I'm worried about the real estate market right now

[Johnny boy]

Explain what you mean by "too efficient of a market". I understand, but it probably a new concept for a lot of people.

Everybody knows about it. It's too expensive to be overlooked. It lacks creativity and there are too many restraints. All of these things come together to drastically limit your upside.

I own a service business. My employee costs $17 an hour. I sell his work for what equates to roughly $170 an hour. I will never buy a house and then immediately sell it for 10 times what it's worth. If you do then you have found the deal of a lifetime. I am not out here looking for the deal of a lifetime. I'm looking for a deal I can make every single day, and at a giant return.

When I say it is too efficient, I mean that the competition in the marketplace has ensured that there is little profit (in my opinion). For people who lack the ability to grow a business, or don't want to run a business, and are comfortable with only making a few million dollars, I would suggest real estate.

For those that want to build something that brings in exponentially larger returns, with arguably less work, in a more scalable way, I suggest a business. Even when it comes to passive investments. (passive investments won't return an exponentially larger return but an active business will)

For example, before I ever become a landlord, I will start a classic car leasing company. I can expect to receive a passive 15+% return backed by assets. All because I chose to be in a less efficient market and add some value instead of doing what hundreds of thousands of other people are doing (or trying to do) in real estate.

a little off topic but just my opinion. ^

 

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[WJK]

I'm worried right now about what is going to happen in our real estate markets in the immedate future. There are some segments that may be, or are, in troublesome.

Several segments in the commercial market are stressed. Properties used for retail sales, the mall properties, and the office space market are having huge problems with vacancies, loan & rental defaults and potential foreclosures. These problems were already trends that have been blown up with the lock-downs due to the virus.

Another market that is suffering is people who have Airbnb rentals and vacation rental properties. I received an email from Airbnb today that they are planning to go public. They are adjusting their rules. Again. In the meantime, there are many people who built mini empires based upon Airbnb rentals. The stories usually involve people taking on massive debts, long term leases, and/or making heavy investment to create short term rental income streams. I was reading yesterday about people who can't pay their rent or payments on many of these properties.They are unsuccessfully trying to sell the properties or hang on.

(As I was reading about their Airbnb woes, I thought about how these investor's business model is similar to people who built e-businesses on other people's platforms. It's a pretty slippery slope for the long haul. I was feeling grateful that I only have a couple of sleeping rooms & summer RV spaces listed with that platform. My life is not dependent on the income from them.)

Another market that is starting to show some stress cracks is the multi-family residential market (apartments). Over the last few years the watch words have been OPM (oher people's money). That is a business model using as much debt as possible to buy as many units as possible. I have friends who have refinanced the minute that they had any equity in their buildings. They would use the loan proceeds to go buy more residential units. The problem with this type of agressive investing is that these loans are commercial loans that are subject to different rules compared to single-family homes and small residential unit (2 - 4 units). If the market value of these apartment buildings drops, the bank can call for the owner to pay down these loans to bring them into conformance. And those rules can tighten as the market retracts. (I remember when those loan calls happened to a lot of people around 1990 and they ended up losing their properties.)

So, I'm going to be sitting on the sidelines to wait and see what happens -- no new investments. If the real estate market starts to slide, it normal leaves no man standing. It cascades throughout the different RE segments one after another. If the dominos start falling, cash will be king. Sure, I may miss out on a few deals while hold my cards close to my chest. That's OK. I will survive to invest another day.

 

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[Envision]

3. I hardly see how RE can be a fastlane strategy. To me, it's similar to the stock market: you invest in it once you became rich, not to become rich, unless you decide to contract a mountain of debt. But even then, you'd better buy a small company and grow it instead of investing into RE. RE is slow to repay itself because let's be honest, it's pretty chilled. You don't do much besides owning the place.

When you rent out a house for 4, it will always be a house for 4. However you manage it, you can't scale the value of your asset.

There a numerous benefits to real estate that make it fastlane that you're not considering.
1. Appreciation
2. Tax Breaks
3. Leverage
You've only considered Cash flow.

There is no business in the world where I can put down 8K and get 2.5% interest on a secured asset that will beat inflation and average 3-10% appreciation per year while lowering my tax burden and paying off my debt and I can compound my growth by leveraging that asset over and over again.

Leverage is what compounds wealth and makes real estate ultra fastlane. If you understand leverage and how to structure debt you can build wealth that lasts in a relatively short amount of time. Debt is what makes you rich, you just cant be the one paying it.

