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Updated over 5 years ago, 09/03/2019
It's Feeling a Lot Like 2007
Hi All,
Wanted to start a discussion on peoples outlook on the real estate market and the economy in general. I know it is a controversial topic but I have not seen many discussions on BiggerPocket on this topic and I believe they are important conversations to have.
Here are my general thoughts on the topic.
Economies always go through cycles and we are coming up on the longest bull market era in history. If history is any indication of the future their have always been corrections or crashes every 8-10 years.
Data
1. Interest rates are rising and the yield curve is flattening a tell tale sign of future growth expectations are declining
2. Corporations are turning to stock buybacks because they cannot find internal or M&A returns that can get a high enough return. Once buybacks are done will corporations begin to "restructure" or contract leading to layoffs and the downward spiral of layoff, people not buying as many goods and services leading to more layoffs.
3. Inflation is another worry when prices begin to increase at a higher rate after almost a century of 2% inflation people are going to be inclined to buy less leading to the ugly spiral as well.
4. In the stock market is extremely over prices with PE ratios being the highest they have ever been.
5. Housing prices especially in California have increase much more rapidly then wage increases and I do not see this as a sustainable recipe.
There are many other factors and coming from an analytical background i know there are ways to spin the numbers to make it look any way you want.
I cannot time the market and nor do I think anyone can but I am writing this post to get others perspectives about where we are and what they think of the future outlook of the economy. With the ways things are, my guess is there will be at least a big correction in 2019 or 2020 but I could be way off as well.
I would like to get peoples opinions on both sides. I am not someone stuck in my ways and truly believe that debating with someone that has complete opposite views is the best way to learn in life.
@Andrey Y.
Lmao... dude. I love your attitude. We should get a beer sometime.
Preparing for the worst things that could happen with your business is called strategic planning not doom and gloom. Watching the market and preparing for what you believe is coming eventually is intelligent..... or maybe not.
Either way, I respect your opinion.
- Danny Webber
@rajah morrison - No...I am not targeting the hood.....Don't have time to run the rigors of a Syrian rental market. I do run numbers on some of those props (east Cleveland) but I figure on huge costs on vacancy (also called non-paying rent), legal expenses, repairs, etc) an if the reward is large enough, I may consider pulling the trigger.
I look for somewhere I can make the numbers work, where people want to live, lower vacancy rates (sub 8%) and blue collar market is substantial.
I want hardworking solid people that are financially capable of paying rent and are completely content to continue doing so......medical/nursing, public workers, teachers, etc.
Originally posted by @Gayle Quinlan:
I am dying to buy another rental, I have 3 currently. But something tells me to wait a bit longer.
I'm like you too, I'm dying to buy another... When you sell a property in California for let's say $1Mil and buy some properties in Mid-West, you have a temptation to buy more and more and more...it becomes an addiction LOL
I think we are far far away from the scenarios in 2007.
1. The lending guidelines are much tougher now than they were before. Yes, they advertise subprime loans, but almost no one is actually getting those loans. Credit and buyer worthiness are much better than 2007.
2. There was a huge amount of building going on in 2007. There is still very little building now. The reason that prices have gone up is low inventory. Before it was a false demand created by bad lending practices.
3. Housing prices are still not that high countrywide based on historical trends. Yes, they are high compared to the crash we saw 10 years ago. But we had a huge crash and rock bottom prices. Comparing prices to that crash is not a good judge of the market.
4. Affordability is not that bad either. The US actually has one of the most affordable housing markets in the world. Australia, the UK, and Canada all have much less affordable markets and their markets have not crashed. They have had less affordable markets for decades. People tend to find ways to afford houses.
I am not saying it is impossible for a crash to happen, but I don't see it coming. I could see the last one coming. It was crazy what was happening in the lending and real estate world. I could see a slow down or a slight decrease, but not a crash. I think there are too many investors and hedge funds who would pounce on real estate if prices started to drop which would stop a free fall.
The one thing we are still missing that helped create the last crash was inventory. They built too many houses. We have the opposite problem now.
==>OK.... you leverage the family home buy the toughest rentals on the planet and 97% of the people on this site want to do the same thing and cant wait to do the same thing.. so that's your mind set..
No offense to anyone on this site, but I don't understand how the football game mentality has become so strong in what should be a serious business of calculating expenses and risks.
And it's not just here. I've been to meetups where people literally stood on their chairs, pumped their fists, and yelled FINANCIAL FREEDOM!
And if you say, hey hold on there buddy, then you're a hater and a dream-killer.
People should see what wholesalers are buying this stuff back for after a miserable year or two goes by.
