RE Investing - Not a good option right now

[Mike K.]

After looking at the opportunities available in RE investing and analyzing the risks and rewards I decided that there are better options available to build wealth.  It pains me to say this since I have been an appraiser for a long time.  In my 10 year time horizon until I retire I believe I can build more wealth as a small business owner and have decided to purchase a business.  I would like to personally thank everyone for sharing your experience and advice. Best of luck to you all.

[Kevin Sobilo]

@Mike K. I hope that works out for you.

IMO opinion, its ALWAYS a good time to invest in real estate.

However, depending on the economic climate deals might look differently. The kind of deal that was easy to find pre-covid might not exist right now, BUT a different kind of deal might be ripe for the picking.

There are SOOOO many ways to invest in real estate that its hard to ever say with authority that "now isn't a good time to invest".

Good Luck!

[Mike K.]

Quote from @Kevin Sobilo:

@Mike K. I hope that works out for you.

IMO opinion, its ALWAYS a good time to invest in real estate.

However, depending on the economic climate deals might look differently. The kind of deal that was easy to find pre-covid might not exist right now, BUT a different kind of deal might be ripe for the picking.

There are SOOOO many ways to invest in real estate that its hard to ever say with authority that "now isn't a good time to invest".

Good Luck!

 Looking at a local service business that currently generates $60k a year with limited owner involvement, no inventory, and very limited equipment required. Basically no overhead and can be scaled up to increase income. Should generate at least $500k wealth in my 10 year time span with very limited risk. I've analyzed numerous 1-4 unit residential deals for both cash flow and appreciation and haven't seen anything close to those numbers.  

Also, I think once the Marxists take over the first people they are going after is the landowners. That's how it always happens.

[Kevin Sobilo]

Quote from @Mike K.:

Quote from @Kevin Sobilo:

@Mike K. I hope that works out for you.

IMO opinion, its ALWAYS a good time to invest in real estate.

However, depending on the economic climate deals might look differently. The kind of deal that was easy to find pre-covid might not exist right now, BUT a different kind of deal might be ripe for the picking.

There are SOOOO many ways to invest in real estate that its hard to ever say with authority that "now isn't a good time to invest".

Good Luck!

 Looking at a local service business that currently generates $60k a year with limited owner involvement, no inventory, and very limited equipment required. Basically no overhead and can be scaled up to increase income. Should generate at least $500k wealth in my 10 year time span with very limited risk. I've analyzed numerous 1-4 unit residential deals for both cash flow and appreciation and haven't seen anything close to those numbers.  

Also, I think once the Marxists take over the first people they are going after is the landowners. That's how it always happens.

Those numbers are incomplete since maybe for the price you're paying one could be multiple 4 unit properties!

I also didn't limit my thinking to simple buy and hold. What if you did subject-to deals providing not only potential cash-flow but instant equity? There are SOOOO many investment strategies.

Holding real estate earns you money 3 ways not just cash-flow plus the tax advantages need to be factored.

[Zachary Jensen]

Quote from @Mike K.:

After looking at the opportunities available in RE investing and analyzing the risks and rewards I decided that there are better options available to build wealth.  It pains me to say this since I have been an appraiser for a long time.  In my 10 year time horizon until I retire I believe I can build more wealth as a small business owner and have decided to purchase a business.  I would like to personally thank everyone for sharing your experience and advice. Best of luck to you all.

 100% think this is the right call. if your entrepreneurial buying a business is the way to go. You can make 200% returns on your equity per year, where real estate you need to go through 100 idiot brokers just to get 5%. SMB I think is the opportunity of our time. Real estate Is great once you have money, but if you are just starting out SMB is a great way to build your cashflow to then start getting into real estate more aggressively. 
Disclosure: I am a heavily allocated real estate investor, and SMB owner (which I acquired) 

[Lynn McGeein]

@Mike K. I agree that investment property is difficult to make work right now at these prices, but I think it’s more risky to open a small business. I think 70% fail within 10 years, about 30% in first two years. So unless you have solid finances to get you through, it sounds more risky than investment property. My daughter and son-in-law opened their own business 3 years ago and so far have done well, but he built a good reputation in his field before starting their own, she kept her good corporate job for benefits, and they are now looking to invest in property with the profits, hoping for more passive income in the future as they’ve realized how much extra work a small business is with compliance, licenses, workers comp, etc.