To your point:
I started my company 6 years ago with about $6k I saved, the same year I bought my first duplex and put down $10k I had saved

My company grew slowly, had insane amounts of risk, and for all intensive purposes should not have worked considering my circumstances and I probably cannot repeat what I did today. This is gross revenue
2014: -$5,000
2015: -$10,000
2016: $75,000
2017: $275,000
2018: $600,000
2019: $1,400,000
2020: $3,500,000
2021: $5-7M...

My real estate grew steadily and slowly at the start, was secured, always cash flowed, and appreciated. This is asset value with about 50% debt

2015: $155000 (one duplex)
2016: $155000
2017: $425000 (another duplex)
2018: $500000 (appreciation)
2019: $2000000 (2 houses and a triplex + appreciation)
2020: $7000000 (Storage + exchange + refinances + existing portfolio minus one duplex)
2021: 10M+

If I had to do it over again and only had one choice, Id pick the real estate every time because the probability of my success is higher in every circumstance. The real estate is also on par with the value of my company with considerably less work and much less risk - this might not last forever but it's something to consider.

Real estate is not a passive asset, it is a business. There are aspects that can be manipulated to increase your returns and processes that can be put in place to prove a consistent and targeted growth rate. You need to build a system that makes CENTS versus just view it as a stock you have minimal control over.

The key is to honestly do both. Because the net income off the business makes it so banks will continue to provide financing and work with you. I merge both and they keep giving me better loan products, deals, and support to keep growing. You merge high risk, high cash flow businesses with stable, secure long term assets with tax benefits.

Hope that helps.

 

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[WJK]

@WJK A lot of your posts age really well!

It is so refreshing to see! It speaks to just how knowledgeable you are about the things you remark upon. I have enjoyed reading your posts on this forum!!!

Thanks, this is my 45th year in RE. I'm just trying to pass on some the knowledge I've gained over the years.

 

[biophase]

3. I hardly see how RE can be a fastlane strategy. To me, it's similar to the stock market: you invest in it once you became rich, not to become rich, unless you decide to contract a mountain of debt. But even then, you'd better buy a small company and grow it instead of investing into RE. RE is slow to repay itself because let's be honest, it's pretty chilled. You don't do much besides owning the place.

It certainly can if you do it properly. Back in 2011-2015 would have been the time to accumulate properties in AZ.

I’m looking at properties now that are $1m that were $500k in 2015. If you purchased 2 of them you’d be doing pretty well now.

Instead I bought an R8 and a $120k place all cash. The $120k place is worth $220k now. I could have bought 2 of the $500k homes and put down $100k on each one. Rented one out and lived in another and I’d be $1M richer now.

$200k a year is pretty fast lane.

This is just an example, obviously you don’t know if real estate will go up or down but it’s a risk just like with a business.

 

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[EvanOkanagan]

I didn't read the entire thread, but here's my take on RE.

1. RE is overvalued in many different markets due to the ridiculously low interest rate ongoing since 2008. However, this is not enough to create a bubble. To have one, actual demand should be lower than estimated demand. The question we should be asking is therefore: will people need more space, or less in the future?

One way to look at this is to look at the demographic pyramid (and immigration number). As long as a country's population is growing, RE is a sure investment. If you have more and more people, you will need more and more homes.

Since the West is about to have much less people than it was used to, RE is doomed to lose value over the really long-term (50 years or so).

The second way to look at it is the Internet: if the online trend perseveres, it is obvious that there will be fewer need for commercial RE.

2. Not everything is overvalued because not everything has the same demand: it all depends on the location. There will be places that will always have demand (city centers of student cities), just like there will be places whose demand depends on trends, economic growth, etc.


3. I hardly see how RE can be a fastlane strategy. To me, it's similar to the stock market: you invest in it once you became rich, not to become rich, unless you decide to contract a mountain of debt. But even then, you'd better buy a small company and grow it instead of investing into RE. RE is slow to repay itself because let's be honest, it's pretty chilled. You don't do much besides owning the place.

When you rent out a house for 4, it will always be a house for 4. However you manage it, you can't scale the value of your asset.


4. RE is not efficient AT ALL.

In Belgium, you can buy RE in some places for a price approximately 40% lower than in Brussels, and subsequently rent it out to students at a price approximately 20% lower than you would in Brussels, so the ROI is much better than in Brussels. It's been like that for 6-7 years now.

In Bruges, prices per sq/m are 3x what they are in Brussels, and yet, the rent is..50% cheaper. Go figure this out.

I actually think RE is the least efficient of all markets. When I look at prices, it always seems undervalued, or overvalued.

Oil is efficient. So efficient that when there is too much of it, producers will pay you to get it.