Well, it is after all a big transfer of wealth from the coasts to the Midwest. I just hope these people don't need their money.
3. Are lower end investments naturally a bad deal even if a thorough, conservative analysis shows a decent ROIand you don't have to leverage to the hilt? I do wonder how a bank lends on a 25k house that would cost 100k to rebuild. Strange.
It's pretty hard for even the most sober analysis to account for the tenant who moves out and gives the keys to his cousin, so that genmtleman can steal your furnace and AC for the copper, or for some of the other truly manic things that happen in class D properties. And remember, all this is happening on top of the regular maintenance , which is enough work already.
4. If lower end investments are a bad idea, how does someone without a huge nut begin?
Lower end investments, but buy smart and cheap, but do the rehab yourself, manage them yourself, screen tenants like mad, enforce rules rigorously, alarm systems in place the minute of a moveout, etc etc. All this means your properties have to be local.
It's good to hear experiences and viewpoints from all areas of the country. You can see indicators for a good market and a bad market. I'm seeing people on the news and online speaking and writing more and more about how this economy is going to go down again, but I'm also reading articles on how we still have inventory shortages even though they are up from a few years ago. I think the only thing that people won't disagree with much is that; there will be some sort of correction in major cities, and it might happen this year or all the way out in the next decade. Anything more detailed than that is going to be speculation.
I still plan on investing somewhere. Right now I'm going to keep learning. Once I do my research in areas and weigh my risks and backup plans, I'll make a move. So even if there is some big correction coming this year, I'm still planning to take action.
@Matt Millard Funny you should mention subprime auto loans. I actually got a loan on my car a while back and it was my first auto loan ever. I didn't bring any pay stubs, didn't really have a strong credit history since I didn't believe in credit cards, and my credit was on it's way up but still in the high 600s. The car dealer guy was talking to the loan officer and she had a problem with me not having any pay stubs. But the dealer just nudged her saying "It's not even that big of an amount, work with me Brenda!" and I got it without verification of my income. So yeah, I can definitely see a subprime auto loan market going on right now.
@Mark Ferguson That's good info to know! Makes me feel a lot better.
@Jay Hinrichs you response was epic, I appreciate you keeping it real
@Dylan Mathias I used to live in San Francisco and invested in the city for ten-years believing it was really the best market in the country. I now live in Spokane WA and while I still love investing in the Bay Area, I think if you are looking for strong monthly cash-flow you should look elsewhere in the country. Bay Area is a place where you need to put 50-70% down to get to break even for single-unit rental properties (I'm speaking specifically of San Francisco, the only Bay Area market I am familiar with). Your numbers are better with multi-unit buildings but the higher cost to buy and the competition from other investors is going to make purchasing more challenging as well.
I currently don't own any properties in the Bay Area but would like to buy something there again in the next few years. I have some great cash flowing apartment buildings in Spokane but I'd like to diversify into SF for appreciation now. I'm waiting on the sidelines to see what happens with the rent control proposition that's coming up on the Nov ballot. If the measure fails I would start looking to purchase again, and here are what my parameters would be:
- Purchase with the idea of long term hold. Outstanding appreciation is the number one reason to invest in Bay Area real estate. That said, appreciation is something that is out of your control. Therefore, I would only invest if I was able to keep the property long term. The Bay Area has ups and downs just like all other markets but the trajectory is a pretty steep up. This is not necessarily true of other markets which have long flat or down periods before slowly moving up again.
- Numbers work with lower rents. Run your analysis and make sure your numbers work with today's rental prices as well as if there is a 20% correction. Or have a plan in place if the market dips. Can you Airbnb one of the units? Always go to your tax assessor's office and file a request to reduce your property tax arguing your property isn't worth what you paid so you can reset the basis, not just temporarily for the year. Worst they can do is say no.
- Purchase a fixer upper. A fixer upper can provide a bit of a hedge for when the downturn does arrive. I would stick to a cosmetic fixer uppers and choose a more modern look as your finished product. Because of it's proximity to China, Bay Area has so many resources for incredibly affordable finished goods such as cabinets, counters, vanities, etc. I completely remodeled an entire kitchen in the Marina district of SF for $7k, including appliances. Don't go to Home Depot, it's way too expensive! Bayview area has lots of these warehouses selling completely finished imported products that are perfect for rentals.
If you can find a well located, fixer upper, right now for a decent price I would make the plunge, regardless of the market. Just be sure you can withstand the eventual downturn. Keep in mind Bay Area has more $100k+ jobs of any other metro area in the US, including New York City. Given the smaller size of the Bay Area that says a lot about its economic engine and unique real estate market position. My advice is the standpoint from which I'm operating for my own purchase in San Francisco as well. Best of luck!
