Afraid of the Big Bad Wolf? How Nimble Investors Beat Funds!

[Jared Garfield]

From 2008 to 2013 it was easy to have a really nice run of buying red hot distressed single family homes in the Atlanta market. Homes built from 2000-2007 that had sold from $150,000 to $170,000 and cost $135,000 to $155,000 to build were selling for $30,000-$50,000. Due to the newer age of the homes the renovations only averaged $8,000 to $10,000 in mostly cosmetic repairs, and returns were through the roof! It wasn't uncommon for investors to make 35-45% Cash on Cash Returns. (For Newbies That's the percentage of your down payment you receive back each year after taxes, insurance, vacancy, maintenance, debt service and property management. Divide the annual net cash flow after these expenses by the down payment and you'll have your Cash on Cash Return).

When Warren Buffet said, "Buy when the blood is in the streets and everyone is running..." and then went on to buy Prudential and turn it into Berkshire Hathaway Home Services, while also buying up a ton of single family homes, he set off a Wall Street frenzy. Behemoths like Colony Capital and Blackstone soon started gobbling up billions of dollars of single family homes. Competing with small mom and pop investors with 30 and 100 Billion (with a B) dollars, it wasn't real possible to compete for the same houses, because they would accept much lower returns. They had to put their money into play because their funds required a return, and they didn't require 25-30%!

When The Biggest Kid Always Wins The Marbles...Go Play Somewhere Else!

Having sold homes by the dozens to these funds, I know a lot about how they work. They needed primary markets, with huge volumes of homes. It had to be scalable, the homes had to be a certain age, and so far from the center of town. There were a lot of requirements that had to be met, and a snowball effect of ever larger appreciation from the laws of supply and demand took over. I believe that an artificial appreciation took place initially, but fortunately this was a good thing as consumers took the time to rebuild their credit, they could come back and buy the same homes (only now more renovated) in three to five years. It helped a great deal with the market recovery as these Wall Street funds provided a role that the secondary loan servicing market was unable to perform for a few years.

For the primary markets like, L.A., Las Vegas, Orlando, Tampa, Miami, Atlanta, Dallas, Houston, Phoenix, Boston these hedge funds sped up the recovery at a rapid rate. The economies and population growth trends made these cities very attractive. High growth secondary markets also performed very well, like Charlotte, NC and Nashville, TN. However, if you were an investor in these markets it was really hard to compete!

The smart kid who doesn't want to loose all of his hard earned marbles has to play somewhere else. For me that meant researching secondary and tertiary markets like Milwaukee, Oklahoma City, Montgomery, Kansas City, and St. Louis. It meant travel, research and team building. However, it meant that one could still get 10-15% Cap Rates and 25-30% Cash on Cash Returns on C+ to B assets.

(An example of a B+ home in a tertiary market that was purchased for $82,000 or so last year and rents for around $1,200 per month - not for sale, illustrative purposes only).

You see these markets don't have enough inventory for the big boys to have critical mass, they are not scalable. Also, they recover more slowly, yet they will also bring really great returns, and as long as they are not rust belt states losing jobs and population in a major way, they can be very stable.

Going further out from primary cities is also a great way we kept our marbles. Many large towns 45 minutes to an hour outside of primary markets had cheaper deals a lot longer, the funds weren't in those markets nearly as much either. As USRDA unloaded their inventory of foreclosures, the deals could be really sweet at times!

Who's Scared of the Big Bad Wolf? Don't Be!

I know a lot of people thought the game was over and went into different fields when they thought the downturn was over, or thought they couldn't compete any longer. For full time professional investors who have made a career through the up and down cycles, that wasn't an option!

The top 3 Multi-Billion Dollar Hedge Funds only own 130,000 homes, the top 18 combine to only own 198,000 homes out of the total single family housing inventory of 17,600,000 that is only a combined 1.13%!

There is so much opportunity for investors! You just have to decide whether your market is a flip or cash flow market, get some education, find some funding, and get to work! There are plenty of people here willing to teach you at no charge and I'm one of them! Follow people, send connection requests and reach out and ask for the help you need!