The State Of The Market

By 2018-10-17Radio Show

RPRE 174 | State Of The Market

 

Real estate is one of those things that once you understand it and once you figure it out, it doesn’t really take that much because it’s very learnable. In life, there’s a cost for knowing things. Oftentimes there’s a greater cost for what we don’t know. Get yourself up to speed with what’s going on in the world of real estate as we give you the state of the market. The marketplace continues to evolve, that is why it’s vital to learn where the marketplace is going, what we are seeing in the marketplace ourselves, what areas are hot and what are not, the price ranges, and all other things about real estate that you should keep yourself abreast about.

Listen to the podcast here:

The State Of The Market

We’ve been busy here at the office. We’ve got a move coming up. We’ve got a little bit going on. Most months we do a case study from one of our successful students and we have tons and tons of case studies that we could pick from. What we decided to do is do a State of the Market. We normally like to do that this time a year, let people know where the marketplace is going, what we are seeing in the marketplace ourselves, what areas are hot, what areas are not, what price ranges and all those kinds of things. If there’s any transition going on this next week and we’re a little bit out of sorts, we don’t give back in time to answer questions, customer service, that stuff, then I’m sorry about that. We’re doing our best. We’re a growing organization and we’ve got lots of things going on.

We’re doing lots and lots of deals. In one day, we contracted twelve properties. I don’t know any other group that contracted twelve properties. It’s amazing how much you get done before the phones start ringing and having great conversations about the direction of the business. It’s that during that timeframe that we came up with our mission statement and it’s to help people create a life of abundance by shifting mindsets, implementing proven systems and facilitating a community of action takers. That’s our mission statement. I know when we first started talking about, “We need to come up with a mission statement,” and I thought, “What a daunting task that is.” It was amazing how just in under an hour, in terms of thinking about who we are, this flowed out. It went through only about two or three revisions, a little bit of tweaking here or there. The real guts of it came out in the first draft. When people have had an opportunity to read it or hear it, they say, “That’s what you all have been talking about for years.”

We have been on the show for three years and our message has evolved and it continues to evolve because the marketplace continues to evolve. One of the things we talked about in our group is what I see investors do a lot of times is one, they start with a plan for their real estate investing without having a financial goal in terms of where they’re trying to get to a year from now, three years from now or five years from now. That’s number one. That’s a huge mistake. You got to start with a goal of where you want to get to. The second thing is not realizing the scalability of what it takes to get to that. Then the third thing is not recognizing that the marketplace is constantly shifting. I had a conversation with a guy named Joe in my office and we were talking about what a deal looked like back in 2008, 2009 and 2010 versus what a deal looks like now and why.

Not everybody's got the same starting point, but everybody can get to where they want to get to, provided that they have the right plan. Click To Tweet

Buying At A Discount

I’ve talked to many people that bought a lot of properties back in 2008, 2009 and 2010, the crash during that time period and how much of a discount they we’re able to buy. Because of that, they were able to buy with little or no money out of pocket, maybe $5,000 or less out of pocket. They had some equity capture because they were buying at such a deep discount and now, it’s harder to buy at that discount. When you’re talking about as an investor buying at a discount, what are you buying at a discount to or of? What’s the discount of? What I would say is that in a normal healthy market, if we’re looking at properties in the $400,000 price range and you’re flipping houses. What I would argue is that for a long period of time, the last years, the bulk of those sales have been retail buyers buying those properties. In other words, an owner occupant buying them. It’s not an investor buying them.

That nine out of every ten, maybe even 97, 98, 99 out of every 100 of those properties have been retail owner occupants. As an investor, we’re buying at a discount to the retail market. In a healthy marketplace, one or two, maybe three out of those are the investors buying. When you go down to the price range of rental properties, from about $65,00, $70,000 ARV all the way up to maybe a $185,000, $190,000 ARV, back in 2007, 2008 again, about eight or nine out of every ten of those purchases where retail buyers. In other words, going out and getting a Fannie Mae loan, moving it in, making it their homestead, a family buying a house to move into the living as their homestead. One or two of those buyers have been investors and that’s what I would consider a healthy market. Investors are buying at a discount to retail. If you weren’t involved in the market, you didn’t recognize what was going on, but the retail marketplace in that lower-end sub-175 price range in the Houston marketplace, the retail buyer dried up. It’s almost nonexistent.

