When the market is hot, prices are on the rise and inventory is low. So the big question is: should you buy in that hot market? Or is it smarter to sit back and wait for things to cool down before jumping in and buying your next property? In this episode, Jeff explains why the “don’t buy in a hot market” argument is simplistic and wrong, and he breaks down five key points to consider as you decide to move forward and buy properties in a hot market.
What is a hot market? Sometimes you hear people talk about a hot market? Well, a hot market is usually what people say when they’re talking about a seller’s market, meaning there are more buyers than there are properties available. And that of course, means the supply is low, the demand is high and the price goes up. So, for those of us who are trying to build our rental portfolios, it begs an important question; should you buy in a hot market? In this episode right here, I’m going to share my thoughts with you about how to break that question down into logical components. And provide five points to keep in mind when your market is hot. Let’s cue up the theme song we’ll jump right into this
Welcome to racking up rentals, a show about how regular people, those of us without huge war chest of capital or insider connections can build lasting wealth, acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans. Nor are we posting “We Buy Houses” signs we’re just looking for quote, motivated sellers to make lowball offers to you see, we are people oriented deal makers. We sit down directly with sellers to work out Win-Win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the thoughtful real estate entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media. This show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.
Hey, thanks for joining me for another episode of racking up rental Show Notes for this episode can be found at thoughtfulre.com/e93. Please do us a big favor by hitting the subscribe button in your podcast app super quick. It really helps send a message back to the platforms that make them spread this show to other people who are fellow thoughtful real estate entrepreneurs, like you and me, and helps those folks find the show. Thank you so much for that, onward with today’s episode. And in today’s episode, we’re talking about hot market. So, at the time I’m recording this, it’s what most people would consider a hot market. Now when people use those words “hot market,” that could mean two things they could mean in their specific locale, that there’s not very much supply, there’s a lot of demand prices are going up and it feels like a seller’s market. And that can happen because maybe that town has gotten a bunch of new jobs recently, it could be because people just consider it to be more desirable suddenly, or it can be a little bit more universal. And not just about that specific town or that specific city, but more kind of what’s going on economically in the country. Like for instance, if interest rates are very low- that’s fueling higher purchase prices, because people’s money has more purchasing power. And people want to invest in having a nicer place to spend time because they spend a lot of time their intent, maybe the some of the effects of COVID. So, whether it’s just a local market that is feeling hot, or that sort of general real estate market that always makes people stop and go, Oh, should I buy right now? Or should I wait a little bit? And right now, this is really happening a lot I hear and see so many people from across the country, as they’re talking about potential investment say Yeah, but you don’t understand. In my market, things are super-hot right now. There’s no inventory and it kind of makes me chuckle because I have the ability to chat with people from all over the country. And I see in almost all places. That’s exactly what’s going on right now. So, when they start to think about Oh, the market is so hot, then that leads to other thoughts, things that you might consider to be limiting thoughts. Like for instance, I hear many people right now say, Oh, come on, you want to buy properties off market, sellers won’t sell properties off market, they won’t sell properties with seller financing, all they have to do is list their property and they can get top dollar, they can get cash, they can get many offers over asking price, nobody will ever sell off market. Or you’ll hear people say, hey, you are an idiot. If you are buying properties in this market, just wait for a while- prices will come down, there will be a crash. And all of those voices, which are pretty prominent can lead you potentially to feeling a little bit of indecision, you might be able to see things from different perspectives and say, Boy, I understand the points they’re making. But I also want to keep buying properties and I don’t know what to do.
