I'm worried about the real estate market right now

[Kid]

And then there's this: Where else can I invest my money and have the same NOI (net operating income)? Interest rates are so low that it's almost impossible to make money work to create cash flow. Yes, I could open another business. But, that's a young girl's game -- been there, done that. I know my assets. I know my tenants. I'm in control of my income. Yes, at times it's inconvenient, but being broke would sure be worse.

Also, if you invest in some startup there is very low chance of getting money back.
If you buy property and its not bringing money at least you can take hit of say 20% and sell it to someone below market price.

Some might argue that stock market is always going up, in enough long perspective (like 30 years) and it's good investment.
But i remember one person saying that, yes its true that index funds go up on average, but only when you have balls to not sell them at market crash (the dip) and even if you won't sell you'll still have to wait another 5 or so years to break-even.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[biophase]

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.

Are you putting your ecommerce profits into the real estate? I'm assuming yes because you have 50% equity in your new purchases?

 

[WJK]

Also, if you invest in some startup there is very low chance of getting money back.
If you buy property and its not bringing money at least you can take hit of say 20% and sell it to someone below market price.

Some might argue that stock market is always going up, in enough long perspective (like 30 years) and it's good investment.
But i remember one person saying that, yes its true that index funds go up on average, but only when you have balls to not sell them at market crash (the dip) and even if you won't sell you'll still have to wait another 5 or so years to break-even.

I've tried some side investment and I haven't won the brass ring yet. They have consistently lost my investment nut.

In fact, the stock I own in a major mining project just went down today. Again. Will they build out the project? I don't know. Now I must decide IF I should sell or continue to gamble.

I know real estate. Yes, it is a pain in the #@%* at times. Yes, it does take constant monitoring and work. BUT, the first of the month just came and I'm going to the bank again today to make another deposit.

 

[Envision]

Are you putting your ecommerce profits into the real estate? I'm assuming yes because you have 50% equity in your new purchases?

No, not yet. Ive been doubling down on my inventory. My only ecommerce draw would be if I end up buying this warehouse.

My equity has balanced out because I live in one of the fastest growing cities in the country and bought years ago.. we have a massive supply problem which is causing crazy "appreciation"

Duplex i bought for 155 is worth 450 now. sold another one for 560k last week that I bought for 270k

Census declares Meridian as 5th fastest-growing city

Meridian continues to be one of the fastest-growing cities in the nation.

www.idahopress.com

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[WJK]

My fears for the real estate market were well-founded. The only segment that is apparently booming is the single-family house market in most areas of the USA. Conversely, rents are reportedly falling in New York City and some other major cities.

Several segments of the commercial markets are falling apart. I recently read about a company that shorted bonds that were primarily secured by shopping mall property debts. That company cashed in their short positions and made a 2 billion dollars payday. What are the local governments going to figure out to do with those failed properties? How are they going to plan the land use and zoning? How many are going to end up in foreclosure sales and/or tax sales?

And then there are all of those commercial properties damaged in all of those inner-city riots this last summer. I experience the Rodney King riot in Los Angeles all those years ago. Those neighborhoods have never fully recovered.

How are local governments going to make up the lost sales tax and property tax revenues?

And, here's the big question -- what's going to happen when the restriction on evictions and foreclosures is lifted???? How many of those back rents and payments are going to come due in full... all at the same time... How many landlords have back property payments tied to the rents due to them? Will the landlords be treated differently from the tenants? The government just extended the restriction for another month. When is it going to be over? Is the fat lady going to sing?

 

[Guest-5ty5s4]

In my mind, the low rates are a two-edged sword. They can get a person into a property that can be wonderful for the investor. (When I started in 1976, SFR interest rates were 9.5%.) On the other hand, it's a way to control the investor by keeping him in debt forever. Those debts and their resulting payments become the velvet handcuffs that are a backdoor to controlling the RE housing market.

This. Don’t even get me started on my rant about the covid situation combined with PPP loans.

 

[WJK]

This. Don’t even get me started on my rant about the covid situation combined with PPP loans.

I agree. It's going to be bad when the secondary market and Wall Street can start foreclosing or collecting on all these commercial loans that are in default and forbearance. I read that the plan is to segment the back payments into an additional amount that will be added to the regular payments. Yikes! And then there are the tenants who haven't been paying their rents. When allowed, the RE owners will need to evict them -- an expensive and long process. A lot of them are going to fight like hell to continue to live rent-free. It's really hard to get someone to pay who hasn't been paying... or even get them to admit that they owe the back rent and late charges. Then the owners must get those vacant units ready to rent -- which is also going to add to the crushing burden that is being faced by the owners. What happens if they are heavily leveraged and have a thin profit margin? Then those tenants who are evicted are going to have both a record of the eviction and judgment against them -- making it almost impossible for them to find different housing. If that pool of undesirable tenants is large enough, it could hurt the number of qualified tenants -- which can push up the vacancy rate for the RE owners -- further complicating any recovery. The dark clouds for the commercial RE market are gathering into a self-feeding storm.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[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]

There are lots of commercial RE markets, and they are not all in the same situation...