In fact, it’s not zero but I would argue that it’s probably one or two, maybe three, max four out of every ten of the transactions are retail buyers and the restaurant investors. It’s relatively easy for an investor to buy at a discount to a retail buyer, but it’s not the same for an investor to buy at a discount to another investor. In other words, if I’m an investor and you’re an investor in the retail price is $150,000 and I buy a property for $70,000 because it needs $35,000 in repairs. Now, I’m all-in at $105,000 but now I’ve got a comp at $70,000. If you’re an investor coming along and I’ve done a good job in sales and marketing to fund that deal and it was on MLS, then you want to buy at a discount to the $70,000 not to the $150,000. Let’s say you buy it at $60,000 and then I want to buy at a discount to $60,000 and then I buy at $50,000. Where does that stop?

RPRE 174 | State Of The Market

State Of The Market: The days of the $150,000 single family house that are move-in ready are coming to a close. In fact, in some markets in California, it’s nonexistent.

 

Where it stops is when cash buyers step in and go, “These retail prices are actually on sale.” There are some savvy investors that understand the economics of the math and they go, “If I can buy single-family houses for $150,000 that are ‘retail’ move-in ready.” The retail buyer is not buying those. In other words, I can buy them on MLS and investors are paying $150,000 for a move-in ready buy and hold property. Then that’s the going price, but it’s not the end user owner occupants that are buying those properties. It’s the investors. It’s hard to buy at a discount to another investor. Granted, the prices aren’t the same as what they were before, but it’s because there’s so much demand for investors to put capital at work because our cost of capital is cheap still, even now.

Anytime you can borrow money at 6%, 7% or 8% and get 20%, 25% or 30% rates of returns, it’s incredible the amount of leverage that we’re able to get and so many investors are missing that. They’re going to look back years from now. They’re going to look back in 2023 and go, “If only I had seen what was going on back in 2018 because those same rental properties are going to be $200,000, $210,000.” The days of the $150,000 single family house that are move-in ready are coming to a close. In fact, in some markets in California, it’s nonexistent. You can’t buy a $150,000 move-in ready anywhere in California. It’s the same thing in New York. The question is how long will it be before those were gone in Houston, Texas?

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We were talking about people not recognizing what’s going on in the marketplace and that the investors have taken over the buying of the price range below $175,000. When you’re trying to buy at a discount, are you buying at a discount to a retail buyer or are you buying at a discount to another investor? Because investors will set a floor in terms of what it is that the least amount that the property will be able to go for. What I find oftentimes is that people will look back and say, “Back in 2010, I could do this.” That’s years ago. Back in 2010, I can do a lot of things for a lot cheaper than I can do. Cars were cheaper back then. Bread was cheaper. There are many things that were cheaper back then, but we’re not going back to those days. If you want to take that to the extreme, look at what you could buy a house for in the 1950s or whatever you could buy for a house for in the 1970s. If I could go back, my parents bought a house in Spring Valley in Houston back in the 1970s. When I look at what they paid for that house back then and what it’s worth today, that’s crazy. What I want to do is I want to find a deal that’s as good as what my parents had back in the ‘70s and that’s crazy.

Setting Realistic Goals

If you’re looking for that as a deal, then you’ll never ever find a deal. One of the mistakes that I see investors make is they get locked in concrete. They put this plan together and say, “This is my goal in the future.” That’s step one. I see that a lot of investors don’t start with that. This is where I want to try and get too. Not like, “I want to flip four houses a year. I want to flip ten houses a year.” It’s what kind of money do you want to make in real estate? Do you want that to be an active income or do you want to be a passive income? You have to understand the difference between those. What’s the realistic goal that you want to make income wise? How do you put together a plan to get there a year from now, three years from now, five years from now?

It’s so amazing to me that people will put a plan together and then lock that plan together in concrete and then the market starts shifting. Lending rules change. In fact, I got a call from a guy that said, “We’ve got a product that doesn’t require a W-2 income and it is credit-based. They look at your credit score, but they would look primarily at the asset itself. It’s not a Fannie Mae product, but it’s a 30-year financing product. It’s not Fannie Mae and there’s no limit on how many of them you can do. We now have a product that lens primarily on a DSCR, Debt Service Coverage Ratio. In other words, what percentage of the debt can you serve as from the income from the rental property? In other words, if you’ve got a $1,500 a month rental income coming in and you’ve got a $1,200 a month outgo between principal, interests, taxes and insurance, that’s about a 1.25. In other words, you’ve got about 25% more income coming in than debt going out. They look at how much more coverage. Imagine if you had a $1,500 outgo and a $1,500 a month income, that’s a 1.0 debt service coverage ratio. Some lending people are at 1.25, some people are at 1.5 and sometimes people don’t even understand the impact of leverage. I was talking with a gentleman and he can borrow typically at about 75% of the appraised value after repairs, which means that he’s got to put about 25% of appraised value down.

