a dart at a map and the property it hit would have made you money. It’s not going to stay this way forever, though. The economy will shift, markets will change, and people will want out for various reasons.

Spend this time before that happens educating yourself and putting yourself in a strong financial situation so you can strike when the time is right. Make connections and strengthen relationships with those buying properties you think are priced too high. You want to be that guy all the miners approach to sell their equipment for pennies on the dollar because they don’t want it anymore. You want to be the person with enough money saved up to be able to buy it all!

There are many factors affecting the real estate investing world that are abnormal. Crazy-low vacancy rates, low interest rates, and an economy trying to climb out of a huge recession are just some of them. Things will turn around eventually, and you’ll be kicking yourself if you miss out because you got discouraged that deals were hard to come by in the meantime. Don’t make that mistake! Understand the big picture and wait for the tides to turn in your favor.

Do you agree with this assessment of the market? What kind of rising popularity for real estate investing are you seeing in your area?

Let’s discuss in the comments section below.

About Author

David Greene

David is a real estate investor/agent/author/entrepreneur/police officer in the CA SF Bay Area. David's goal is to achieve total financial independence through real estate and to help as many others do so as possible. When not hunting bad guys, he hunts deals and loves talking real estate. To learn more about David, visit his website where you can also sign into his free investor's newsletter and follow along as he walks you through his deals and shares his latest projects.

89 Comments

  1. Tim Hoffman

    Awesome article David. I was a young investor (2-3 years) when the RE Bubble run up started. I was a perfect storm AGAINST landlords. Prices going up. Good tenants buying houses leaving the less desirable tenants to pick from. Profit margins Squeezed as rents dropped to keep units full. Then the Bubble popped in 2008ish! Distressed property for sale on every corner and those once great tenants were back (albeit with some foreclosure baggage) and soured on owning a home ever again. If you had cash, you had your pick of the best homes in great areas, with rents were going up every year. A perfect storm FOR landlords.

    Point is, be conservative, consistent and willing to wait for the deal that makes sense.

    I love the TV shows as much as the next person but they are not reality. Same for interest rates and money looking for a place to land. The times, they are a changin.

  2. David Roberts

    Fantastic article, and yes I’ve been very discouraged because i don’t want to break my equation. The one time i broke it last year almost caused me a loss and all kinds of grief.

    Better to sit tight and be patient. Hard to do though.

  3. Michael Williams

    I’m fairly new to real estate investing and I really do understand the long game. My mentors taught me to be prepared to switch strategies when the market shifts. But the smartest advice I have every gotten was this, “Align yourself with a long game veteran that has weathered the cycles in an industry and offer to help him grow his business”. So I constantly educate myself in real estate so I will have the skill set needed to help him grow his business while I grow mine. So when the market does shift and investors start selling of the good stuff, the investor I’ve aligned myself with is going to need help buying all of those properties at the best prices. I learned a long time ago, when the masses are fleeing the deals are flowing. That’s when wealth is created.

    • David Greene

      Yes it is! I feel a lot of the “goals” people set for themselves are anti-productive. Saying things like “I want to buy x number of doors by 2018” can be dangerous because you’re adding pressure to yourself to close on something that doesn’t make sense.

      Save as much as you can when you’re not buying, and buy as well as you can when you do.

  4. Stephen S.

    You ain’t seen nothing yet – bide your time and wait until the PACE financing debacle unfolds. This time the municipalities will end up with giant REO inventories. That banks will walk away clean.

    One thing that you can Always count on is the fact that The Banks will always find a way to get themselves into trouble.

  5. Christopher Smith

    Good Read

    I’m not sure when the real estate fallout will occur because to me predicting such things is fraught with far too much uncertainty to make it much more than crystal ball reading. Everyone seems to think interest rates must increase imminently because that’s just what they have always done in the past. I am not so sure, I can make a very strong case (which I have done for years) that there is no immutable law of physics that says interest rates must revert to where they were in the past. There are a number of very profound reasons why rates can remain low for significantly extended periods of time. However, having said that I would agree that it would be most prudent to at least factor that possibility into what you are doing currently in the real estate market.