I disagree somewhat on RE not being fastlane. If you make the right moves and utilize “intentional iteration” as MJ calls it in TMF , it can be.

In about 5 years, I was able to grow my net worth to over 1.5m while at the same time having a mostly passive positive cash flow (managed) over 5k/month by investing in rental properties (long term leases). Have been able to take one month trips while not working at all and come back home in a better financial position than I was in when I left. At the same time I’ve also “house hacked” where we’ve lived essentially paying almost nothing for housing or at one point getting a surplus positive cash flow on top of mtg, taxes, even utilities where we’ve lived (and in decent homes).

Definitley takes knowing what you’re doing but is possible.

 

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[Johnny boy]

There will be a flood of foreclosures hitting the auctions around next summer once eviction moratoriums are lifted and the backlog of foreclosures comes through the pipeline.

I don't want to invest in much real estate. I believe it's too efficient of a market

 

[Johnny boy]

Johnny Boy, I would be interested in talking to you about what you are doing right now to automate your businesses? I am a commercial real estate investor and broker, I own several commercial buildings in different states. The COC (cash on Cash) returns I have seen in the past are in the range of 10-20% backed by an asset that matures in equity over time. Real estate has been a great investment for me. I hear what you are saying about ROI and agree with you that achieving a 10x immediate return is mostly only going to happen in a Service model that you can leverage online. An asset like real estate will likely have a cap based inflation for growth and return. This is the beauty of online that you are talking about. If you are able to create a good foundation for people to work and provide a service to others and you provide value and people see the value in your service the upside is pretty limitless. I still believe that you should consider Real estate as a great way to have your money work for you. I mean you have to live somewhere right? Even owning a house that you live in can outweigh renting. For example, if you can find a duplex or fourplex to purchase or a place with a separate unit, then live in one unit renting out the other units, supplementing your mortgage from the other paying units. Now in this situation, you have just created passive income or at the very least eliminate the largest monthly expense any person has (RENT/MORTGAGE). The wealthy have several levels of income, real estate is a large portion of many successful people. I implore you to reevaluate this market for a viable investment platform. Example: With the team for sale, in 2000 philanthropist Woody Johnson whose grandfather, Robert Wood Johnson II, expanded Johnson & Johnson. Johnson was unknown among the other NFL owners at the time of his $635 million purchase of the Jets franchise. Today the Jets franchise is worth more than $3.55 Billion dollars. It's not quite the 10x marker but it's a pretty damn good investment. That value is largely based on the Real Estate. Look at Gary Vee one of the biggest doing it online, even he wants to own the Jets. I finish by saying this; having a diverse portfolio is the way to hedge all markets.

My opinion:
I am not wealthy enough to hedge myself. People with "diversified portfolios" with under 50 million in the bank are pussies

I don't own because if I'm still stuck in the same house for more than 3 years my life is growing to slowly. Last year was 1900 a month for my place. This year it's 3200. In a few years I'll be living in Medina but I'm not going to purchase a home. The only property I'm buying will be for the business. My landlord thinks he's a genius. I think he's a moron. He's twice my age and has to listen to me complain about how the dishwasher is making a noise. That's no way to live. If I had his amount of equity/net worth/access to capital I would be doubling my money every year with a business, not getting little puny rent payments. And I am doubling my money. We're twice as big as before and will be twice as big next year.

Supplementing a mortgage or rent payment: I told my girlfriend to get a job or start a business. Brings in another 3k a month that I put towards rent and food.

The business automation is 1. You get a recurring client that pays monthly with autopayments. 2. You hire other people to do the work. (For location-dependant business only: 3. You build a great single location and then franchise it) There's gonna be management issues, little problems here and there, etc. It's not fully automated by any means. It certainly beats having a job though.

 

[WJK]

It certainly can if you do it properly. Back in 2011-2015 would have been the time to accumulate properties in AZ.

I’m looking at properties now that are $1m that were $500k in 2015. If you purchased 2 of them you’d be doing pretty well now.

Instead I bought an R8 and a $120k place all cash. The $120k place is worth $220k now. I could have bought 2 of the $500k homes and put down $100k on each one. Rented one out and lived in another and I’d be $1M richer now.

$200k a year is pretty fast lane.

This is just an example, obviously you don’t know if real estate will go up or down but it’s a risk just like with a business.

Hindsight is always 20/20.

 

[Sauce]

Dude this just happened to me too.