Sure, office and retail are in a bad place. But, if you own self storage, industrial or flex space, you've probably made a killing this past year, and will likely make a killing over the next couple given industry trends.

The nice thing about commercial are that there are a lot of non- and negatively correlated asset niches. So, it's not difficult for investors to diversify in a way where the the blended risk is low, but with long-term upside.

You're right. There are some "golden niches". My mobile home park for low to moderate-income tenants is one of them. I also have some RV spaces that I usually rent in the summers. The tourists didn't come this last summer so those were mostly down. My sleeping rooms in the back of my office have also been quiet. We're in a very rural area and isolated from a lot of the chaos.

It just depends on what part of the market you are looking at. In our towns here, the retail spaces have a lot of vacancies. The self-storage market now has some strong competition. U-haul took over an old big-box-store space and converted it to heated self-storage units. They are very predatory. They are sure giving all of the little guys a run for their money.

I'm so glad I'm not in the major city's markets where the We Work empire imploded.

 

[Determined2012]

@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!!!

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[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]

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.

@snowbank and I met with a builder on Wednesday in Sedona. He said that just getting an architect to draw up plans for you will take 6 months. They are so behind with everyone wanting to build a house. Then getting permits through the city is backlogged too. He said probably one year to break ground and another year to finish. On top of that lumber prices are super high now.

Also the contractor that did my 2018 remodel in Scottsdale told me he’s booked until end of 2022. I was surprised people would wait that long for a remodel, but he said they are usually second/vacation homes so it really means they just miss out on one winter here.

I can’t believe rates are so low. People can afford so much more house right now!

 

[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.

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.

My lumber and materials prices have just about doubled during the last year. You're right about the prices of the materials. I'm glad that I own a sawmill. I just ordered 2 semi-truck loads of logs for us to mill this spring.

About the residential prices, I have seen those markets and they are scary. I've also seen them fall flat after their big run-ups. I'm head shy about that market too as well as the commercial sectors. Usually, this time of the year, I'd be out looking for privately owned (OWC) trust deeds to buy. Right now I'm just sitting on my strutting money, waiting it out, to see where things go. I have the itch to go "bird-dogging" and make a deal or two -- BUT...

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Raja]

sorry for replying with no experience,
isn't it boom before burst?

I have read somewhere(Now I am unable to find it again), real estate crash later as it takes time to buy or sell a property so the 2008 crash impacted brought down the price of real estate in 2011. (in us)

there might be my bias here as I am looking for a real estate crash so I could buy my first property in USA.

again, I am coming from a place of inexperience. you guys are much wiser than me.

 

[Raja]

Similar to source.

 

[WJK]

sorry for replying with no experience,
isn't it boom before burst?

I have read somewhere(Now I am unable to find it again), real estate crash later as it takes time to buy or sell a property so the 2008 crash impacted brought down the price of real estate in 2011. (in us)

there might be my bias here as I am looking for a real estate crash so I could buy my first property in USA.

again, I am coming from a place of inexperience. you guys are much wiser than me.

Yes, it's one cycle after another. But, trying to predict and act on those peaks and valleys will make you crazy and keep you broke.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Raja]

Yes, it's one cycle after another. But, trying to predict and act on those peaks and valleys will make you crazy and keep you broke.

@WJK thank you for the sound reply.

not trying to time the market, I just not earn that high enough at this time to invest in real estate at this time.

right now, just keeping an eye on the market. because my credit is non-existent in the USA I'll have to be ready to have at least 50% as a downpayment.

 

[Kal-El1998]

I think a lot of people are worried about it as well. The thing though is that real estate does create a lot of wealth for a lot of people besides just investors. I remember kris krohn did a video about this though and explained it pretty well. Now that being said, I don't put it past the gov to potentially F everything up though. Especially considering we have a dude with dementia in right now, but I digress. Personally though I've gone virtual with the real estate business model and find it to work better.

 

[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.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[HoustonRealtor]

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

I think being part of the real estate business as a service provider sounds makes much more sense. You invest your time, energy, and expertise to make a deal happen and for whatever reason, the deal doesn't close, all your losses are your time.

 

[Redwolf]

@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?

 

[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.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[WJK]

@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 was in the Los Angeles housing market for 30 years. I saw it crash and burn more than once during those years. In 1979, housing interest rates were 12 1/2 %. Then in 1980, they went to 21% - 22% just about overnight. It was to curb runaway inflation. Talk about the housing market coming to a complete stop!

There are other factors that have put the brakes on that market -- riots, earthquakes, etc.

The only reason the prices could run-up so far this time is because of the very low-interest rates, which have distorted the normal market forces -- since Wall Street, institutions, and the secondary market took over financing for RE. That take-over happened in the 1990s when the Savings & Loan and the Thrift industries crashed and burned. Another one of those "got-ya" moments in the housing market and commercial market that lasted a decade.

 

[Guest-5ty5s4]

I was in the Los Angeles housing market for 30 years. I saw it crash and burn more than once during those years. In 1979, housing interest rates were 12 1/2 %. Then in 1980, they went to 21% - 22% just about overnight. It was to curb runaway inflation. Talk about the housing market coming to a complete stop!