    I also agree that the market now is really tough when screening properties for those that can be clearly justified on cash flow and appreciation potential grounds. I stopped buying in Ca in late 2013 (after about 2 to 3 years of several solid SFR acquisitions) because of the rapid price appreciation in this area which has been absolutely tremendous for my existing Ca portfolio, but totally price prohibitive for any additional acquisitions. At that time, I switched to buying properties in a very nice berg between Dayton and Cincinnati (Springboro), where yields are very good (much better than Ca), and underlying price appreciation has been surprisingly strong. However, prices there have taken off now so my most recent buy in June of this year may be my last in that market that I can justify for the foreseeable future.

    So 2010 to 2013 ended up being the god send years to those of us who were able to exploit them, and I think is the type of paradigm that investors should be preparing to act upon when the opportunity ultimately presents itself again. Of course when that time comes, it won’t be a comfortable experience because the market will very likely be totally ruled by fear and trepidation (just as it was in 2011/12). But as I believe Warren Buffet has said, the time when it makes sense to be really greedy is when everyone else is totally paralyzed by fear, that’s when the real opportunities abound. During 2011 getting great deals was like shooting fish in a barrel, in 2017 its going to be like finding a needle in a haystack.

    • George Smith

      I agree that the rates do not have to increase but historically dropping the rates has always been the federal reserves main weapon against a collapsing economy. If they dont raise them, the only tool they have is printing more money which ultimately ends in Germany pulling out the gold, China ending their US debt purchasing, the IRS unleashing FATCA on other nations, and major countries developing ways to trade outside of the dollar. Its obvious that the confidence in the dollar is waning.

  6. JL Hut

    I agree completely with you. I have been doing this for 37 years and one constant is CHANGE. Interest rates will change and normalize again and values will have to adjust with it. I hope all the new-bees that are buying 100 doors a year have long term fixed rate loans so they can keep their heads above water when rates change. Always think long term because what works today will CHANGE. Another bubble is on the horizon, so be ready and have the cash to take advantage of it.

    JL

  7. Domenick T.

    Very insightful article David. I would add one more reason to the list of more investors. I got into real estate accidentally myself when I couldn’t sell my condo but needed to move. I wasn’t chasing returns, far from it. I was losing over a thousand each month!

    It was completely out of necessity that I became a landlord. But I spent the next few years turning that one unit into a profitable investment and I was hooked ever since! I even named my blog “AccidentalRental.com” because it summed up my experience.

  8. Audrey Ezeh

    Your intro is spot on! That combo of excitement and disappointment hit me for sure but now I’m concentrating on accumulating cash so your article is so apropos! This is by far one of the best blog posts I’ve read on BP and I appreciate your insights!

  9. Joe Higgins

    This is exactly where I’m at right now as a newbie for all the reasons you’ve listed. I have to come to BP daily to keep my spirits up. Luckily, over the past several years (and thanks to my BiggerPockets education) I was able to see what the market was doing and bide my time when others were asking why I wasn’t moving forward. Great article, thank you.

  10. Nathan G.

    David, this is one of the best articles I’ve read on BP. Successful investors do not follow the crowd. Consider the market, stick to your principles, and buy smart. There is money to be made in every market, but some markets are better than others and we should be prepared to scale back when things turn south.

    As rates increase, the market is bound to drop because buyers won’t be able to afford the high prices. A $300,000 loan at 4.0% will cost you $1432 a month but at 5.0% will cost $1610. That’s about a 12% increase in cost, which cuts into your profitability as an investor. Get rates back up to 6 – 7% and things get ugly.

  11. Corey Smith

    Always love reading your articles, David!

    To your last point … this is exactly what I’m working towards. I only have one (accidental) rental at the moment, but in the 9 months since I found BP and started learning as much as I could about REI, I’ve been able to get myself in much better financial position than I have ever been. I want to do deals now, and plan to, but my vision is much more long-term … Get myself into position for if/when the market turns. I feel like that is the way for me to go.

    Great post!

  12. Jim Stanton

    I agree that it’s getting harder and harder to find good deals though I’m pretty new at this having just closed on my third flip a week ago.