My duplex I bought for 270 in 2017 I figured I would hold forever. Then the market went from 300 > 350> 400... and I started looking to refinance. Figuring Id atleast pull some money out. Start talking to realtor friends and we figure I could probably sell for 450. Market keeps going up, look at listing for 500... List it for 539 and get an offer at 560...

Absolutely insane. The argument that businesses can surpass current real estate appreciation is difficult to make today especially when looking at the work loan compared to the two. I bought a company last year and tripled it but my real estate still appreciated faster.

Im not saying its sustainable at all. I netted what I paid in 2017 and I dont believe that that can last at all. Sure supply is low but for many markets it is affected by rent and for alot of people where I live they cannot support increased rents. We just dont have the industry here. We're completely driven by a California invasion.

I think the music stops when the stimulus stops. We're already over the edge, I think its just freefall now.

That is really crazy.

I still don't get the market, but I am holding my 45+ rental units as a hedge on inflation.

They are cash flow positive right now, and if I sold, I wouldn't have a place to put my capital without a big tax hit.

Another concept I have been considering is that a house is really a basket of goods. Take a look at all of the components that go in to it - lumber (Lumber package for a 2300 SF home Jan 2020 $21K now $46K), concrete (2018 $95/yard now $130 per yard), then you factor in the labor which has gone up tremendously (Tile install 2015 1.50-2.00 PSF now $3-$4 PSF). So, is the RE market really overpriced or just finally catching up? Did the printing of trillions of stimulus induce a rapid inflation?

It should be interesting to see what the next year brings.

I wonder what @SteveO and @JScott opinions are on this.

 

[PizzaOnTheRoof]

My landlord thinks he's a genius. I think he's a moron. He's twice my age and has to listen to me complain about how the dishwasher is making a noise. That's no way to live.

Maybe he's happy making semi-passive income and enjoys the work. Not everyone wants to run a "doubling every year" business especially if they're older.

Your landlord is probably thinking: "My tenant thinks he's a genius. I think he's a moron. He's working 60 hours a week rather than putting 3.5% down on income-producing assets that will give him semi-passive income for life in <10 years. That's no way to live."

 

[SteveO]

That is really crazy.

I still don't get the market, but I am holding my 45+ rental units as a hedge on inflation.

They are cash flow positive right now, and if I sold, I wouldn't have a place to put my capital without a big tax hit.

Another concept I have been considering is that a house is really a basket of goods. Take a look at all of the components that go in to it - lumber (Lumber package for a 2300 SF home Jan 2020 $21K now $46K), concrete (2018 $95/yard now $130 per yard), then you factor in the labor which has gone up tremendously (Tile install 2015 1.50-2.00 PSF now $3-$4 PSF). So, is the RE market really overpriced or just finally catching up? Did the printing of trillions of stimulus induce a rapid inflation?

It should be interesting to see what the next year brings.

I wonder what @SteveO and @JScott opinions are on this.

I sold all my apartments about 5 years ago. Sold my commercial retail building a couple years ago.

I still have the golf course which incorporates a lot of land but the value is mostly in the product.

I bought land that is being improved with roads, access, utilities, etc... This is more of a hobby but it should bring in some great returns.

Bottom line is that I bailed out of the main businesses that was making me a lot of money. While I jumped ship early in this cycle, was still a bit leery after the last crash.

Everything I own now, house, golf course, and land is all free and clear. Basically went into retirement. While I was waiting for a crash, too much time has passed. Motivations have turned toward recreation and pleasure.

Just an example of what I have seen over the past number of years. When I started purchasing apartments in Phoenix around 2003 price per unit was around 25k to 30k. In 2007 prices were around 40k to 50k. 2010 was down to 15k to 22k. I sold out in 2016 for around 76k average. Last year I looked again and they were up over 150k.

I could not imagine how they got there. Seems like it would be really difficult to make any cashflow with these prices.

 

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[Joshuatree]

Everybody knows about it. It's too expensive to be overlooked. It lacks creativity and there are too many restraints. All of these things come together to drastically limit your upside.

I own a service business. My employee costs $17 an hour. I sell his work for what equates to roughly $170 an hour. I will never buy a house and then immediately sell it for 10 times what it's worth. If you do then you have found the deal of a lifetime. I am not out here looking for the deal of a lifetime. I'm looking for a deal I can make every single day, and at a giant return.

When I say it is too efficient, I mean that the competition in the marketplace has ensured that there is little profit (in my opinion). For people who lack the ability to grow a business, or don't want to run a business, and are comfortable with only making a few million dollars, I would suggest real estate.

