What if my market is just too hot?

Question

Hey Guys! I'm just dipping my toes into the waters of Real Estate Investing and I'm interested in buy and hold rental property.

However, the more I look and analyze deals in my area, I'm seeing that there aren't any deals (atleast not ones i'm finding) that just make a lot of sense. Yes, they could cash flow, but I feel like I need something that is a "GREAT" deal to get my feet off the ground and for this to take off in the right direction. I couldn't do this and it cash flow $100 a month and it create enough momentum financially for it to snowball into the next deal anytime soon. If that makes sense? I listen to the BP podcasts and I hear about all these 2% deals and I struggle to find a 1% deal in my local area. To be honest, I don't have a huge savings to pull from at this point, so if i invest, it needs to offer good enough cash flow for me to convince my wife that this is worth doing! haha.

I'm scouring Zillow & Realtor.com for these deals. Am I missing it? Is it imperative that I find a connection to the MLS because the good deals are gone before they make it to those sites?

I'm just trying to connect the dots here and find if I'm missing it. And if I'm NOT missing it, and my market is too hot and oversaturated, how do you confidently invest in a foreign market? Really just looking for feedback and ppl to share their experiences with dealing with situations like this and overcoming them. Thanks!!

Ryland Taniguchi · Answer

This is a beautiful analogy with the Front view, the Side view and the Rear view. I also agree that IRR is the way to look at any investments as it factors in cash flow, leverage and appreciation.The only issue I have with your analogy is that it is not for newbie investors. What you are talking about should only be attempted by very experienced, battle-tested sophisticated investors. On an IRR T-Table, there is the cash flow component and an appreciation component. Calculating for the future requires an advanced Financial IQ of understanding where we are in the real estate cycle and what factors drive that. It is really dangerous to take a "my market goes up 9.5% per year" approach to arriving at a future net proceeds. Historically, cash flow has more future predictive value and is easier to access for a new investors. What I would tell a new investor in a hot market (like my market here in Seattle where even the Pros are finding less and less deals) is to diversify their approach. Take a hedged portfolio approach to real estate investing. Put a 1/3 in a conservative wealth preservation strategy with a minimum 6% target return and make sure this investment value does well in a 2008 like market crash. Buy something like a tax lien certificate or a performing note at 50% LTV.Put a 1/3 into a moderate cash flow strategy with a minimum 18% IRR and plan to hold on to it through a market crash as the main risk is selling where investors panic. You can find 18% IRR locally through a strategy like BRRRR or out of state. I generally do what I think has the highest return with the least amount of risk. For a newbie investor with limited capital, you may only want to look in the Front View mirror only if you at least get a 1% rule property.How you invest may depend on your access to capital. In 2009 to 2013, I went all in in buying $80 k to $95 k newer cash flow turnkey properties in Phoenix. It was a historic opportunity with very high returns with virtually no risk. At the time, I had only access to a little over a million dollars and so this limited my opportunities. Nowadays, I have access to over $35 million (and hope to have access to over $200 million through our hedge fund by the next crash). With more capital after a 2008-like market crash, I would go all in buying cash flow AND appreciation in hot areas like San Jose, Santa Monica, San Francisco, Seattle, Honolulu, Williamsburg Brookyn, and/or Boston. In the last cycle, I stuck to cash flow because that was the limits of capital that I had access to. With more capital, I could look into buying more in Hot Areas.And only after having solid conservative and moderate investments where 75% of your money can survive a 2008 crash, then and only then full blown look into the Front and Rear view mirror that have more aggressive returns based on appreciation. The conservative and moderate approaches are your safety nets that allow you to create wealth through appreciation. The truth is that you aren't going to get wealthy off cash flow alone. Appreciation makes you wealthy and then you preserve your wealth by rolling over your appreciation into cash flow. However, cash flow though gives you the safety net and securitization to play in the appreciation wealth game.