@Dylan Mathiasundefined
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Originally posted by @Pete Barrow:
==>OK.... you leverage the family home buy the toughest rentals on the planet and 97% of the people on this site want to do the same thing and cant wait to do the same thing.. so that's your mind set..
No offense to anyone on this site, but I don't understand how the football game mentality has become so strong in what should be a serious business of calculating expenses and risks.
And it's not just here. I've been to meetups where people literally stood on their chairs, pumped their fists, and yelled FINANCIAL FREEDOM!
And if you say, hey hold on there buddy, then you're a hater and a dream-killer.
People should see what wholesalers are buying this stuff back for after a miserable year or two goes by.
Well, it is after all a big transfer of wealth from the coasts to the Midwest. I just hope these people don't need their money.
I have been funding deals since about 2003 in Indy.. and many mid western cash flow cities.. and unfortunately west coast buyers just chase yield or cash flow and seem to have cash flow pounded into their head.. and so because its cheap they take excessive risk on low end hard to manage transient tenant base.. the Morris debacle perfect example all though its obvious those guys were out and out pathetic and in many cases did not even rehab said house.. but I can tell you the cycle in low end rentals.. they sell for 5 to 15k to a wholesaler who sells it up the line to maybe one level above wholesaler that then sells it to a turn key or out of state operator who then sells it to a west coast investor.. If you buy the top end or top 25% of the rental pool in any of these mid western cities you will be fine you buy the bottom 25% of price point and tenant pool your playing Russian Roulette.. I always tell folks see what the house your buying looked like before it got rehabbed.. that's what your house is going to look like after its been a rental in that same area for 5 years sometimes less.. unless you mini rehab it every tenant turn over .. and if you mini rehab it every tenant turn over you will have no cash flow or negative.. that's just reality.. in the major metro areas in these areas.. but does not matter west coast folks are priced out they want to own locals in INdy are filling a niche or a demand that's capitalism.
- Jay Hinrichs
- Podcast Guest on Show #222
==>locals in INdy are filling a niche or a demand that's capitalism.
Capitalism is a rough sort of contact sport, but in the end, it gets the money out of the hands of people who can't handle it, and into the hands of people who can, more or less. It's just painful to watch sometimes.
I’ve been considering dumping some of my less desireable inventory of houses. Then I think about the the opportunity cost of dumping those properties in fear of a downturn. I’d rather work hard through a downturn and get those properties rented at $0 cash flow and gain the equity by principal pay down and then see the increases in future years. I’m definitely nervous, but so long as you’re buying right, a downturn may be painful, but manageable.
Thank you Caroline. You seem very knowledgable and have some great points. I have been looking and will continue to look until I find something that meets my criterial. I have also began to look outside CA for find better cash flow.
I would not say this is another 2007. There are some changes happening in the market but the causes are completely different.
I will just ignore the politics but the economics are simple.
Direct foreign investment into the US real estate market has fallen off a cliff.
The Fed is mostly concerned with preventing hyper inflation so they are about to really ramp up interest rates.
Chinese and Russian investors are taking profits and then taking their money out of the US.
The good news... Greece looks like a good investment long term.
Also if there is a major price correction here there will be huge opportunities.
@Account Closed , Where are the Chinese and Russian investors taking their money to? I know China has been putting pressure on some of the big companies like Wanda to sell their U.S properties , but I don't think it's affecting the smaller/individual investors as much at least now.
U.S still seems like the most stable place investment wise or at least one of the most stable.
What would the investment play in Greece be for a U.S investor? Investing in real estate there? Stocks of greek companies?
Originally posted by @Joseph M.:
@Account Closed , Where are the Chinese and Russian investors taking their money to? I know China has been putting pressure on some of the big companies like Wanda to sell their U.S properties , but I don't think it's affecting the smaller/individual investors as much at least now.
U.S still seems like the most stable place investment wise or at least one of the most stable.
What would the investment play in Greece be for a U.S investor? Investing in real estate there? Stocks of greek companies?
Nowhere. There's a global slowdown in foreign investment which coupled with the strong dollar and Trump's trade policies has caused a large slowdown here in the US.
Originally posted by @Joseph M.:
@Account Closed , Where are the Chinese and Russian investors taking their money to? I know China has been putting pressure on some of the big companies like Wanda to sell their U.S properties , but I don't think it's affecting the smaller/individual investors as much at least now.