For those that want to build something that brings in exponentially larger returns, with arguably less work, in a more scalable way, I suggest a business. Even when it comes to passive investments. (passive investments won't return an exponentially larger return but an active business will)

For example, before I ever become a landlord, I will start a classic car leasing company. I can expect to receive a passive 15+% return backed by assets. All because I chose to be in a less efficient market and add some value instead of doing what hundreds of thousands of other people are doing (or trying to do) in real estate.

a little off topic but just my opinion. ^

Johnny Boy, I would be interested in talking to you about what you are doing right now to automate your businesses? I am a commercial real estate investor and broker, I own several commercial buildings in different states. The COC (cash on Cash) returns I have seen in the past are in the range of 10-20% backed by an asset that matures in equity over time. Real estate has been a great investment for me. I hear what you are saying about ROI and agree with you that achieving a 10x immediate return is mostly only going to happen in a Service model that you can leverage online. An asset like real estate will likely have a cap based inflation for growth and return. This is the beauty of online that you are talking about. If you are able to create a good foundation for people to work and provide a service to others and you provide value and people see the value in your service the upside is pretty limitless. I still believe that you should consider Real estate as a great way to have your money work for you. I mean you have to live somewhere right? Even owning a house that you live in can outweigh renting. For example, if you can find a duplex or fourplex to purchase or a place with a separate unit, then live in one unit renting out the other units, supplementing your mortgage from the other paying units. Now in this situation, you have just created passive income or at the very least eliminate the largest monthly expense any person has (RENT/MORTGAGE). The wealthy have several levels of income, real estate is a large portion of many successful people. I implore you to reevaluate this market for a viable investment platform. Example: With the team for sale, in 2000 philanthropist Woody Johnson whose grandfather, Robert Wood Johnson II, expanded Johnson & Johnson. Johnson was unknown among the other NFL owners at the time of his $635 million purchase of the Jets franchise. Today the Jets franchise is worth more than $3.55 Billion dollars. It's not quite the 10x marker but it's a pretty damn good investment. That value is largely based on the Real Estate. Look at Gary Vee one of the biggest doing it online, even he wants to own the Jets. I finish by saying this; having a diverse portfolio is the way to hedge all markets.

 

[WJK]

I agree , but when it comes down to it that's the bet most of these investors are currently making who are staying in, investment wise you can see the commercial sector is massively overbuilt long term, Covid has just thrown fuel on the fire that was really already burning.

I personally don't know whether the government will bail them out or how, but I suspect it will.
I am predicting a massive bailout ala the financial bail out in 2008 but economy wide, yes some sacrificial lambs will be shown but I suspect this bubble is not going to pop just yet.

Yes. And here's a good example. In Los Angeles, around 1990, we had a total meltdown in the office market and in the warehouse market. That's where it started and it took down everybody else -- including the whole Savings and Loan industry. It was the start of personal computers.

My ex worked for a major oil company. (Yes, I was a trophy wife.) His office was in their downtown towers. I was in RE. That oil company sold its twin towers to a Japanese investor group. They were occupying 48 floors in those buildings. They built a new office building on the wrong side of the freeway. There they occupied 2 floors. They fired all of the secretaries, receptionists, and admin. assistants. They gave everyone a voice mail account and a PC. They had to make an appointment for office time. Everyone worked remotely.

That trend cascaded through the whole office market. We had "see-through" buildings -- totally vacant office high rise buildings that had been 100% occupied before the PC. That trend crashed all segments of the office space market.

And then, the PC brought about on-time deliveries. The warehouse segment of the RE market crashed. Everyone had previously had 60 days of inventory on hand. Suddenly, they had 3 to 5 days of inventory. No one needed their big warehouses anymore -- gobs of vacant space.

Our mantra in RE was "Stay alive until 1995." We figure it would take 5 years for the market to recover. Then the apartment and residential markets went south. Friends lost their entire portfolios.

1995 came and went with no relief. It took the rest of that decade to absorb the excess inventory.

After playing in the RE market for 44+ years, I'm really head-shy about this moment!

 

[WJK]

The Residential market where I live is unreal right now (a few hours out of Vancouver, Canada).

I’m a realtor so I’ve always got my finger on the pulse. The prices have never been higher than they are now. 4-5 months ago, I was looking at listing my house, and figured I would list for $775k and likely get around 750k at the end of the day...

The market started getting hotter.. we love our house so weren’t eager to just let it go, but if we got the right price then yeah.

I tested it out on a realtor networking group a month ago at 800k... lots of interest. Then I put it up to 825k.. still decent interest.

We decided, what the hell, let’s throw it on for 850k and if it doesn’t sell, we still love living there.. and it’ll probably shake out around 825k.

