Is it a good time to start investing as beginner with the market

[Zachary Perrin]

Hey there investors! 

I have made major changes in my life so I can get to the point where I can move into real estate full time and start developing assets. I am in San Antonio, TX interested in flipping houses initially to build some capital so I can eventually move to renting for cash flow. I hate to ask this question before I really start looking at the numbers, but as a beginner with a smaller amount of capital to get started do you think it is a bad time? With the price of materials 2-3x more expensive. Not to mention the houses are selling for much higher than appraisal. The chances of getting the seller to pay for a few things like closing costs is unlikely. 

I know most of the time I am speaking to people without any experience or education on the matter but everyone keeps telling me not to because the material cost is so much and the housing market will crash soon.   

[David Mares]

Hey Zac, great question. I see you mentioned wanting to flip homes - can you tell us more about whether you have a team in place that will help you carry out your plans? Also, have you considered other strategies like house hacking as a means to generate some capital and get started? 

[Jonathan Greene]

If you have low capital, flipping right now will eliminate the capital as a first-time flipper and have you paying back money you didn't want to. The deals to get flippable properties are high on-market and via wholesalers and when you couple that with rising material costs and add to that that all first-time flips cost 2x what you think and take 2x longer than you think, it's not the time to start doing that as a newbie. There may still be other options, but when the market is hot and you have low capital, you should spend the time learning and building more capital so when they market calms, the capital you earned over time becomes more valuable because the market is not completely on fire.

[Zachary Perrin]

@David Mares:  I am slowly building a team. Currently I have my father or uncle who is a master electrician and my wifes father who is a jack of all trades but focuses on framing and carpentry. Since I do have lower capital currently I was wanting to do as much as possible on my own.  Definitely contracting out any roof/side panel or plumbing if it needs to be done. I need to find a real estate agent to help me legally with selling and buying the property and possibly a hard money lender. Since i'm new a contractor or someone who could give me a good estimate on repairs would be good. As far as house hacking Ill consider when i'm closer to the end of my current lease.

@Jonathan Greene: Thanks for your opinion, that's how I have felt and its currently holding back on making any serious moves. I do however believe in my ability and dedication and believe I can make it work. Ill be keeping a solid head on and keep what you said into consideration

[Evan Polaski]

@Zachary Perrin, I agree that is it harder to find deals today and materials are up.  But my concern is not that you can't find a property with the right margins to make it work, even accounting for the mistakes you will make.  My concern is your lack of capital.  Essentially, the only difference I am seeing today versus 4-5 years ago is the buy in cost, so you need more capital at your disposal.  

But houses are selling for record highs these days.  And even with the increase purchase price, and higher cost to rehab, there are deals that still have profit available, even accounting for some mistakes along the way. 

Put another way: 5 yrs ago, I was making 20% profit on flips, but my costs were $130-150k.  Now to do a flip in the same neighborhood, my costs are double.  I have, in the last year found deals that still make me 20%, but I need $250-300k.

[Jaron Walling]

@Evan Polaski Ouch. It's crazy how much material prices change the investing landscape.  

[Christopher Campbell]

@Zachary Perrin

Way to reach out on this forum for help. Kudos!

Being a newbie at any point in time will make getting started seem daunting especially in a business like this with many moving parts. You have to line up financing, make sure your teams are ready, find the right deal, manage the progress and completion of the project, get the property up on the market, and then get it sold/closed/funded and accounted for. It's a lot to manage no matter what the market conditions are. After a few repetitions you get the hang of it and hopefully do better with each project. 

Without knowing what you'd consider to be a "smaller amount of capital" I can't speculate too much on your readiness to get started. But I would definitely take a closer look at the market to see how people are finding success here. The seller's market doesn't help when acquiring distressed properties but it helps A TON when you're selling freshly rehabbed homes. Out of the 216 homes that closed last month listed as a "Recent Rehab" across Bexar County, 110 of them sold ABOVE their listed price by an average overage of 3.64% in an average of 21 days on market. This market isn't red hot for no reason at all. It's hard to see why it would be a bad time to start flipping when the market is as hot as this. 

We've been at double digit YOY increases in our pricing metrics pretty much all year. We're appreciating very rapidly. It's looking like an almost 4% increase in the city's average sale price just from March to April. It's mostly a simple supply/demand imbalance and the fact that we're in a very desirable place to live which is attracting so many new residents. Put this all together with low interest rates and a big local stimulus package and it's pretty hard to anticipate a crash, at least for the near term. 