One of the things that we look at is imagine if you can shift that from 75% to 80% if you can find a lender that lends you at 80% instead of 75%. Imagine if you have a $150,000 house and you put 20% down. Now, you’ve got $30,000 into the deal. If you have to put 25% down, now you’ve got an extra $7,500 in. It skews your leverage. If you’re leveraged five to one versus your leverage four to one, you should build a spreadsheet, calculate the math and what kind of rate of return are you getting? Although when you put money down, it’s going to increase your cashflow a little bit. What you have to look at is the bulk of the returns on single family buy and hold is in the area of appreciation. If I’m getting 5% appreciation on an annual basis on $150,000 house, let’s say that’s $10,500 of appreciation at 7% on $150,000 house, if I’m leveraged five to one, that gives me a 35% appreciation. If I’ve leveraged only four to one, that gives me 28% appreciation based on leverage depreciation. Imagine being able to increase your rate of return from 28% to 35% on the amount of leverage. You’re not increasing your risk as long as the cashflow is there. You might be minimizing your cashflow a little bit, but you’re dramatically increasing. If you can get a 7% bump, would you pay an extra 1% in interest rates in order to get a 7% bump on appreciation based on leverage?

RPRE 174 | State Of The Market

State Of The Market: When you look at people that have achieved a level of success, it always begins with the right mindset.

 

Growing Your Wealth

In other words, sometimes it might cost you. You can borrow 75% loan-to-value based on let’s say a 5.5% or 6%. What if it goes to 6.5% or 7%? Would you pay an extra percent in interest rate in order to leverage? Some people don’t even know how to do those calculations. What I want to point out is all of these techniques and more is how you grow your wealth. We teach people how to buy fix and flip. With Houston House buyers, we’ve been flipping houses since July of 2013 and we’ve had multiple six-figure returns on our flips. We’ve had high five figures on wholesale deals. We teach people how to buy fix and flip. We teach people how to wholesale. We teach people how to buy and hold. We teach people how to be the bang, how to be the lender. Most people don’t realize that if they put a plan in place, they’re oftentimes five years or less from being able to retire in a lifestyle that they’re not even living right now.

It may take some sacrifices over the next five years, time and money. In other words, you can’t come to Right Path and say, “I don’t want to make any changes in my life and I want to have a dramatically different outcome.” It’s a little bit like going to a gym and you say, “I’m a hundred pounds’ overweight and I don’t want to change what I’m exercising right now and I don’t want to change what I’m eating, but I want to be a hundred pounds lighter six months from now.” That’s not going to happen. What you’ve been doing has gotten you the results that you’ve gotten so far. If you want to have different results than what you’ve gotten so far, you’ve got to do some things that are different. How much change are you willing to make? Most people have a good life, but what they’re dreaming about is a great life and oftentimes it’s so hard to let go of good or to make enough significant changes. I remember talking to a guy up in Dallas. He was able to share some honest and what I’ll call transparent issues he’s dealing with in his life. I was honored that he felt comfortable enough with me to share some things that I won’t share what he shared with me, but understand that everything that he described, he had a good life and yet, he wanted more.

I felt like I owed it to him, transparent as he had been to be able to look him in the eye and say, “I see your struggle and your number one struggle that you’re going to have to make is it’s not small changes. You can’t do more of what you’re doing to have a lot more of what you want. In other words, it’s a dramatic change for you to go from what you’ve got now to get to where you want to be. That’s not small.” Sometimes people think, “I could change an extra 10%, then it’s going to make the difference that I wanted to make.” Oftentimes, it’s not. In order to squeeze out that extra 10%, you actually have to retool a significant portion of your life. I don’t think he’s willing to make those significant changes. Yet when I shared that with him, you could tell that it resonated with what it was. He knew it was true. I could tell that he was a little bit frustrated, maybe resigned. I almost watched the switch go off that basically says, “Do I want to give up on my dreams and settle for what I’ve got or do I want to fight for what I’m dreaming about?” That’s what most people struggle is how hard are you willing to fight for what it is that you say that you want to have. We want to help people create a life of abundance by shifting mindsets. That’s where it always begins, where significant change happens for people.