    Here in Boston area prices are appreciating quickly but along with that it’s making good flips at decent prices harder and harder to find. The banks want crazy money for short sales and foreclosures. By the time you buy them and rehab them there’s little if any profit. As alluded to in the article, many people are buying these properties and rehabbing them themselves with the intention of living in them long term. HGTV programs create dreams of buying a run down home and rehabbing it yourself to create the house of your dreams.

    While I think that there will be a time in the relatively near future when people will once again mass exit the market it’s hard to stock pile the cash to take advantage of that time if you’re not still investing and making money on your real estate investments. Plus, the taxes on flips that aren’t 1031 exchanged are outrageous!

    I’m curious to hear what others are currently doing, especially in the MA area right now and what there more long term plans are. Please share them with the rest of us.

    Great article!

    Thanks!

  13. Jon Peterson

    Great article. I constantly get into this discussion with a few of my REI buddies. I am a relative newbie, only been at it for 3-4 years, but many of buddies are telling me the market is overbought, home prices are inflated, steer clear of purchases, etc.

    In the buy-and-hold discussion, one counter-point that comes up is whether or not the cash you are saving long term by buying at these Stupid-Low rates offsets the artificially high purchase price of the home? If I am looking at a duplex whose real value should maybe be 150k but is inflated to 180k, and I purchase at 180k with 20% down at a 4.0% interest rate, my debt-servicing payments are 687$. If I buy the same building at more ‘normal’ value of $150k with 20% down at a more ‘normal’ interest rate of 8%, my monthly payments are about $882. Over the life of the loan, buying at 180K with the lower interest rate saves me $70,000 in monthly payments.
    More important is the effect it can have on cash flow. If you can increase your cash flow by almost 200$ per month simply by paying $6,000 more (20% of the $30,000 increased “inflated” sales price), most buy and hold investors would call it a no-brainer. It can turn a marginally profitable deal into a homerun. I know this is over-simplifying things, but it is an interesting thought.

    Anyways, great article and I agree with a lot of what you have said. I am just trying to learn and to explore both sides of every argument whenever I can. Anyone’s feedback is appreciated!

  14. Daniel Odess

    This is probably the single most important article I’ve read on BP. Over the past several years, we have gone from being able to do deals that cash-flowed so crazy well that I kept having to quadruple check my math because they were such good deals to ones where I really had to sharpen my pencil to see if it could work. We are now in the territory where an unexpected repair or vacancy or non-paying tenant is all it takes to move an investment property from green to red for the year. I read a lot of posts on these boards by people who are very aggressively trying to build their portfolio, even though (or perhaps because) they have only been at this for a year or two. Beware the bubble. Successful investing over the long-term takes discipline. It might just be time to start building up the war chest instead of building out the portfolio. Those with cash will be able to move quickly to take advantage of special situations. Look for opportunities in places that are very reliant on single industries and be prepared when those industries are in a downturn. Think about industries such as oil that are cyclical, and look at places that saw big price drops in RE when the price of oil cratered. I agree, at some point all the billions of hot money that flowed into RE will flow back out again in pursuit of great returns. As Warren Buffet said, be fearful when others are greedy, and greedy when others are fearful.

      • Mike Dymski

        The current competitive market is not new, it’s just normal. There are a lot of BP investors who started investing during the crash and don’t realize that it has always been hard to find deals outside of that time period.

        • David Greene

          I think the majority of BP users, and the reason BP took off the way it did, is because of the huge crash and all the fear that accompanied it. I agree with you that the standard got set a little too low during the time after the crash and now expectations need to regress to the mean.

          But I also think that technological advances, group funding, and the overall ease of spreading information has also changed things enough to make it easier than ever for people to get involved investing.

  15. Brandon Miller

    Great article David! This one got me thinking big time about market investor saturation. I’ve had the same feeling about what the article entails. As far as investor saturation goes, is this problem vary from market to market or is this true for the whole country in general? Been thinking a lot about when would be a good time to get started but right now I’m focusing on soaking up as much knowledge as possible and saving.

    • David Greene

      It’s true for the whole country in general, but “more” true in certain areas rather than others.

