111: Should you Invest in a Hot Real Estate Market?

The real estate market in Colorado has been crazy. Median prices in my town have jumped from $110,000 to $280,000 within 5 or 6 years. My town has some of the lowest prices in the area! With real estate prices increasing so fast, I decided to stop buying residential rental properties and focus more on flipping. I stopped buying rentals for a number of reasons, but the biggest one was that I could not cash flow on properties anymore. On this episode of the InvestFourMore Real Estate Podcast, I talk about the current real estate market, including how crazy it is in Colorado, how the rest of the United States is doing, how you should invest in a crazy market, and why you cannot use national trends to decide how to invest locally.

Are we in another housing bubble?

Many people think we are in a housing bubble because housing prices are high. When prices increase like they have, they can decrease just as fast. However, just because prices are high, it doesn’t mean we are in a bubble. You have to look at many other factors to determine what prices may or may not do. Even the experts who study economics and the housing market disagree on what will happen and cannot predict the future. I am an REO agent who sells foreclosures for banks, and I’m an investor. For many years after the housing crash, experts were predicting a tsunami of upcoming foreclosures, which would cause another crash. That tsunami never happened. In fact, the exact opposite happened, and housing prices increased at a frightening pace.

I am not an economist or a housing market expert, but I could see the crash coming in the early 2000s. People were getting loans that were 120 percent of the value of their house. Everyone became a house builder and flooded the market with inventory, and it was easy to get a loan. I bought my first house in 2002 when I was 23 years old. I was a real estate agent at the time, with up and down income. I got a stated-income loan for my house, where I basically told the lender how much money I made, and they were okay with it. The lending industry is much different now, and getting a loan is much more difficult. There is also much less building going on, which means less inventory and a completely different real estate market. I don’t think high prices mean the market will crash, and in the current market, I don’t see a crash coming. Things may cool down, but I don’t see a crash.

Should you invest in rental properties when the market is hot?

One thing to consider is that every real estate market is different. Just because housing prices are going crazy in Denver does not mean they are rising in Memphis. If you plan to invest in real estate, you need to look at your market. I have heard that Miami may be in a condo-construction mini bubble. That mini bubble will not affect the Colorado market if it crashes. I stopped buying residential rentals in 2015 because I could not cash flow in Colorado anymore. I was buying houses costing from $100,000 to $130,000 that needed $15,000 in work and renting them for $1,300 to $1,500 per month. Now, I would have to buy those same houses for $200,000, put $20,000 of work into them, and maybe earn $1,600 per month in rent. Rents have not come close to keeping up with housing values. Since I couldn’t cash flow on those properties, I stopped buying them. That does not mean that every rental-property market is bad.

I have considered buying rentals in another state or buying commercial real estate instead of residential. Many people ask me why I do not buy multifamily properties, but multifamily properties in Colorado have even worse rent-to-value ratios than single family! You should base whether you invest in rentals on many factors besides housing prices. Look at rent-to-value ratios, tax rates, market conditions, and economic outlooks.

Should you flip houses in a hot market?

I have focused on flipping instead of buying rentals because of local market conditions. I think you can flip houses in any market. I would love to have more rentals than I do based on my plan to purchase 100 rentals by 2023. I still want to buy long-term rentals, but building my flipping business has been fun as well. I went from selling 5 to 10 flips per year to selling 18 flips in 2016, and I have already sold 17 flips halfway through 2017. If I find a new market to invest in, a new sector to invest in, or our market changes, I will have a lot of money available to invest into rentals.

While I think you can flip houses in any market, you also have to be careful flipping in a hot market. Many investors went broke betting on appreciation. I never buy a flip assuming it will go up in value. I assume it will sell for as much money as it is worth when I buy it, and if values increase, that is a bonus. I also am conservative with my ARV (After Repaired Value) and assume my flips will need more work than I think. This year, I have been able to buy flips from the MLS, wholesalers, foreclose auctions, and from direct marketing. My average profit per flip has increased this year thanks to rising prices, but I have not changed my buying criteria. You can flip in a hot market, but do not get caught assuming prices will go up!

Conclusion

Real estate is always changing. Real estate markets change, financing changes, the way you find deals changes, and the competition changes. I think real estate is a ton of fun because you have to constantly tweak how you do things. Just because prices are going up does not mean they must come down. If you are waiting for a market crash, how do you know when the bottom will happen? I will keep investing in any market, even though the way I invest may change. Soon, I will start a Facebook Coaching Group on how to find deals. If anyone is interested in learning more, send me an email to [email protected].