Is the market too hot right now?

Question

I started investing a couple of years ago, and since then, it seems like the market has gone from hot to insane.

Currently, I've been searching around in a city I chose, that isn't on any of the top lists for real estate investment, and there is such incredible competition here that any deal that is remotely good is gone almost immediately. I have heard from local agents that there are many out of state investors throwing money at bad properties, sight unseen.

Add to that many areas have seen ~10% appreciation in 2020, and are expecting the same for 2021. That can't realistically continue for a longer period of time.

My gut feeling tells me that we are in a period of irrational exuberance. It seems like there is so much competition that it may be better to invest elsewhere until the market returns to a state of normalcy. I'm sure many of you will have a different opinion on that matter.

What are your thoughts?

John Warren · Answer

@Tyler D. when I started investing it was 2015. Everyone said that another correction was imminent, but I picked up a nice 4 unit locally here in Lyons and started investing. In 2016 people said the market was high, and I bought a 20 unit with a partner. In 2017 everyone here on BP was saying things were going to high and I picked up a 9 unit with a partner in Berwyn. In 2018, the sky was falling and the market was about to crash and I picked up a 19 unit gut rehab project. Then in 2019 the stock market was at an all time high and all the BP crowd said things were about to crash, so I bought a 6 unit. This year, with Covid has been one of the toughest times on memory, so I bought a 22 unit and a 7 unit making this my biggest year yet.

Focus on finding good quality buildings in areas that make sense (blue collar, have a star bucks, etc). Make sure the deals cash flow, and then keep on saving and keep on buying. In 20 years, you will have seen some crazy market corrections but you will have a solid portfolio. All the nay sayers will still be online waiting for the "right" time.

Russell Brazil · Answer

The exuberance is purely rational. It is simple supply and demand economics. Huge demand coupled with almost no supply.

Michael Orlando · Answer

Focus on buying right and you'll be sheltered from most economic issues! Diversifying between asset classes is a good way to protect yourself a bit as well i.e. holding C class and workforce housing, some more upscale rentals, and even section 8 / project based properties all in your portfolio... There's a lot of ways to mitigate risk and if the deal is good enough, speculation on where the market is (or will be) wouldn't stop me from buying!

In terms of competition, most major metros right now are very competitive. Pretty much every Ohio city is seeing intense competition and lack of deal flow (form what I've seen), but they are still out there! You might have to get creative and try sourcing deals yourself. Or, maybe move into some tertiary markets that you feel are strong or growing but where the bigger money doesn't play as much.

Eric Bilderback · Answer

The reality seems to be we will not know for certain whether the market is to high at this moment for another 5 years.  Plenty of very smart people on both sides of the argument.  One thing is for certain underwrite properties and make sure you have a plan to hold them for the long-run.

Alexander Szikla · Answer

Depends where. It is ALWAYS a good time to buy if you BUY RIGHT.

Suburbs are on fire right now, but I am sure there are fortunes to be made in cities like San Francisco and I know there is ample opportunity in New York for massive equity appreciation in coming years.

Jay Hinrichs · Answer

the other thing is its  very big difference of 10% annual appreciation if your property went for 80k to 88k  !!

Eliza Sprague · Answer

Agree with the previous responses. The competition has absolutely gotten intense over the last few years, but whether that competition is irrational depends on 1), the economic factors in a particular area and 2), the potential of a particular investment within that market.

My partner and I moved from New York to Austin a couple of years ago, largely because we were more bullish on Texas and the Hill Country in general. New York and Austin both experience insane competition, but we believe Austin and Texas have healthier economic fundamentals than New York that will produce more wealth over the long term. The fact that competitions is intense has for sure made it harder to find deals, but doesn't necessarily indicate that the competition is irrational. To @Russell Brazil's point, this is a highly desirable area and that is driving up the demand.

The factors that contributed to Austin's growth (Texas' business- and real estate-friendly environment, large companies setting up shop here, huge influx of population largely from the coasts) are still in place and seem likely to continue for a while longer, which should provide some protection against any state-, nation- or worldwide correction that takes place.

Is the market too hot right now?

Most Popular Reply