Llewelyn A. · Answer

I'd like to chime in on investing in Hot Areas. I have 2 Decades of experience in the Hottest City currently, Brooklyn, NY.First, if I used the 1% or 2% rules, I would never have bought here. Those rules are really for Cashflowing properties, not really properties which will take time to Cashflow as the Rent and Value appreciates.Second, to invest in a Hot Area, you will need a different kind of Analysis. One that is much more extensive. I have seen some of it done here, and there is a really good analytical tool that BP offers called the BRRRR Calculator.Unfortunately, the BRRRR Calculator hides all the Calculations from you which is why it's easy to use, but then you really don't learn anything other than using the Calculator and hoping that the numbers are correct.FORTUNATELY, I'm an expert in these calculations and I have been utilizing it for the last 15 years in my own Investment Property Purchases in Brooklyn.The bottom line of the BRRRR Calculator is that it calculates your Internal Rate of Return (IRR) for the next 30 years.Why is this the most important Calculation you will need to know? Because it helps you to Drive your Investment Vehicle by looking through the windshield.Here is the Analogy.Treat every Investment like a Vehicle. So we call it an Investment Vehicle.You are Driving your Investment Vehicle like you drive your Car.If you only look at the Rear View Mirror and NEVER through the Windshield... you have a good potential to Crash your Vehicle.If you only look at the Side View Mirror and NEVER through the Windshield... you have a good potential to Crash your Vehicle.If you ALWAYS look through the Windshield and occasionally through the Side View and Rear View Mirror... you have the BEST chance to succeed. Let's define the 3 ways you can look.The first is the Rear View Mirror. This represents the Past. That's the History of the Investment Property which would include past Sales Data, past Rents, past Renovations, past Economics of the Area, etc.The second is the Side View. This represents the Current situation. This is exactly your 1% and 2% rules, your Cap Rate, your Cash on Cash Return, etc.The third, AND MOST Important..... is the Windshield. This is the FUTURE. It forces you to think of things like "What will be the future worth of my Investment Property in the future?" That question implies the following:- What will the Future Rents and Future Expenses be? - What are the Economic Factors that will be affecting my Investment?- What can will the Appreciation Rate?The Calculations you would use here is Discounted Cashflow, Rate of Returns (RoR), Internal Rate of Return (IRR), Appreciation Rate, Future Value, Present Value, etc.Many beginning Investors are taught only about Rules for the Current View, the Side View of your Investment Vehicle. Hardly is there a mentioning of the Windshield view, the Future View. In fact, you are generally told you cannot depend on the Future like Appreciation.HOWEVER, that is FAR from the truth and it's critical that you think of the Future.Let's say you bought your Investment Property in Detroit in the year 2000. The only View you had for this Investment Vehicle was the Side View, the Current situation. You calculated the 1%, the 2%, the Cap Rate, etc. It meets your entire Criteria. You then purchase your Investment Vehicle.Years later, what was a good Investment Vehicle, was laid wasted because it went over a cliff. The reason why was because you did not look through the Windshield of your Investment Vehicle to see the warning signs that the Bridge was out. You did not notice that you should have taken a different route.The interpretation of this is that what you should have paid attention to when you bought your Investment Property was the Big Three Domestic Automotive companies that 90% of the Economics of Detroit was dependent on. Had you followed their economics, you would have seen the warning signs and veered off in a different direction.ANYWAY.... I'm trying to make this short, but it seems I cannot really write a posting short these days!To invest in a Hot Area like Brooklyn, NY.... you cannot use just the Side View which is the Cash on Cash Return, the Current Cap Rate, etc. You need to anticipate the rising rents and expenses, the migration of people, the potential for good and bad economics, otherwise, it doesn't make sense at all.The BRRRR Calculator gives you some of that. However, I did not subscribe to it to see if it had the things I normally use.For instance, NYC will have a vastly different appreciation rate than nationally. In an area that conforms to National Averages, you will use somethings like 3% to 5%. NYC, depending on the area and the local economics of the neighborhood, it can be something like 7% to 15%.An example would be a property that I purchased in 2014 for $900k. I put in approximately $300k for renovations, but this year, 2016, it was valued at $1.85 Million. This was the Bed-Stuy neighborhood which is a highly Gentrifying neighborhood.Another example, in 1999 I bought a 2 Family house for $140k. in 2013, I sold it for $675k. There was no significant Renovations. Rents in that property tripled. If you calculated the appreciation rate, it was 11.89% per year for 14 years. Some would call that amazing... but it's fairly typical in the last 2 decades all over Brooklyn and NYC in general. I'm sure it was even better in many places in SF as well. This property was a negative cashflow in 1999.... but by 2013, I was Cashflowing more than $2k per month.If you applied the Side View rules to any of my several Investment Properties.... or should I say, Investment Vehicles...... you would never have invested in them.Now, YEARS later.... decades later I should say.... I am reaping the rewards of looking through the Windshield while I have seen lots of other Investment Vehicles which crashed during the financial crisis.The theme here is to understand as much of the more sophisticated calculations and how to apply it to your potential investments. If you do, you will begin to see that you should not exclude ANY place.... whether your Goal is Cashflow, Appreciation or Both.I hope the readers of this post can be inspired to learn beyond simple rule of thumb calculations.Investor Llew