      There are definitely markets where you can have an easier time finding good deals. My philosophy is you go to those areas and start buying there while waiting for your preferred market to cycle back to a point it makes sense for you to buy.

      I think I’m ahead of the curve and more people will start doing the same soon. I’m writing a book right now about how I invest out of state and why it’s easier than most people think that should help show there are more opportunities than people think.

  16. Chris Field

    Hgtv had ruined the market to many idiots overpaying and to many poor idiots expecting hgtv stuff on spam budgets.

    Rant over!

    The multi market is definitely oversold I’m circling the wagons on my multi family business in 2017. I.e. Building cash reserves way up and paying extra on the loans. I don’t plan on buying anything unless it’s a steal.

    On the construction side we will see. I think values are inching up but I don’t see anything crazy in the Sfh area. Frank Dodd is keeping a cap on the crap we saw in 2007. If that goes away…

    My buddy is pretty high up in finance and he always likes saying don’t bet against the Fed it’s the most powerful bank in the world. So the Fed says rates are going up and they are. This is going to kill the multi family market. A lot of the aggressive ltvs I’m seeing on these boards will implode at 6%-7% rates which I fully expect to see in the near future. I’m banking on it with $3m in commercial loans by paying extra to compensate for the reset up.

    My 2 cents

  17. Daniel O'Grady on

    Good thought provoking article.

    For a long time I too was naive, and believef that one day rising interests rate would cause asset bubbles to pop and it will end very badly for irrational investors

    Since then, I’ve wisened up and realize this will not happen. Two main reasons why….1) the Fed will do ALL they can to keep interests rate low for as long as possible. They simply HAVE TO in order to keep the ponzi scheme going. 2) Welcome to the new age…with the ever increasing populations never ending quest for SOME/ANY yield, the SECOND housing prices start to decline, a million investors will immediately be there to “buy the dip”, so don’t ever expect fire sale prices again. The game is rigged..welcome to the new age

    Good thoughts though, you will catch on to reality one day

    • JL Hut

      What will cause inflation and make the FED act with higher rates?
      Mr. T wants to create many more jobs and we are already at full employment. How do you get reluctant people off the sidelines and into the job market to fill openings? Higher wages. Higher wages = inflation. Also, now we are making it tough for people to enter the USA and it will make the job market even tighter = more inflation.

      Everything reverts to the mean eventuality including interest rates. Don’t believe me, look at history. All bubbles will pop, I just don’t know when or what the catalyst will be. BUT there is sharp data point out there somewhere the the bubble is going to bump into and cause it to pop. I know, I used to blow soap bubbles when I was a kid, not one of the bubble survived to this day.

      DANIEL O, Like you said, everyone is searching for yield, what does that tell you? The market is unbalanced and most people are on one side. Does that remind you of 1999 or 2007? when everyone gets on one side of the market it can cause the max pain by reversing. by reverting back to the mean. All market love to do this. We have had decades of lower interest rates and it is ripe to take all the baby booms bonds (the BBB) and cut the value in half just when they need it the most. When I don’t know. but don’t get to comfortable with the status quo.

      • David Greene

        Thank you, Daniel, for pointing out my naivete.

        I would maybe point out that while this is indeed the position of the FED right now, there is no way you or anyone else can know for how long that will continue to be the case.

        I’m also not sure that a thirst for yield is new. I’d feel pretty confident stating that people have pretty much always enjoyed making money on their savings. What I was saying is that people are forced to real estate to find that yield because interest rates are being held artificially low.

        It’s the belief that when things aren’t easy it someone means things are “rigged”, or that there is an entitlement to excessive, cheap inventory readily available to investors that causes unnecessary discouragement.

        Nothing is “rigged”. It’s just not as easy as it was. Those who lost money when the market crashed claim it was “rigged” against them. Now those who can’t find easy inventory to buy claim it is “rigged” against them.

        Nothing is owed to us. We’ve had some once in a lifetime opportunities that recently came our way and there is no objective reason to think that’s the way it “should” stay.

        Different presidents, administrations, and government officials take office all the time. Things change. The FED’s current position can change too.

        And when it does, people should expect a different real estate investing environment.