In life, there's a cost for knowing things. Oftentimes, there's a greater cost for what we don't know. Click To Tweet

The Right Mindset And The Right Plan

When I think about people that society looks up to, whether they’re musicians or whether they’re athletes or whether they’re people in the spiritual realm or pastors of churches. When I look at people that have achieved a level of success, it always begins with the right mindset. When you look at people in football, baseball and basketball, when you look at what their mindset is like versus other people’s mindset. Mindset by itself doesn’t get Michael Phelps, the swimmer, to get to where he was with as many gold medals as he got. It took work also, but it begins with the mindset of being willing to do the work. I see a lot of people. They say they have the mindset but then they’ll join Right Path and joining Right Path is a lot like joining a gym. If you don’t put the work in, you won’t see the results. It’s not a secret formula. It’s the right formula and it’s not the same formula for each and every person because not everybody’s got the same goals in terms of where they’re trying to get to. Not everybody’s got the same starting point, but everybody can get to where they want to get to, provided that they have the right plan.

I have oftentimes thought that if people realize that they could make between 20% and 50% passively in real estate, why would they invest in anything else? In fact, if you compare it to a business, one of the things that I’ve talked to people about is this idea of buying a machine shop. For those of you that know about oil and gas and machine shops, imagine cutting machines and things like that that take blocks of steel or blocks of aluminum or blocks of whatever metal it is. They cut away from that block of metal and make a part, whether it’s a drill bit or whatever it is. Any kind of tool that gets a machine or any type of part that gets the machine in order to make it. Imagine you have this machine shop that’s for sale and it’s making $1 million a year in net profit. The owner lives in The Bahamas. It’s not that you would want to own a machine shop. It’s not about that. It’s about you want to invest your money. Do you want to own an oil and gas company? Do you want to own eBay? Most people want to own stock because they want to invest their money, they want their money to work for them, but they don’t think about it in terms of is that the business that you want to own, number one.

Number two, is it actually producing the rates of return? If we’re looking at it strictly on a return basis, how much would you pay for a machine shop that generates $1 million a year? I started asking the question, would you pay $1 million? I lose a lot of people right there because they start thinking in their own mindset. I can’t stroke a check. Not many people can stroke a check for $1 million. Anybody can stroke a check for $1 million. Question is, is it going to clear when it gets presented to your bank? That’s the real question. People get lost in that. They forget that in real estate, I can raise money, I can use other people’s money. It’s a self-collateralizing asset, but they forget about that so is the machine shop. It’s a self-collateralizing asset as well. It’s got a business, you’re going to have assets there and all that. If you had $1 million, would you pay $1 million for a business that makes $1 million a year? I see a lot of people hesitate with this. When I see them hesitant, I’m like, “Are we teaching it in high school or even junior high?”

RPRE 174 | State Of The Market

State Of The Market: The biggest regret that people who are active in real estate have is that they didn’t get started sooner.

 

Then all I have to do is change the way I asked the question. If I had an investment that had a 100% rate of return, would you invest it? “Yeah, 100%. It’s great.” If you buy something for a million that makes you a million, isn’t that a 100% rate of return? “Now that you put it that way.” I’m like, “How were you putting it in your head?” I say, “Would you pay $2 million?” I can see them going, “I don’t know where I get to $2 million.” They come up with all these reasons and excuses. “This is a hypothetical. Just play along.” They start hesitating. I go, “If I had an investment that gave you a 50% rate of return, is 50% good?” They’re like, “Yes. It is really good.” Don’t you understand that if you pay $2 million for something making $1 million a year, that that’s a 50% rate of return? “Now, that you put it that way.” I’m like, “Are you slow? Are you not catching onto the pattern here?” What about $4 million? “Now, you’re getting expensive.” $4 million to make $1 million a year. The guy is living in The Bahamas, he’s not doing squat. The machine shops here in Houston. It’s his money that’s at work. He went, “Why would you want to sell it?” Come up with all these reasons to get suspicious. Add and all kinds of things to the story that don’t belong in the story. It’s a 25% rate of return. Would you not be happy with a 25% rate of return? “25% is really good.” “Then why wouldn’t you pay $4 million for something making $1 million a year?” “I guess I would.”

Would you pay $10 million? Now, you’ve lost your mind. Now, you’re just getting all cray-cray. $10 million that only makes a million. That’s a 10% rate of return. Do you know how many trillions of dollars are invested at less than 10% rate of return? The problem with it is that it’s a small amount of money to deploy. $10 million is not that much for most people. They want to deploy a lot more. Warren Buffett would love to get but he wants to deploy $1 billion at a time, not $10 million. The real issue is that as you’re starting to deploy smaller dollars, it gets harder and harder to deploy the capital efficiently. Then most people say, “I don’t know that I’d do $10 million. I’m probably out at a $10 million price.” Do you have money in the stock market?” “How much do you get there?” $300,000, $500,000, whatever the number is. Do you understand what P/E ratio is? That’s the price divided by the earnings. We’ve got $10 million as a purchase price for $1 million of the earnings.