Goes live on the MLS, and in two days we have 25 showings. 3 offers and the top offer is also unconditional (cash offer and no inspection needed.. on a 1970 house). We just sold for $865k. Over 100k more than I thought we could get around the summer time.

Could the market go up anymore? It’s still super hot where I live but I don’t see this growth as sustainable...

I've been through several of these "hot" markets -- only to have them crash at our feet. It's not "sustainable". The housing market depends on the job market and the income of the average buyer versus the cost to own (the payments, the upkeep, the taxes, etc...). Homeownership must also compete with the average rentals in the area.
The idea of living in a place that costs $850,000 is pretty scary to old tightwads like me. My first house was a 2 bedroom, one bath with a single car garage. It was known as a "GI special" tract house. We paid $27,500 for it. But, minimum wages at that time were $1.65 per hour. So, it was a day or two ago...

 

[WJK]

The current market makes me think of the warren buffett quote "be fearful when people are greedy and greedy when people are fearful". On one hand we are in the middle of a global "pandemic". States are being shutdown, unemployment is at a record high. On the other, the stock market is about to eclipse 30k and the real estate market is on fire. It doesn't make sense. I have pivoted out of residential real estate and I am waiting for things to make more sense.

I too am sitting on the sidelines. Usually, I'd be doing my research to buy a trust deed or two after Christmas -- it's my favorite time of year for big purchases (TDs, heavy equipment, etc.) But, I'm on hold waiting to see which way the RE market in my area goes. I'm looking for trends of where the "herd" is going next. I too move against the market -- buy when most are selling -- sell when most are buying. In times like this, "Cash is King".

 

[Sauce]

Ok, I guess I had missed a bunch of stuff.

Thank you, I understand better.

What I meant was regarding asset value "explosion".

You can start a company with $1000 and grow it to one million.

You can't invest into real estate with $1000 and grow it to one million.

I guess what I am trying to say is that the value of a company can explode by 100000%.

This isn't the case with real estate (because you need to borrow).

It's correct, right? Or am I crazy?




The embodiment of the desert of desertion

You can absolutely grow $1k to one million in RE. Takes some time, and lots of trading up, but it can be done (I will take $30k to $1mm plus early next year in the span of <2 years).

 

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[Sauce]

@WJK @JScott thoughts on what happens to SFR real estate prices once interest rates rise? Specifically curious about Los Angeles which has a perpetual housing shortage... Do you think they'll "crash", dip just a bit, level off... or even continue to rise?

I think that housing prices will continue to rise for a few reasons.

1. Simple supply and demand. We aren't building enough houses to keep up with demand. In 2008, supply surpassed demand.
One Caveat is there are going to be markets where there are winners and losers. I moved to Lubbock TX in 2008 and there was no crash. However the place I moved from, Reno NV, there was a huge crash.
Currently, everyone is bearish on Office. I am bullish on office in select markets and locations. Quick example, I bought a 7k sq foot office building in March of last year. I had it leased up before I finished remodeling it for one simple reason. The market I bought in has a 98% Occupancy rate in office, the location is on the busiest street in the town, and it is very difficult to build new in the municipality due to bureacracy and impact fees. Buy on fundamentals of the market and don't make overgeneralizations about all markets.
2. Inflation. Even though the gov is telling us there is no inflation, EVERYTING is more expensive. Easy example, Oriented Strand Board (OSB) early 2019 Price $10 Current Price $33. Or take a simple 2x4x8 early 2019 price $3 Current price $6.56. Not to mention labor has gone through the roof.
Houses are a bundle of goods and that bundle is getting more expensive to put together. I don't think the prices of the commodities (lumber, PVC, labor) are going to be going down in the near future.

 

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[WJK]

We're just about to see the results of the Federal and State lockdowns on the real estate market. The hot single-family housing market is still with us in many markets. I'm not sure if 2008 will repeat itself in that market segment. But, it sure feels like it could be a bubble again. If it a repeat of history, it will get personal for a lot of people really fast.

With all the disruptions in the commercial and office market, there's going to be a lot of pain coupled with many opportunities available. The path forward won't be well marked. That uncertainty will cause a lot of confusion and missteps. A few people will come out on top either by dumb luck or well-calculated guesses and gambles.

 

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[WJK]

I hear what you are saying but you are glazing over what happened in 2007,08,09. Many properties were captured at rock bottom prices. Because of this low entry fee for many owners they are able to create a better stable property even in times of low rents. Commercial Real estate is about building wealth with OPM. And now because of the internet, small mom and pop investors have an opportunity to now invest in larger commercial real estate deals, when before it was more coveted for the accredited investors. Everything is cycle-based.