    • David Greene

      Thank you, Daniel, for pointing out my naivete.

      I would maybe point out that while this is indeed the position of the FED right now, there is no way you or anyone else can know for how long that will continue to be the case.

      I’m also not sure that a thirst for yield is new. I’d feel pretty confident stating that people have pretty much always enjoyed making money on their savings. What I was saying is that people are forced to real estate to find that yield because interest rates are being held artificially low.

      It’s the belief that when things aren’t easy it someone means things are “rigged”, or that there is an entitlement to excessive, cheap inventory readily available to investors that causes unnecessary discouragement.

      Nothing is “rigged”. It’s just not as easy as it was. Those who lost money when the market crashed claim it was “rigged” against them. Now those who can’t find easy inventory to buy claim it is “rigged” against them.

      Nothing is owed to us. We’ve had some once in a lifetime opportunities that recently came our way and there is no objective reason to think that’s the way it “should” stay.

      Different presidents, administrations, and government officials take office all the time. Things change. The FED’s current position can change too.

      And when it does, people should expect a different real estate investing environment.

  18. Justin R.

    VERY well written article – one of the best I’ve read on BP in a long time.

    My only comment is that while things are generally cyclical and return to the mean, there are times when structural change forces a “new normal.”

    I would argue that globalization and the spread of technology are two such structural changes – they have both reduced friction in the efficiency of capital and the availability of data. We’re not going back to how things used to be – just ask those who have lost their jobs due to a globalize supply chain.

    It’s prudent to ask which elements of real estate that are also a new normal – I would argue that the cost of capital and amount of interest in REI, though it will adjust, will never revert to mean.

  19. Adolfo Cuellar

    Truly fantastic article! In my second year of Real Estate, I feel great about my position because I’m doing well making/saving money and getting a fantastic education in the meantime. I’ll be buying my first house (hacking it) this year (off-market for what it was worth two years ago) and gain equity on it as I save for a bigger purchase (multifamily) when things balance out.

    • David Greene

      Great plan Adolfo,

      People underestimate the value in actually earning more money rather than trying to make it all through investing. earning money is one of the three pillars of wealth and when it’s not a good time to buy, you should be maximizing earning and saving!

  20. Glenn C

    What damn good & well written article David! Kudos

    You laid it out perfectly and I learned something new today.

    You covered all the bases in the big picture and re-confirmed why I’m not crazy for not buying up mediocre properties right now and am content just remaining in a holding pattern until the tide turns at some point…

    …unless it’s an ‘exceptional’ opportunity.

  21. Aleksandar P.

    Terrific article. I would say one of the best posted on BP ever. No fluff and typical RE investing cool-aide that I see in many other “motivational” posts.
    I am one of those who has pull the trigger yet due to irrationally high prices in my market. In the meantime I have accumulated/saved a significant amount of cash that is partially parked in those low-interest saving accounts where I can have immediate access if needed. The other part is invested in stable and proven higher yield Dividend Champions stocks with at least A+ Credit rating.

  22. Bernarr Pardo

    Very comprehensive and thoughtful article. I have the advantage of being a little older and have seen market cycles come and go. Interest rates may remain low for a while, but I think we will eventually see higher rates. The FED certainly wants higher rates. And, yes, that will affect the housing market. Low interest rates have pushed many into securities and real estate.

    The stock market is partially artificially high due to company stock buy-backs, increasing share prices. On the real estate side, buying for cash flow is great, but there are risks that are not often discussed. I have seen successful real estate investors in the past who had a 100+ property portfolio go bankrupt when a recession hit. How many of your tenants do you need to stop paying so that you are cash-flow negative? So, use reasonable, somewhat conservative, leverage to give you some protection.

    One aspect of longer-term investing often overlooked is that of inflation. Over the 29-year period from 1985-2014, prices actually dropped in about 25% of cities in the US when you account for inflation. No one is talking about that. While it is possible to do reasonably well with rental properties, real wealth in real estate is made from appreciation. But it seems everyone is afraid to talk about appreciation after the housing crash of 2008.

    You can invest for both cash flow and appreciation with little risk, if you have the right tools and system (and a system that will protect you from down-turns in the market). And, if you invest in this way (keeping a property for an average of about 5 years), you have the ability to use the power of compounding.