If you sit on the sideline, keep the capital you have sitting (every day losing more purchasing power due to inflation), the market continues to appreciate, and then what some anticipate to be a crash comes, how far does it drop? Does it come down to a level that will work for you at your current capital amount? What if it doesn't come for a few years? What if the market sees more of a stall like a plateau before rising again? Is it more speculative to hope/wait for a crash to get started or to play the game as it is now? 

This past month I closed a deal with a newer investor (not totally new, but newer) who is working with a hard money lender I have a good relationship with that came to the table with below $20k to close. Lenders will typically want to see proof of double that in the bank to qualify (among other things - you'd have to talk to them specifically). The point that I'm making is that the capital requirements may not be as high as you might think. It's a big market and much of it has very affordable housing options. 

I hope this provides some good perspective.

Cheers!

[Evan Polaski]

@Jaron Walling, the price is not exclusively materials, it is also the cost to get into the deal.  Meaning a house that I used to be able to buy for 80-100, in that same condition, is likely almost 200 now, and what was a 50k rehab is now a 100k rehab.

[Nicholas L.]

@Zachary Perrin can you house hack?

[Zachary Perrin]

@Christopher Campbell @Evan Polaski , I really appreciate your time responding. 

I feel like you have resolved my overall worries before diving in head first. I know prices are high but If I work hard, bring in as many leads as possible, analyze those leads and eventually I will find one that works for me. All Ill need to do is find a partnership that will bring the down payment. I can bring the deal, the sweat and confidence to the field. Overtime I will be able to invest by myself. So Thank you. 

@Nicholas L. House hacking is a serious option. Allowing me to get a loan for much lower down. Allow me to live cheap or free and gain experience as a land lord and rehabbing. I dont feel like San Antonio has many multifamily's as other cities so finding the deal could be more troublesome.  

[Brock Mogensen]

There's never a bad time to get started.  Trying to time the market will usually lead to sitting on the sidelines too long.  That being said, you have to accurately analyze each deal and weigh in the risk of where the market is at.  Current market conditions mean being very conservative in underwriting. 

[Bradley Sriro]

@Zachary Perrin I would recommend doing a live in flip. While the market is out of control across much of the country, there are still always deals to be had. As you are already aware, it will just take more effort to find them. If looking for homes on the MLS, I would suggest having an agent run a search for homes with at least 45 days on the market. This way you are dealing with homes whose buzz or lack thereof has already passed and you are likely not dealing with a ton of competition like you will with some of the other "pretty" homes.

If you can successfully locate a deal that you will live in, you will be able to get into it using an FHA mortgage with 3.5% down or maybe a 5% conventional loan if the seller won't accept an FHA buyer. This should allow you to use more of your capital toward the rehab. If you are handy at all and willing to put in some sweat equity, this may also be accretive to your bottom line. The benefit to going this route is that you are not under the gun for paying back a hard money lender and you also have a place to live while completing renovations. One of the biggest benefits with this strategy are the tax benefits... With the current IRS home sale exclusion from capital gains, if you live in the home for 2 years and have a capital gain from the sale of this home, you may qualify to exclude up to $250,000 of that gain from your income if you are single, or up to $500,000 of that gain if you file a joint return with your spouse ( IRS Topic 701 - Sale of Your Home ). While not as quick as a standard flip, this strategy can be a very powerful way to create substantial and possibly tax free gains. 

The other option as someone else mentioned would be house hacking. Although there may not be a large inventory of multi-family in San Antonio, you can also house hack a single family... assuming you are personally ok with it. Ideally you would want to find a single family home that has an in-laws quarters, a guest house, or an ADU (Accessory Dwelling Unit). If you are single, you can live in the smaller unit and rent out the main home or vice versa if you have a family already and need more space. The same tax benefits related to capital gains would apply with the sale of this home also as long as you live in it for 2 years. You can still of course look for a property like this that would be a value-add proposition. This way you can force some appreciation and maybe unlock some equity to play around with with by tapping it with a HELOC.

It sounds like you are pretty determined... with that being said, there are quite a few options out there for you. In the meantime, just keep educating yourself and try to find an investor friendly agent in your local market that is willing to work with you. I hope this helps... All the best!

[Jaron Walling]

Originally posted by @Evan Polaski:

@Jaron Walling, the price is not exclusively materials, it is also the cost to get into the deal.  Meaning a house that I used to be able to buy for 80-100, in that same condition, is likely almost 200 now, and what was a 50k rehab is now a 100k rehab.