EXCEPT, this time there is a disruption in the cash flows from an oversupply of commercial properties and a long term reduction in the number of tenants for that class of property. I'm not "glazing over" any of the cycles. I've lived through several of them. What I am saying is there is a fundamental change in the basic structure of our society. How can we, for what purpose, and at what cost are we going to convert these commercial properties to other uses? The only reason to buy property is to create income streams or to personally use it. What good is a "big deal" where the property is sitting vacant and has no chance of being rented or occupied soon? It becomes a rock around your neck rather than an asset.

 

[EvanOkanagan]

The Residential market where I live is unreal right now (a few hours out of Vancouver, Canada).

I’m a realtor so I’ve always got my finger on the pulse. The prices have never been higher than they are now. 4-5 months ago, I was looking at listing my house, and figured I would list for $775k and likely get around 750k at the end of the day...

The market started getting hotter.. we love our house so weren’t eager to just let it go, but if we got the right price then yeah.

I tested it out on a realtor networking group a month ago at 800k... lots of interest. Then I put it up to 825k.. still decent interest.

We decided, what the hell, let’s throw it on for 850k and if it doesn’t sell, we still love living there.. and it’ll probably shake out around 825k.

Goes live on the MLS, and in two days we have 25 showings. 3 offers and the top offer is also unconditional (cash offer and no inspection needed.. on a 1970 house). We just sold for $865k. Over 100k more than I thought we could get around the summer time.

Could the market go up anymore? It’s still super hot where I live but I don’t see this growth as sustainable...

 

[Connor]

I do believe there is a coming recession, and real estate will be included in it. However, there are a few things to note (in my opinion):

1. Real estate tends to lag significantly behind the economy- 2008/9 was the bottom of the economy last time, but real estate prices didn't hit their low points until 2010/11.
2. Given the government protections on evictions/PPP/stimulus and how much the banks don't want to end up with the assets like they did the last go around, the drop will be further postponed/stretched out. What the heck is a bank going to do with a vacant hotel or shopping center?
3. Real estate performance will vary drastically by market and submarket. Remember 2008, when Texas pretty much didn't have a recession? We'll see similar things happen in areas where there is continued growth. While the tourism industry and business travel has hit the Carolinas (where I am), this area will fare far better than the Northeast or West Coast.
4. It will heavily vary by asset class. Hospitality & retail of course are getting hit, but multifamily and industrial are holding up well. Here, we can't get enough warehouse space, with all of the reshoring and e-commerce booming.

So I am a firm believer that there are ways to smartly invest, and it depends what your time horizon is. In this marketplace, prices could go down in the next 2-3 years, but if you're looking at 5-10+, it's a completely different story.

 

[Sauce]

Actually, they are cycles that occur regularly. I've been through several over the years. They are trackable. I don't know the exact moment they will happen, but I know when things are getting overheated or going sideways. The wild card is an unforeseen event, like this virus shutdowns. But, the underlying issues were already festering in the commercial RE markets. Those wild cards are generally a tipping point, not a determinate.

The current market makes me think of the warren buffett quote "be fearful when people are greedy and greedy when people are fearful". On one hand we are in the middle of a global "pandemic". States are being shutdown, unemployment is at a record high. On the other, the stock market is about to eclipse 30k and the real estate market is on fire. It doesn't make sense. I have pivoted out of residential real estate and I am waiting for things to make more sense.

 

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[Envision]

The Residential market where I live is unreal right now (a few hours out of Vancouver, Canada).

I’m a realtor so I’ve always got my finger on the pulse. The prices have never been higher than they are now. 4-5 months ago, I was looking at listing my house, and figured I would list for $775k and likely get around 750k at the end of the day...

The market started getting hotter.. we love our house so weren’t eager to just let it go, but if we got the right price then yeah.

I tested it out on a realtor networking group a month ago at 800k... lots of interest. Then I put it up to 825k.. still decent interest.

We decided, what the hell, let’s throw it on for 850k and if it doesn’t sell, we still love living there.. and it’ll probably shake out around 825k.

Goes live on the MLS, and in two days we have 25 showings. 3 offers and the top offer is also unconditional (cash offer and no inspection needed.. on a 1970 house). We just sold for $865k. Over 100k more than I thought we could get around the summer time.

Could the market go up anymore? It’s still super hot where I live but I don’t see this growth as sustainable...

Dude this just happened to me too.