  23. Camilla Sauder

    In our case, we wanted an early retirement vehicle. Sure we could have put the money into a 401K, Roth or other account, but then we couldn’t take it out until we were at least 59 1/2 which is still years away. And, as we know, you can lose a lot of the worth of that seemingly overnight.
    I think the reason that there will be a turn around is because a lot of new investors will be over leveraged. Once they start losing houses, that makes the whole market take a plunge because it is flooded with people just trying to get something out of their investment because they have loans to pay. This in turn then makes my all cash property worth less.
    I would totally have to agree that if there were something that could earn 8% without any hassle whatsoever, we would jump on it and not have to deal with all that landlording entails. I personally can’t wait for that day!

  24. Jay G.

    Thank you for a non kool aid article.

    This is the new normal. No one can afford higher rates. The consumer, governments, corporations are all addicted to cheap money, with little savings to back it up. Take away the cheap money and the music stops. The Fed is well aware of this. All they’re doing at this point is playing the dog and pony show of being ‘data dependent’ in order to try to salvage their credibility. Ever notice how data out of the U.S. economy stays right in the Goldilocks zone where the ‘data dependent’ Fed can avoid hiking rates, yet still claim a hike might be right around the corner? They know exactly what would happen if rates returned to “normal”, it wouldn’t be pretty. We are truly in uncharted waters here and there’s no historical analogue to point to. I have no idea how this will all play out, but I’d definitely keep a large amount of cash ready to deploy. I can’t bring myself to put a bunch of money into stocks or real estate at this point. Seems like it would be “picking up pennies in front of a steamroller”. Good luck to all.

  25. John Barnette

    Great article. I would add that technology and more sophisticated participants all around have made the “market” much more efficient and thus reducing ability to find the good buys that will cash flow. As you suggested re investing needed much specialized knowledge that was not always easily available. Marketing of properties and fixers, distressed, probate, etc was also much less ubiquitious prior to the internet. Money could be made by those who had the smarts, experience, connections, risk profile, strategy, etc largely due to inefficient markets.

    Interest rates. In current worldwide interconnected economies and money markets I do not see US interest rates increasing to prior historical norms. All mature economies are experiencing low growth, low spending, aging demographics, all moving to a path of low rates. Europe, Japan, China, US. We are the stongest and safest..thus our treasury government debt should have the lowest yields among the group. If we have higher yields, world money flow will buy our debt and thus drive rates down again. High rates correlate to high growth and/or high inflation..as in 1950’s to 2000 or so for most of the countries mentioned. Well we are all old and retiring now. The high growth economies are SE Asia, India, even Mexico. But they don’t drive international interest rates.

  26. Hi David,

    Very interesting article! I know a lot people who got carried away from all the enticing hype from the media and friends of the luxury attached to a real estate investor, but soon realized the nightmare it takes to manage an investment property if you don’t play your card properly.

    Josephere Perral

  27. I must say , I bought my first house in 1968 and have done just about everything there is in real estate . Without a doubt this was one of the very best articles I have ever read . You are so in touch with the market and street savvy. All rehabbers should certainly do the math on the qualification of your final buyer when these silly interest rates get back to normal.

    • David Greene

      Hey Ben,

      My guess is, no.

      Right now we are borrowing money to pay the interest on money we have already borrowed. If we raise rates, and have to pay more to borrow, it makes it that much tougher to pay off the debt we already have.

      Long term however, who knows. I’m leaning towards the fact that we will just let inflation run away so we are paying back dollars we already borrowed with cheap money. It seems more likely to see that scenario than to see people actually tighten up the belt and cut the budget like we should.

      Rates could go up if inflation takes off. I’m just not expecting that anytime soon.

  28. Oliver Sparks

    This is a great article! I’m pretty new to BP, but one thing that really got my attention to bring me to REI is the fact that so many people are no longer able to get approved for lending, whereas it would have been much easier 10 years ago. There are numerous people desiring a rental property due to the fact that they may have some credit blemishes or job changes and as a result are having a hard time finding a mortgage. That market of people is what ultimately pulled me into REI.