That’s a ten P/E. You’re paying ten times what the earnings are and yet the average P/E of the Fortune 500 is 22.46. That means that you would be paying not a million to make a million, not $5 million to make a million. Not $10 million to make a million. Not $15 million to make a million. Not $20 million to make a million. You’d be paying $22,460,000 to make a million. That’d be like going back and saying, “Would you pay $22,460,000 for a machine shop making $1 million?” People will say yes all day long to blindly putting money into the market. Yet, when you compare it to real estate where you’re getting a 20%, 25%, 30%, 35% rate of return. You realize a 33% rate of return is like a five P/E because it pays it yourself back in less than three years. A 20% rate of return is less than a five P/E because if you get 20% of your money back every year and either equity appreciation, that doesn’t even take into the consideration the tax consequences that real estate has, which is another fantastic reason why real estate is one of the best wealth building tools in America.

The Pitfalls Of Day Trading

There’s a radio show that comes on the same station and they teach people how to day trade. People get in and out of trades fast. What I’ve ever known from people that have actually done day trading is that two things that kill you on day trading. One is how it gets taxed and number two, the fees on the transactions. You’re making these little micro transactions especially if you’re doing it on a high frequency or even a low frequency. The fees eat up such a significant portion of the transaction costs. It’s one of the reasons why I see that when I do the math in some investors are concerned about these companies like Opendoor or Redfin Now or some of these that are coming in as real estate brokerages. They’re technology companies that are trying to figure out real estate and they’re going in and buying properties.

Instead of listing a property for somebody, they’re going in and buying 93% of retail and doing light fix-ups, cleaning carpets, doing touch up paint and that kind of stuff. They are doing very bare bones minimum updating and keeping those expenses, but the math doesn’t work. There’s too much expense on that remaining 7% because there are transaction costs. You’ve got title insurance and you’ve got all those other expenses that are related to all of that. The math breaks down that it can’t be done. We put the fun back in real estate. It was never taken out. Real estate is fun. It doesn’t have to be stressful, but it also doesn’t need to be emotional. It needs to be in your head, not in your heart. Making money should be in your head.

Once you to head on over to RightPathRealEstate.com, what you can do is go over to Events. If you’ve never been to our Right Path to Financial Freedom, that’s our free event. We’ve got a Wealth and Income workshop. We’ve got a two-day event. We’ve got a weekend workshop, which is our two-day event. We’ve got the Right Path to Financial Freedom, which is our Wealth and Income workshop. It’s a one-hour event. If you’ve never taken a look at real estate before as a key to your financial future, then what you don’t know is costing you money. In life, there’s a cost for knowing things. Oftentimes there’s a greater cost for what we don’t know. I know that as people get older and over an older, they realize, “If I had a life to do over again, then I would have done these things differently.” Oftentimes, they would have learned more. They would have invested more in their education. They would have spent more time learning in the stages of life.

There would have been more action, more activity in the earlier stages of life. When I talk to people that are active real estate investors in 2018, their biggest regret is that they didn’t get started sooner. There are some things in life that we look back when we go, “I regret ever having done that. I wish if I had a life over to do over again, I wouldn’t have done that.” Somebody in my office, there’s a phase of his life that he wishes that he could forget. There are some trials and tribulations he went through. He goes, “I probably would have been a whole lot better off not having made those choices. I regret ever having done that.”

Real estate’s not like that. Real estate is one of those things that once you understand it, once you figure it out and it doesn’t take that much cause it’s very learnable, is very knowable. It’s a lot easier than what you realize once you have it figured out, your regrets going to be, “I wish I’d have figured it out sooner. I wish I’d have taken action earlier. I wish I would have done more in the beginning.” One of my biggest regrets is I wouldn’t buy in real estate twenty years ago. I can’t go back and change that. The only thing I can do is take action now. There’s a cost for coming to our event, but it’s not money. It’s your time, but there’s an even greater cost and not coming and not being at the event. If you’ve never been to our free Wealth and Income workshop, you’ve got to be here.

I promise it will change the trajectory that you’re on where you’ll end up a year from now, three years from now, five years from now or ten years from now. It will be a dramatically different trajectory if you show up versus if you don’t. It’s hard to quantify, but I know of at least one person that within a year of getting started added $1 million to his net worth. You carry that out over time. What impact is that going to have, not just in a year, but two years down the road, three years down the road, four years down the road, five years down the road? Imagine what that would have cost him if he didn’t show up to the first event. Buy a lot of real estate. If you don’t know how, get started now. Thanks for reading.

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