[Alecia Loveless]

@Mike K. I’m starting to look at buying a business as an alternative to my high cost area where I invest in real estate.

That being said I’m still looking for real estate deals and believe every time is a good time to invest in real estate.

[Chris Seveney]

@Mike K.

On market real estate today is not a great investment today (just like it wasn’t in 2006-2007)

You can do a lot of work and try and find something off market or as you mention invest in another asset class.

I see a lot of people trying to “force” deals because of FOMO or lack of knowledge

Can you still make money and find a deal - yep. But it’s not going to be easy.

[Bruce Woodruff]

I agree with @Kevin Sobilo. RE is king because of the multiple equity paths. Appreciation (passive or forced) is the ultimate money maker.

I've owned about 20 businesses in my lifetime just as a point of reference. The overhead is the killer, you can seemingly never account ofr it all in your projections.

But hey, you gotta do what makes you happy, go for it, and good luck. You can always come back to RE as a side gig.....

[Sam Yin]

Quote from @Bruce Woodruff:

I agree with @Kevin Sobilo. RE is king because of the multiple equity paths. Appreciation (passive or forced) is the ultimate money maker.

I've owned about 20 businesses in my lifetime just as a point of reference. The overhead is the killer, you can seemingly never account ofr it all in your projections.

But hey, you gotta do what makes you happy, go for it, and good luck. You can always come back to RE as a side gig.....

My sentiments exactly! There are multiple layers to REI. But depending on your current situation, mindset, and ambitions, it may not be the right time. But it will be here if/when you decide to return.


Best of luck.

[John Morgan]

It's not easy now but I'm still finding deals. I've bought 10 SFR buy n holds in the last 12 month that cash flow ok. I'm more of a dollar cost average investor and have bought on average 2 houses a year for the past 9 years. But I've found some of my best deals in the last 4 or 5 months so I jumped on them. I look 5-10 years in the future to see if I think my investments will be good so I'm ok only making $200-$500/month when I first buy properties. And many investors have paused their buying so I'm seeing less competition and able to make low ball offers to secure these homes.

[Marcus R.]

@Mike K. - If you don't mind can you share more details about some of the businesses you're interested in?  Understand this is market specific.  I've looked into some franchising and/or small business via the SBA loan but I keep coming back to RE like others have mentioned.  Certainly not passive but from my research is seems to be more passive than a small biz. 

[Scott Allen]

@Mike K. Look harder. Pain in finding deals is temporary. Quitting last forever. 

Still pursue the local service business though - sounds like it could be a good opportunity as well to mix in with everything. 

[Henry Clark]

OP you joined BP in February.  Asked the beginner questions of how and where to invest.  You’re an appraiser.  You live in Ohio where for whatever reason people want to invest from out of state.  Now you have decided a small business is the best way to go.  

I tell people to Start small and Make Your Big Mistakes Early.  

No matter what endeavor a person takes you have to get your failures out of the way.  

Good luck in your endeavor.  Right now is the best time to ever be in Real Estate though.  

[Mike K.]

Quote from @Henry Clark:

OP you joined BP in February.  Asked the beginner questions of how and where to invest.  You’re an appraiser.  You live in Ohio where for whatever reason people want to invest from out of state.  Now you have decided a small business is the best way to go.  

I tell people to Start small and Make Your Big Mistakes Early.  

No matter what endeavor a person takes you have to get your failures out of the way.  

Good luck in your endeavor.  Right now is the best time to ever be in Real Estate though.  

 I disagree.  The best time to buy real estate is when everyone is selling and there is an oversupply of properties available for the buyer demand. Right now it's clear that there is a significant undersupply of available properties to meet investor buyer demand. Too many real estate agents enticing out of state buyers to invest in Ohio. 

[Mike K.]

