Are hedge funds still major competition?

Question

If this comes off as an odd post, I apologize, but it's something I am really curious about .... When I was investing in Jacksonville, Florida about 7 years ago, my main competition seemed to be hedge funds in the area. I'm actually in a weird place right now where I'm afraid to hold cash due to all the FEDS money printing and inflation, but I'm also afraid to invest in the stock market because I think it's in a huge bubble, and I'm afraid to invest in real estate because I think we are at a peak, and there still seems to be a buying frenzy going on. In these strange times, I'm wondering where the uber wealthy are putting their money. So I'm curious, for those of you out there actively making offers right now, are you finding hedge funds as a major source of competition in your market, or do you know if they are actively investing much at all? I can't seem to find reliable info myself online, so I figured I would ask some of those with "boots on the ground". I would appreciate any comments.

Jack Bobeck · Answer

@Ty Whitman As long as Interest Rates stay low, real estate will continue to be strong. When the rates rise, you will see the stock market tank and it will be a sign, but right now the real estate market is hot. Nothing stays on the market for long. Median listing prices continue to grow at 12.9 percent over last year. Economists, market watchers, and most especially buyers have been looking for signs of a slowdown in the housing market that has been red hot since its post-pandemic recovery. So far, at least, the median listing price continues to defy gravity. New listings were down 12 percent. The new listings trend took another step back this week. Earlier in the year, new listings growth was tied closely to the prevalence of coronavirus spread in various housing markets. The second week of larger declines in new sellers could be related to rising new coronavirus cases. New listings are a necessary ingredient for further home sales, so additional improvement here will be important for home buyers and sustaining home sales activity.Total inventory was down 39 percent. After five steady weeks at 38 percent, the total number of homes available for sale shrank by a slightly larger amount this week. Fewer new sellers coming to market while a greater than usual number of buyers continue to search for a home causes inventory to continue to evaporate.Time on market is still 13 days faster than last year. With limited homes available for sale, those that are on the market are selling quickly–roughly 2 weeks faster than a year ago. For 7 weeks now, we’ve seen homes sell 13 or 14 days faster than last year. We typically see a big increase in time on market before the end of November. If this indicator remains steady in the weeks ahead, that points to a seasonal slowdown, but if time on market shrinks by a greater amount, that’s a signal that this year’s housing market is not taking the holidays off.

Denis Woosley · Answer

What kind of properties are you looking at? REITs are not going to be competing with local investors on MLS listed SFH and small MFH. They look at portfolios and large multi family properties. Large companies may have a representative at local auctions in certain markets.You will never be able to time the market. Maybe the market will just keep going up, maybe not. You need to, determine your risk tolerance, set aside cash you have to invest and then start looking and see if any properties fit your criteria. Real estate investing always has some inherent risk but there are ways in hedging against that risk.

Carolyn Morales · Answer

@Ty Whitmanyou could follow the foreclosure and tax deed auction websites calendars and winning bidder lists to see who is competing heavily as a hedge fund. I do see large investors competing not necessarily hedge funds but could be part of one as they create 1000s of entities. Sometimes the mailing address is a giveaway if its a fund with 1000s of entities.

Sean T. · Answer

@Ty Whitman Yes, in a word yes. I am seeing it constantly but not just HFs. PE is moving to RE in droves for the asset protection. many of the large SFR REITs are starting to do more of a build their own motion as well.Buying bulk is still very difficult because they are all cash, 2-3 week closes, etc. I am also seeing many smaller boutique funds starting up SFR plays and then packaging and selling to HFs which might explain why some folks think they are gone from the market.

Michael Bennett · Answer

In our Phoenix metro market there are multiple SFR buy and hold groups with serious Wall Street funding. They compete with the small SFR investor and anybody looking for a median priced home to live in, and have the cash to buy a home a day. If not more. They will also underwrite deals to a cap rate much lower than I would advise my clients to purchase at. Now, there is a dollar cap on what they will buy and other stringent requirements, so they can't buy anything and everything, but they do raise prices and keep inventory extraordinarily low. However, they don't buy small multi-unit properties like duplexes and quads and this is primarily the niche we operate in. So yes, they are here and they have deep pockets. We choose to target MF properties with a lower per door cost and better returns. We also manage these properties which is huge for out of state investors building their local team.

Ryan Cleary · Answer

I don't see interest rates dropping soon, I am half way through a live-in flip and just on appreciation alone my property has risen 25% in one year, not to mention the forced appreciation. That being said, in searching for my latest long distance buy and hold I have not even considered competing HF's, I suppose I see none of that in the market I live in and don't consider it a threat!

Travis M. · Answer

I have noticed the same buyer's agent keeps sweeping properties at foreclosure auctions here in town. Could be wrong, but I assume they are working for someone with a lot of money.

Brian Ploszay · Answer

Around 2012, institutional capital descended and bought a lot of foreclosures. There are funds ready this time to do it again, but it most likely will be commercial real estate. Residential real estate will not be as wounded.

David Avery · Answer

Deep pockets in Phoenix, I agree with Michael Bennett. With Phoenix being one of the on going economy's in the Nation and people moving here about 350 a day more than leaving. And business to support this much growth.Hedge Funds are here. !In the 90's before most of you were thought of!Could by a 4 plex that needed work for $60 and fix it up, rent it out and sell it all day long for $150-$160. Most cost back then was 22K.My business partner would buy and sell them. I would run the crew and do the work with them.At times we would have up to 7 properties at a time in progress!We would pay the crew and materials and our business arrangement was 50/50. We both would invest equal amounts in buying and my split was my time and labor, his split was his ability to buy and sell.Michael you should meet me!

Sean T. · Answer

Great post @Jack Bobeck! Thanks for putting that together!