U.S still seems like the most stable place investment wise or at least one of the most stable.
What would the investment play in Greece be for a U.S investor? Investing in real estate there? Stocks of greek companies?
Its all inter-connected. I work for a large company and we have a Consulting company as essentially a partner. For years our company used the consulting company to source foreign talent in India. This Consulting house has a large scale practice off-shore. The people in India, who spoke English well, and could fit the company culture basically would prove themselves in 6-12 months on H1-B1 or a J-1 Visa contract. Some of the people coming over from India said they took a job at this Consulting firm 3-4 years prior to their arrival because they knew if they performed well they get a shot coming to the USA (or Canada). These people come hungry too work like crazy, they have to make minimum $72K due to regulations. They make a name for themselves then get a full-time position, and a H1-B1. Then they work 3-5 years, get the coveted Green Card. That money they send back to their home Country gets pooled and who knows what else, then comes back into the USA as a real estate purchase. Thats when floodgates open for a family/extended family/close friends. They open a business, more are allowed entry into the USA through various Visa provisions. Its a legal.
The high-tech or high-skilled workforce knows and understands buying property in the USA gets their foot in the door. Then they have the investor visa, which allows importing more people. Or just open a business Gas Stations, Convenience Stores, small hotels/motels require 24/7 staffing they all require 5-10 people to run the whole thing, close family/friends all can live in close quarters working the business. The workers go to college in their off-time often.
But small-time foreign investors they are the most affected. These people are not "rich" they are the often Middle-class/upper middle class they are liquidating family properties to make a bet in North America. That bet is made on the back of they can get a family member into the country and stay. It all starts there.
Super-rich foreigners and funds will continue to invest because they have the means and ability to come and go or check on an investment using services. A close family friend of my wife bought a $2M home in the Toronto Area. Well some people nearby was saying some rich Asian guy bought the house and its empty. Well it was empty because no one lived in it. But my Father-in-Law would cut the grass and shovel the snow, then his Nephew lives not far away who would check on it who had a key. After about 2-3 years his Son and Daughter-in-law moved in straight from China and she was pregnant (had 3 kids since being in Canada). So I don't know Canadian immigration laws but I imagine they won't be going anywhere soon. These investments are really a series of transactions/actions being made in order to get into the Country. If its one-thing I've learned from my Wife's family and family friends they know how to play the long game.
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Originally posted by @Pete Barrow:
==>locals in INdy are filling a niche or a demand that's capitalism.
Capitalism is a rough sort of contact sport, but in the end, it gets the money out of the hands of people who can't handle it, and into the hands of people who can, more or less. It's just painful to watch sometimes.
well I would not go that far.. for many there is an aviation saying it goes like this.... actually a few... one is pilot just did not know what he did not know.. the other is you have to fill your experience bucket.... so like landing with your gear up .. that would be an experience bucket item wont do it again.. looking at your moving next rad weather on your MFD and trying to shoot a gap between convective activity and about getting bounced out of the sky.. well you just did not know what you did not know.. IE don't do that.. dangerous.
either way pilot had the money and skill to be there.. so these investors.. they are smart.. they just have no experience in the asset class like you folks have.. and they just don't know what they don't know.. and when you get locals pop on BP touting their low end rentals and how they make 20 to 30% returns that gets west coast or out of area folks chomping at the bit.. without a thought to these people do this because they live there,, Self manage, many times do little jobs around the houses themselves etc etc.. Can respond to vacant home in a matter of hours instead of weeks.. ( risk of squatter or home getting stripped) its hard to understand how those areas are when you have no point of reference when you live or were raised in an area that is completely different and you may have only seen this stuff on TV
- Jay Hinrichs
- Podcast Guest on Show #222
@Christian Hutchinson , Yeah I remember there was a VISA program for those that bought a property over $500,000 I don't know if that is still around or not. I spent some time working in Florida a few years back and there were many Venezuelans and South Americans buying businesses there. Venezuelans were eager to get their money out of course and considering how much worse the situation is they were smart to. You would need to have a certain number of employees for the visa.
The Patel motel/hotel network is really interesting , I remember reading about it years ago. They started out more in the motel business but now they also own higher end locations like Hiltons etc. Here is an article from a couple years ago.
@Nancy Zhao , it doesn't seem to have affected the U.S economy at least , we are seeing 4.1% GDP growth.
https://www.forbes.com/sites/randybrown/2018/08/14...
For the housing market it doesn't seem there has been a large slowdown either.
Dow almost to 26,000 today a year ago it was under 22,000. Where are the signs of the large slowdown here in the U.S?