Quote from @Lynn McGeein:

@Mike K. I agree that investment property is difficult to make work right now at these prices, but I think it’s more risky to open a small business. I think 70% fail within 10 years, about 30% in first two years. So unless you have solid finances to get you through, it sounds more risky than investment property. My daughter and son-in-law opened their own business 3 years ago and so far have done well, but he built a good reputation in his field before starting their own, she kept her good corporate job for benefits, and they are now looking to invest in property with the profits, hoping for more passive income in the future as they’ve realized how much extra work a small business is with compliance, licenses, workers comp, etc.

 Lynn, I'm looking at buying an existing business with a track record and documented income and expenses.  Ranked website with good traffic and 160 existing customers with recurring monthly billing. Not much risk compared to buying a 100 year old duplex.

[Charles Granja]

It's definitely tough out there right now! Best of luck.

[Mike K.]

Quote from @Charles Granja:

It's definitely tough out there right now! Best of luck.

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

[Samuel Diouf]

Quote from @Mike K.:

Quote from @Charles Granja:

It's definitely tough out there right now! Best of luck.

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

 I think this is the best time to start investing in real estate. Plenty of people are sitting on the sidelines right now.

[Charles Granja]

Quote from @Samuel Diouf:

Quote from @Mike K.:

Quote from @Charles Granja:

It's definitely tough out there right now! Best of luck.

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

 I think this is the best time to start investing in real estate. Plenty of people are sitting on the sidelines right now.

How I see it: When you buy real estate, you are buying a stream of cashflows. Due to high interest rates, those cash flows have become less attractive when you consider their respective risk profiles. If we compare levered real estate against the risk-free rate/SMP500, there is too much work for too little yield. The cost of debt has simply become too high. To get a break-even net yield with current interest rates you have to allocate 2.5x the amount of cash when compared to 2021, which removes most of the benefit of investing in real estate.

The reason people are sitting on the sidelines is because it is very difficult to make money in real estate today

[Samuel Diouf]

Quote from @Charles Granja:

Quote from @Samuel Diouf:

Quote from @Mike K.:

Quote from @Charles Granja:

It's definitely tough out there right now! Best of luck.

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

 I think this is the best time to start investing in real estate. Plenty of people are sitting on the sidelines right now.

How I see it: When you buy real estate, you are buying a stream of cashflows. Due to high interest rates, those cash flows have become less attractive when you consider their respective risk profiles. If we compare levered real estate against the risk-free rate/SMP500, there is too much work for too little yield. The cost of debt has simply become too high. To get a break-even net yield with current interest rates you have to allocate 2.5x the amount of cash when compared to 2021, which removes most of the benefit of investing in real estate.

The reason people are sitting on the sidelines is because it is very difficult to make money in real estate today

Cashflow, to me, seems like a small factor when you look at all the other variables that real estate has to offer. And rates are definitely high today, but you're married to the property, not the rate. You can always refinance when rates come down. By the time rates do come down, it's looking like property values aren't going to be where they are at now, especially if everyone jumps back into the market at the same time when they do drop.

[Bruce Woodruff]

Quote from @Charles Granja:

The reason people are sitting on the sidelines is because it is very difficult to make money in real estate today

No. The reason people are sitting on the sidelines is because they are scared and uninformed. Interest rates are not high overall, just high compared to what you are accustomed to.

[Bruce Woodruff]

Quote from @Mike K.:

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

Well if that's your choice, ok....Plenty of properties out there where you could get in now while the prices are relatively low. I'm following a few areas where properties are literally flying off the market....rare to see a good investment property stay on for more than a couple weeks. I don't think you're seeing this correctly......if you wait until the masses are comfortable with rates and prices, you will face an insane amount of competition and increased prices to boot.

Always be where others are not and do what they won't do....

[Charles Granja]

Quote from @Samuel Diouf:

Quote from @Charles Granja:

Quote from @Samuel Diouf:

Quote from @Mike K.:

Quote from @Charles Granja:

It's definitely tough out there right now! Best of luck.

 I'm gonna make some money with a local or web business and wait until we get some blood in the water in the housing market. It's coming and there will be good investment opportunities.

 I think this is the best time to start investing in real estate. Plenty of people are sitting on the sidelines right now.