There are other factors that have put the brakes on that market -- riots, earthquakes, etc.

The only reason the prices could run-up so far this time is because of the very low-interest rates, which have distorted the normal market forces -- since Wall Street, institutions, and the secondary market took over financing for RE. That take-over happened in the 1990s when the Savings & Loan and the Thrift industries crashed and burned. Another one of those "got-ya" moments in the housing market and commercial market that lasted a decade.

To other people reading this:

Yeah, I'm no expert, but it seems intuitive to me that borrowing money at extremely low interest rates = lots of buyers and requiring super high interest rates = almost no buyers, or limited to cash-only buyers.

As we all know, most people do not have enough cash to write a check for a house.

Most people (hopefully) are also smart enough to realize 20% on a mortgage is not a good deal.

So those factors can overwhelmingly change the landscape. I trust @WJK 's experience big time.

It seems obvious to me too that the same thing happens to things like tuition, when student loans are cheap and readily available -> demand goes up, tons of buyers using borrowed dollars, and sellers raise their prices...because they can.

wouldn't you raise your prices if you could? If there was a seemingly endless stream of buyers using other people's money?

 

[Lyinx]

To other people reading this:

Yeah, I'm no expert, but it seems intuitive to me that borrowing money at extremely low interest rates = lots of buyers and requiring super high interest rates = almost no buyers, or limited to cash-only buyers.

As we all know, most people do not have enough cash to write a check for a house.

Most people (hopefully) are also smart enough to realize 20% on a mortgage is not a good deal.

So those factors can overwhelmingly change the landscape. I trust @WJK 's experience big time.

It seems obvious to me too that the same thing happens to things like tuition, when student loans are cheap and readily available -> demand goes up, tons of buyers using borrowed dollars, and sellers raise their prices...because they can.

wouldn't you raise your prices if you could? If there was a seemingly endless stream of buyers using other people's money?

gotta realize that mortgages are often written up with a "locked in" rate for 5 years..
after that period, the bank gets to go over your mortgage and adjust the rate closer to prevailing rates at that time (could go from 5% to 25%)
also, the bank can look at your new situation and decide they want all their money now (your losing money, your collateral is worthless now, etc..) and they decide it would be better to foreclose now instead of waiting another 5 years and then you going bankrupt.
People think the bank is committed for 20 or 30 years, but don't realize it can simply crash your life if things don't look good anymore

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Guest-5ty5s4]

gotta realize that mortgages are often written up with a "locked in" rate for 5 years..
after that period, the bank gets to go over your mortgage and adjust the rate closer to prevailing rates at that time (could go from 5% to 25%)
also, the bank can look at your new situation and decide they want all their money now (your losing money, your collateral is worthless now, etc..) and they decide it would be better to foreclose now instead of waiting another 5 years and then you going bankrupt.
People think the bank is committed for 20 or 30 years, but don't realize it can simply crash your life if things don't look good anymore

It sounds like you are describing an ARM mortgage with a balloon payment. I'm talking about fixed-rate mortgages, no balloon payment, etc. (for residential)

However, if you're talking about a corporate mortgage, you are exactly right.

The bank has us by the b*lls. And the banks will threaten you during the toughest times, like 2020.

So it depends what kind of loan you’re talking about. A corporate loan can have “covenants” set by regulators and the bank can use that to default on your business even if you never missed a payment and are going through a global pandemic.

 

[Redwolf]

Right now fixed rate mortgages are so cheap, I don't imagine any long term holders are doing ARM loans. That would be a stupid decision.

 

[Guest-5ty5s4]

Right now fixed rate mortgages are so cheap, I don't imagine any long term holders are doing ARM loans. That would be a stupid decision.

You underestimate the bad decisions of the average consumer, sadly

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Lyinx]

Some bad information here...

First, very few loans are adjustable loans these days. The last data I remember seeing was a couple years ago, but it was that 15% of total loan origination is adjustable. And the bulk of those are 7- or 10-year terms. I'd be willing to bet the percentage is actually lower than that now, given 10-year bond rates.

Second, for most adjustable rate mortgages, they CANNOT go from 5% to 25%. Most of these mortgages have annual and lifetime increases. For example, they might be able to raise the rates 1-2% in any year, and up to 5% over the life of the loan (those are typical numbers).

Third, for most loans, if you're current on your payments, the bank CANNOT just foreclose or force you to pay off the loan. The standard mortgage contract/promissory note does not allow for the lender to accelerate payments for any reason other than default.

thanks for updating - I must be going off rumors and here say (except for them adjusting my rates by a few %'s unexpectedly, that legit happened to me directly and made me UPSET!
thanks for your info - appreciate it.

 

[WJK]

Third, for most loans, if you're current on your payments, the bank CANNOT just foreclose or force you to pay off the loan. The standard mortgage contract/promissory note does not allow for the lender to accelerate payments for any reason other than default.

That's true for single-family homes and small units. I have seen banks make borrowers pay down commercial loans for commercial properties and multi-family units when the market values fell. It depends on what kind of loan you're talking about.