Ryan M. · Answer

I'm also looking forward to hearing others answers on this one.But what I can say is that in a hot market you'll have to look harder to get deals. Put your name out there and let people know you're looking for deals. Maybe try direct mail or driving around the area. Maybe post an ad on craigslist saying you're looking for less than perfect houses. There's a lot of creative ways to find a deal, and while it may not seem as practical as just searching online, the best deals you will probably find creatively.Secondly, standards like the 1 and 2% rules are good rules of thumb for quickly eliminating deals in a lot of markets, but in many markets, particularly hot or appreciating markets, you need to look at the big picture. If you buy a property worth $200,000 that falls short of the 1% rule maybe around .8% that appreciates say 6% annually over the next 5 years, it could be worth around 267,000 and be renting around 2150 a month, as opposed to a 1% property that barely appreciated and is still worth just over $200,000 and renting at 2000 a month. And maybe in this 5 years you still netted more on the 1% house, but in 10 years that probably won't be the case. Neither of these deals seem too impressive, but maybe one of them you can get the seller to work down to 180,000, or even 160,000. Run those numbers again, and now its a much better deal. I also like to estimate an ROI for 1 year later, 2 years, 5 years, and 10 years. Some just look at their immediate cash flow. If you bought a home in New York or San Francisco many years ago, even at a negative cash flow to begin, theres a decent chance you still made a decent ROI on it in the long run. Hot markets are hot for a reason. You might have to work a bit harder to get deals, but there can be a lot of other benefits to hot markets such as good appreciation, easier to fill units, easier to manage tenants, and it could be easier to exit when you decide to.

Ryland Taniguchi · Answer

I agree with every things you are saying and learned the same financial analysis of real estate. They teach all this when you learn commercial real estate. Residential real estate continues to be the Wild Wild West. A newbie would need a six month type course to understand this stuff. I still think the problem is gaining the financial IQ to understand what is going on in the financial markets. You have to be able to see the trends to bank on appreciation. This remains the biggest challenge to looking through the Front Window.Most investors not just newbies don't comprehend the impact that low interest rates will have over the next two decades. We will be in a state of perpetual roller coaster highs and lows that American has never experienced before. With an $18 trillion deficit, the government cannot afford to pay 20% interest on $18 trillion ($3.6 trillion). They will manipulate the currency until it is out of their control and Judgement Day would like look like hyperinflation. It will be very difficult for a newbie investor to "time" the real estate markets and know when to get on and get off the bus. Relying on cash flow is more forgiving in financial sophistication.

Sam C. · Answer

Ok. Here's my 2-cents.1. The best deals never make it to the Zillows, MLS, etc. I work very hard to "get lucky" once or twice a year. And if I'm looking for someone to "bring me a deal" I have to ask what's in it for them. Why should they offer me a great deal instead of the x number of investors they have been working with for years.2. You're right about making sure the first one doesn't loose money and hopefully makes some with cash flow and on the resale.3. I've done well enough over the last 25 years with putting my emphasis on cash flow (I wanted the income more than appreciation) and minimizing leverage ( bumps in income/corrections along the way have not harmed me with loss of properties or standard of living).4. I was never a calculator of potential but more of a do the numbers work in worse case scenarios. 5. I try to detach emotionally from a deal or least stay committed to my "do the numbers work" spreadsheet which gives me everything I need to know on one sheet of paper. No future appreciation enters my calculations with buy and hold.(That may or may not be a bonus)6. I Don't get greedy unless the deal allows it. I don't make up "what if's" to "make" a deal work.7. I don't follow the "stupid money" where things are bought and sold at non-sustainable values and manipulating the next person into paying more than it's worth before they catch on to the reality of what it's really worth. Corrections have periodically killed that group although there is money to be made if your timing is right. I'm not good at that and respect my weaknesses and focus on my strengths.Best of luck.