How I see it: When you buy real estate, you are buying a stream of cashflows. Due to high interest rates, those cash flows have become less attractive when you consider their respective risk profiles. If we compare levered real estate against the risk-free rate/SMP500, there is too much work for too little yield. The cost of debt has simply become too high. To get a break-even net yield with current interest rates you have to allocate 2.5x the amount of cash when compared to 2021, which removes most of the benefit of investing in real estate.

The reason people are sitting on the sidelines is because it is very difficult to make money in real estate today

Cashflow, to me, seems like a small factor when you look at all the other variables that real estate has to offer. And rates are definitely high today, but you're married to the property, not the rate. You can always refinance when rates come down. By the time rates do come down, it's looking like property values aren't going to be where they are at now, especially if everyone jumps back into the market at the same time when they do drop.

 I'm not talking about cashflows informally as we often do on Biggerpockets. When I say cashflows, I am referring to the cumulative sum of discounted cash inflows and outflows over a hold period. These cashflows encompass the other benefits of real estate you are referring to, namely principal paydown, appreciation, and tax benefits.

I am arguing that real estate is not attractive as it once was, because in the current state, yields are dramatically lower due to the cost of debt, Rd, and when you compare them to other investment vehicles, it is not worth the risk.

[Charles Granja]

No. The reason people are sitting on the sidelines is because they are scared and uninformed. Interest rates are not high overall, just high compared to what you are accustomed to.

Hello Bruce,
It's not about interest rates, its about yields and principal risk.

In investments you have market risk and idiosyncratic risk.
When we think on quantifying these risks and assigning a discount rate, we can look at 2 components. Risk-free rate and risk premium

This is an informal way of showing you that what you are saying is incorrect:
If the risk-free rate is 5%, then an investor should not invest in anything with risk at 5%. That would mean real estate, stocks, literally anything.
-Why would I invest in anything that has risk when I can get the same yield risk-free?

If the SMP 500 gives an average return of 7% return each year, and has minimal risk, then we do not want to invest in anything that has more risk for the same yield.
-If a value-add project/flip/start-up also give a 7% return, why would I invest in those projects when they are giving the same yield as an index fund? 

Interest rates could be 50% right now, but if we are getting a 20% IRR it doesnt matter.

Real estate prices have increased considerably in recent years due to low interest rates. Now that we are in a high interest rate environment with high prices, real estate yields have been compressed, and are generally not worth it given their risk profiles.

[Bruce Woodruff]

Quote from @Charles Granja:

No. The reason people are sitting on the sidelines is because they are scared and uninformed. Interest rates are not high overall, just high compared to what you are accustomed to.

Hello Bruce,
It's not about interest rates, its about yields and principal risk.

In investments you have market risk and idiosyncratic risk.
When we think on quantifying these risks and assigning a discount rate, we can look at 2 components. Risk-free rate and risk premium

This is an informal way of showing you that what you are saying is incorrect:
If the risk-free rate is 5%, then an investor should not invest in anything with risk at 5%. That would mean real estate, stocks, literally anything.
-Why would I invest in anything that has risk when I can get the same yield risk-free?

If the SMP 500 gives an average return of 7% return each year, and has minimal risk, then we do not want to invest in anything that has more risk for the same yield.
-If a value-add project/flip/start-up also give a 7% return, why would I invest in those projects when they are giving the same yield as an index fund? 

Interest rates could be 50% right now, but if we are getting a 20% IRR it doesnt matter.

Real estate prices have increased considerably in recent years due to low interest rates. Now that we are in a high interest rate environment with high prices, real estate yields have been compressed, and are generally not worth it given their risk profiles.

Thank you for taking the time to reply with your opinion. We think very differently about this apparently.....

It's really not about either interest rates, yields or principal risk when you get right down to it. It's about can the investor make enough money, in whatever amount of time they feel comfortable with, to make them happy (with the perceived ROI and other factors that make people happy).

You are assigning a risk rate of 5% (or whatever) to RE. That's an assumption. Lots of people :-) can find properties, fix them up a little and double their money in a couple years. Then you have a different ball game, eh?

You do say that RE is 'generally' not worth it, so you got that right. Kinda, sorta..... But with your inside-the-box thinking, I would definitely not recommend that you purchase Real Estate anytime soon.