  29. Rapy Narruhn

    David bro, again I AM NOT SURPRISED THAT IT IS YOU THAT WROTE THIS ARTICLE.

    I have been busy putting in work and so much has changed for the better. I have now gotten two properties under contract. Now I am jumping on BP again to heightened my knowledge about real estate. In the last hour I have read a few articles but man!!!……after I read this article, the fire in my belly was lit again.

    Of course there are those couple of seconds where you scroll down to see who wrote the article. I was excited to see who it was and then I saw,

    “David Greene.”

    I smirked, not in a disrespectful way but more like in a “why am I not surprised” way. Though it’s been awhile since the last time I put in time to study on the page, I still remember your name and the email you sent to me.

    I like the part where you said, “because you are in it for the long game.” I also like the part you said about building relationships. I still remember what you told me about giving and helping others a year ago. A year later, I have only found that to be NOTHING BUT THE TRUTH.

    Thank you so much for sharing and I mean that with all the integrity I have in my heart. I have nothing but respect for the information you share but more importantly, the man that you are. Thank you.

  30. Anthony Fung

    It is a good case for what could happen. But I think the article is strongly on the side of market timing, which concerns me. Someone may read it and think they should sell off their real estate portfolio and go all in cash waiting for the crash. If I run the numbers correctly and the return meets my needs long-term, then I think buying is correct. The stock market returns 7% on average, right? I’ve tried to diversify my investment portfolio so I am not all-in on real estate, targeting investments that do no highly correlate with each other. IMHO diversity and buying in a disciplined way is the key to minimize the down swings and the emotions that come with it.

    • David Greene

      Hey Anthony,

      Market timing matters when you’re in the wrong market to buy. It’s better to wait than to try and force things because you set a goal to buy X number of properties this year. That kind of thinking is what makes people make foolish decisions.

      If the market you buy in still has good deals and cash flowing properties, by all means go for it!

  31. Oh the humanity! So many virgins! So little time! The last crash was nothing just wait till you see the next one!
    (I’ve been through 3 full cycles, manias/panics) Make sure you babies have fresh diapers ready…

  32. Mohammad Alabsy

    Great article but I have some observations; first, please keep in mind interest rates in Japan and Europe are still below zero from what I recall and large chunks of RE investing money comes from those regions. Fed is increasing rates but at a slow pace… I think we will see higher prices before we see lower again..
    Second point, California and other parts of the country have always been over priced, even during the 2008 crash it was overpriced. But it’s a very big country and there are deals out there you just have to work harder to find them.
    Third, prices have dropped significantly with the crash but that was not the normal, that was below normal. So if you started investing right after the crash today’s prices may seem steep but really it may be only a bit higher that where prices should be at (given inflation and RE appreciation).

    Best of luck to all.

  33. Howard Sklar on

    Tim:
    Sound advice and I believe a clear assessment!
    When is the right time to put the dry powder to work?
    Let the math do the talking….the math never lies!
    When genuine superior rates of return are in the offing….it is time to pull the trigger!!

    Good Luck

  34. My investment is based on the brrrr strategy and I only purchase properties if they fit into my investment boundaries which says that I will only keep properties that I am considering to purchase if they fit into my boring safe criteria much like the fisherman or woman that only keeps fish that fit into their 10 inch frying pan and all others are released after they are caught or turned over to someone with a smaller or bigger frying pan. Like wholesaling a property to another investor, or assigning your great accepted offer to another invester for a small fee. I am always thrilled by great deals so I may purchase something outside of my normal disciplined criteria to buy and hold but I am always interested in making money and having fun doing so.i only use less than 10 percent of my resources for these ventures outside of my 10 inch frying pan criteria

  35. Jeff Gonzales

    David, great post. It’s always interesting to read peoples’ opinions on the long term economics of the real estate market.

    I’m not hesitating to jump in now, as I’m young (and time is on my side). But once prices start to recede and interest rates go up, ideally I’ll be well-poised to 1031 several SFRs into larger investments (commercial, apartment complexes). I’m playing the long game! This article gave me some motivation to keep pressing forward.

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