Joseph Caracappa · Answer

Zach Vaught when your in a hot market you just have to work harder to find that great deal! There out there! You might want to consider marketing to properties that are not listed on the mls. You can do so through direct mail, door knocking, driving for dollars and many others. Research on BiggerPockets. Also if you do not have a realtor, you might consider doing so. Another thing you can do is call up some realtors in your area, find one you seem to click with. Ask them to be put on an email alert/notification system, give them your investment criteria, every time something comes or sells on the mls within your parameters you will be notified via email. Great way to see what's going on in your market. There is always a deal to be had, just have to get your hands a little dirtier! :) To your success bud!!!!

Amit M. · Answer

interesting that you guys bring up the potential for long term hyperinflation. I personally think that is the only way to eventually climb out of the national debt. For once the currency gets significantly devalued, the national debt amount owned looks relatively small. If it can be engineered in a semi controlled manner, that would be ideal but usually when a country goes through hyperinflation it's pretty chaotic, and hard to control. BUT, real estate investors with fixed term low interest rate debt, who own in quality locations, will probability benefit from this course of events significantly IMO. It's just that the ride getting there may be wild.

Mindy Jensen · Answer

@Zach Vaught , I live in a hot area, too. While there are people in my area who are finding deals frequently, I don't have the time to devote to this right now, so I am looking north. There is a city 45 minutes away from me that has far better pricing and deals. Do you have any cities like that near you? I like local investing, but 45 to 90 minutes away isn't that bad, either.

Michael Lee · Answer

Hello again! I meant to say lucky instead of luck.

Michael Lee · Answer

Hello and welcome to this website! Of course the banks do not care about anybody but themselves. Everything has cycles and most of America is suffering right with a seller's market and/or a low inentory. It will turn around sooner or later because the future cannot tell us what is going to happen. Deals are getting hard to find but not impossible. You miight have to spend more to make more time in a day finding them. Be patient and consistent and wait for the market turn around.in the meantime work on making you business run more ef effiently. Learn how you should grow by tracking everything you do and use "virtual" assistants to assist you less expensively. Learn how, if you do not allready know, to be better organized. Stay as close to downtown as you can afford. Look into new markets (the ones that are popular in sales). To find deals in.Marketing is important to your worthiness. Keep on learning how ro do things more efficiently. You might have to adjust your goals. Everything is getting more technological. Learn more about it. Take classes that will make you more productive and educated. The market will eventually get better. Be prepared for it.Have a written plan so you can track your progress. Hire part time people that may know certain things more better than you. Put together mission statement boards to remind you what you should be doing. Hang them on the walls at home where you will see it everyday. Oh by the way I am 60 years old and still recovering medically.I am luck that I have a wife that will help me along with my full time nurse. Boy I am also lucky that she has been saving money for about 25 years where she works as a computer programmer. I have a daughter that is in her third year at the University of Arkansas. You just never know when something goes wrong and you are not planning on having it. You ought to get your financing figured out before you start making offers.If you are in any doubt about with the involve with the IRS.. A tax consultant that is experienced at what you do and help do the right thing. Using that sales tax advisor should also do your tax return. One person that I have read 3 books of his is that there is good debt and bad debt. Good debt puts money in your pocket. Debt is not your enemy if your property has it.Always do your math analysis and try to look at your prospective properties before you make an offer or have a clause in the sales agreement (usually 10 days) that will give you time to make a detailed inspection and possibly back out of deal without penalty that will not hurt you. I could go on but hopefully this will not take extra paper to print out. Good luck to you!