My duplex I bought for 270 in 2017 I figured I would hold forever. Then the market went from 300 > 350> 400... and I started looking to refinance. Figuring Id atleast pull some money out. Start talking to realtor friends and we figure I could probably sell for 450. Market keeps going up, look at listing for 500... List it for 539 and get an offer at 560...

Absolutely insane. The argument that businesses can surpass current real estate appreciation is difficult to make today especially when looking at the work loan compared to the two. I bought a company last year and tripled it but my real estate still appreciated faster.

Im not saying its sustainable at all. I netted what I paid in 2017 and I dont believe that that can last at all. Sure supply is low but for many markets it is affected by rent and for alot of people where I live they cannot support increased rents. We just dont have the industry here. We're completely driven by a California invasion.

I think the music stops when the stimulus stops. We're already over the edge, I think its just freefall now.

 

[MJ DeMarco]

In terms of residential real estate, it seems like inflation, cheap money, and supply problems are causing the market to explode to the upside. I just looked at a new build in the Park City area (Utah) and the builder confirmed what I was seeing visually with prices... the cost to build (labor + materials) is skyrocketing -- and it is causing prices to go up, literally monthly.

A house that I considered for $3M was gone in four days. If it survives the market for two weeks, next month the price goes up $3,250,000.

I've never seen anything like it.

 

[WJK]

Yes, there are airbnbs, but mainly, real estate in Brussels depends on students and foreign workers. And none of them are here.

70% of inhabitants weren't born in Belgium. With the pandemic, a bunch of workers is back in their home country.

As for students...a friend of mine didn't get accepted into a program in September, then the university called him back in February to say that eventually, he could be accepted...that's how desperate for students they are.

I don't know about the debt level, but seeing the prices so high in such an empty market is weird, it simply doesn't add up.

You must realize that a lot of the owners have never been here before. They have never seen this type of RE market so they freeze. They don't know what to do. And they were totally unprepared. I have a lot of people around me in that same boat.

Before this market, I tried to tell some of them what could happen. I was told that I was stupid and I didn't know how to make money in RE because I don't believe in using heavy leverage. I belonged to a landlord's group that is no longer meeting because of the virus lockdowns. Within that group, I was treated like an unloved, redheaded stepchild. I own a mobile home park, which they considered to be an inferior property compared to their multi-family units. And I was trying to tell them that leverage and these high LTV (loan to value) ratios could get them into trouble. Now, I have some of them coming to me for RE advice. Go figure.

 

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[WJK]

All players in the current commercial(large, medium, small) that are in trouble are hoping for a government bailout as that is the only thing that can save them at this point.

It was the same for the investors in the mid-1970s, around 1980, at the beginning of the 1990s, and again in 2008. Playing the game has risks, seen and unseen. It's cyclic. No, the government doesn't bail out investors. These disasters, regardless of who is at fault, are part of the game. It's up to the investor to become better at his craft.

 

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[WJK]

I think commercial RE is bubble forming (or already formed).
I can't count how many buildings were built in past 5 years around place i live
that supposed to be office-for-rent type buildings.

In hindsight it's pretty obvious - anything that promises easy and safe profits
will become bubble.
It's slightly educated guess but there is big surplus of investors cash and they build wherever is land is available.
Since residential market bubble burst is still fresh in investors minds, they invest in commercial.

Commercial RE used to be the holy grail in the business. Those who could afford to go into that market had the ticket to steady, rising income. And there were almost no management/maintenance problems for the investor, in many of the long term leases, which were executed with solid national tenants. (That was before the internet and on-line shopping.) Based upon that truism, the commercial markets were totally over-built during the 1990s with OPM (other people's money). Adding the recent virus lock-downs to the mix is tipping the scale toward a segment wide disaster.

 

[traction2]

Buy what? What segment of the market? Where?

Dry humor..... Referring to have you ever heard an agent discourage a potential client from buying?

 

[socaldude]

I’m not a real estate investor and I’m really not that knowledgeable about it but I’m guessing it will take a hit as payments and interest can only be deferred for so long. So the debt aspect is probably the riskiest part of this sector.

But it’s also helpful to keep in mind that it’s a part of our financial system and the last thing to collapse will be our financial system as they have VIP access to unlimited liquidity. And the central bank corporate partnership loves anything “backed” by this asset or that asset and even better if it cash flows.

I personally would be more worried about what it does to Main Street as that is always what gets hit the hardest. And the social consequences of all this.

But if prices collapse it would be a good time to get some cheap properties paid in cash. As it would eventually pick up again thanks to infinite bailout money.

 

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