The same thing happened Indianapolis. My neighborhood has those exact numbers. I love Cincinnati though! You excited for that new FCC stadium? 

[Alyssa Dyer]

@Zachary Perrin I always try to remember that there are going to be winners in any market and normally it comes down to understanding the market you’re in (not the market that there was a couple months ago and not the one that you wish you were in).

So that said winning in this market looks like remembering that material costs are inflated and there are delays in getting materials. You want to make sure that whatever financing terms you have and whatever your current capital position is accounts for longer holding costs.

I don’t know about other markets but I know in Oklahoma we have a labor shortage which has caused pricing on on labor to go up. It’s also requiring us to coordinate our contractors earlier than we had to when we were scheduling a year ago.

I see a lot of people paying too much for properties because they are afraid to miss out on a deal. It's OK that prices are a little higher than normal right now just keep in mind that the price of the house is a little higher, the price of labor is a little higher, the price of materials is a little higher, and your holding costs are going to be a little higher... ARV is also higher though.

Just make sure that you're not too optimistic on what the ARV is going to be on the backend. If there's somebody in your market that you know who's willing to help you look at your comps and double check your numbers, I would definitely have somebody who is seasoned kind of help you verify that information. Hope this helps, good luck!

[Matthew Forrest]

@Zachary Perrin The best time to start was twenty years ago! The second best time is now. If you're going to be an investor and buying property for the rest of your life, does it matter if you buy a property at an intermediate peak? Do you think that property values are going to be higher to lower twenty years from now? If your answer is significantly higher like mine is, then I don't think you'll look back as see a property that got you started that you maybe could have purchased lower as being that important. My vote is always to get started as soon as possible.

[Matthew Jordan]

@Zachary Perrin it's always a good time to invest. Even back in 2014 people were talking about the 8 year cycle and that we were getting close to another dip. It's now been 7 years since then. You can't ever time the market perfectly. There are still deals to be had. With hard money you can get up to 90% financing on the purchase and 100% on the rehab. Have a margin of safety on your first deal to protect yourself on the downside and maybe even be the GC yourself to save on costs. You can do this, it's just a matter of getting started and most people spend way too much time in the forums over educating themselves. 

[Zachary Perrin]

Yep, currently deciding which strategy will best suit me. Still a bit on the education side of things but I plan to find a good team and start taking some action here shortly. Feel like Flipping, house hacking or wholesale is probably where I will start. Mostly focusing on flipping but it feels like it will depends on the property and deal. If I get a excellent deal I may just wholesale that bad boy. If I can house hack a multifamily where I can live practically free there is no reason not to grab that, even if I still have to pay my apartment lease. 

I must be missing something however. Ideally I would prefer to BRRRR so I can obtain assets instead of just flipping for profit. Then I ask myself when you flip a house and you profit or at least break even you are able to pay back all the loans you took out in order to purchase and rehab. However when you rent out the house, yes the tenants will be paying your monthly mortgage but you will not get back your down payment. So essentially you have to drop a downpayment for every rental? I feel like the amount of time it would take for the cashflow to become profitable is a long time. I'm sure im missin something big. Onwards to forums and google to figure it out.

Appreciate everyone responding, It goes to show me I chose the right website to journey into real estate. 

[Matthew Brill]

@Zachary Perrin

You can also do a live in flip. Will give you an opportunity to get a feel for how it works, get an owner occupant loan, and give you a better chance to profit on it (buy holding it longer and potentially not paying any capital gains taxes).

You are definitely correct with not getting your money out on rentals not doing a BRRRR. The great returns in RE really come from the appreciation which you won't realize until you refinance, get a HELOC, or sell. That's why it's important to have the cash flow, to being able to ride out the market. The other way to look at it is you are buying a bond, and cash flow stream. If you have all the cash flow you need to support your lifestyle then it doesn't matter nearly as much what you put in dow payments or what your ROI/ROE is. You just have to see what your goals are and the strategize the best way to accomplish them.

[Eric M.]

Just take notice when all the folks telling you this is a GREAT TIME TO START are brokers and lenders. In other words, people trying to sell something.

Investors are telling you maybe its not a great time. Properties are hard to find. I have done over a dozen flips and I have absolutely no clue how much a rehab is going to cost me right now. Like NO CLUE. Materials are crazy, contractors are unavailable and unresponsive. ARV's are looking awesome but I have no idea what costs are and what might happen between buying and selling. It feels very crazy to me.