And so, in this episode, I’m really going to focus on helping you try to sort out your thoughts on that and give you a little bit of my perspective on that topic too. In order to really think about asking the question; in what circumstances could it possibly make sense to continue buying properties we have to revisit this topic that I allude to in this podcast a lot, which is are you an investor Are you an entrepreneur, because an investor has more of a mentality of, they are looking at investment vehicles that are headed in a certain direction, and they want to get in on those vehicles while the getting is still good. Whereas an entrepreneur, on the other hand is more about creating the opportunity themselves, right? So, an investor usually gathers up their resources first, and then they figure out into what they can place those resources, right. So, they’re confident in their resources. But an entrepreneur, on the other hand, is confident in their resourcefulness. And an entrepreneur goes out into the world and creates opportunity, and then assembles the resources needed to capitalize on that opportunity. So, an investor is out there trying to ride a wave, whereas an entrepreneur is out there trying to create their own wave. And I think that in order to be successful and thrive in what is a hot market, when you’re continuing to do acquisitions, that means you have to be thinking much more like an entrepreneur than an investor. And as you have probably heard on this show before, I actually think that having the entrepreneurs mindset is a higher level than having the investors mindset, anyway. Now, you also have to keep in mind, of course, that if you’re listening to this show, it’s probably because you also want to be buying properties that are off market, right? So, people say the market is hot. And does that affect us? Well, of course, it affects us to some degree, I mean, we’re not doing business on a different planet. But we’re not subjecting ourselves to all of the same market dynamics that people who are buying off the multiple listing service are, because we are having conversations with people who have not raised their hand and say, to the public, I want to sell my property, we’re having bat channel conversations in private rooms. And so well, we can’t pretend that we just exist in a vacuum and that the contextual world around us that is the hot market won’t have any impact, it certainly does not have the same impact as for those people who are trying to buy properties that are indeed listed on the market. So I want to focus on giving you five points that I think you should keep in mind when you are considering acquisitions in a hot market.
Okay, five points. The first point is an overall point that will kind of feed into the next four points. And that is simply this price is only one part of the equation in an acquisition. In a deal analysis. Now, it happens to be the part of the equation that gets the most focus and gets the most attention. And where everybody tends to really put most of their energy and their concern, but it’s really only one part of the overall equation. And there are so many other things that make up whether a deal makes sense to do or not. Let me just list out a few of those things. One is expandability. What else could you do with this property to make it more than it currently is? How about the zoning the zoning could play into the expandability? Right? If you’re if you’re overpaying for a single-family home that’s zoned for a skyscraper, chances are, you actually could just be fine overpaying for that single family home because you’re not really buying the single-family home, you’re buying the opportunity to build something much, much, much larger income, that would be another part of the equation, right? How much rent is it producing? How much rent could it produce? How could you impact the NOI, the net operating income, on the property and potentially thus change the value of the property that way? terms? Oh, my goodness, that’s a whole category that will circle back to, in and of itself in just a couple minutes. But the terms have as much to do with whether the deal makes sense as the price itself. How about simply the location about if this location is an incredible location, and maybe it’s strategically located next to or nearby other properties, you have the location alone. I mean, that’s the most famous words in real estate, of course, right? All about location, well, location, is about rareness. The reason location matters so much is because there’s a very finite amount of stuff at these locations. And so, when you have an amazing location that might by itself, be enough to compensate for the hotness of the market and the effects on other things like price. Maybe it’s the uniqueness of the property, maybe it’s the historical nature of the property and some other less sort of objective but more subjective, that factor into your vision for this property, what it can be and what it can do. So, the first important overall point that will affect the rest of the things we talked about is don’t get overly hung up on price. Price matters. Absolutely. But it’s not the only thing. And the people who are not necessarily in the thoughtful real estate entrepreneur category, tend to feel like price is indeed the only thing that matters. So, keep pressing. Rice in perspective and keep its importance in your mind relative to the other elements of the deal.
The second point I’d like you to keep in mind is that you should be focused on transformation right now, if you are buying what some people might call turnkey rentals, which is not so much our thing and talking about that so much on this particular show. But if you are focused on buying turnkey rentals, then you have more of that investor mindset, then the entrepreneur mindset. And your goal is to place money in those vehicles and just sort of let it do its own thing. transformation is a not a big part of your vision for property. But as entrepreneurs transformation is almost always a part of our vision for a property. Some people might call that value add, and I would agree with that, but there’s some transformation that says the property is what it is now. But I’m going to make it something different. And that gets back to one of our key topics on this show, which is opportunity vision. How do you see something with this property or this overall opportunity that others don’t? Right? And now we’re getting back to the definition of being an entrepreneur good, because entrepreneurs don’t just see what other entrepreneurs see what could be there. So, if you can develop the opportunity, vision that helps you see things that others don’t in a deal, you see what could be there more or differently than other people see, what could be there, that by itself can make buying property even in a slightly overinflated price. make perfect sense, because you’re not buying it for what it is you’re buying it for what it could be, as you might recall, just a few episodes ago, we had an episode called having profitable deals is about finding the Delta, the delta is the difference between your understanding your vision for something and the seller’s vision for something. And when you have that delta, that’s what allows you to create a deal that makes sense to create profit, and there’s lots of different ways that can happen. So ask yourself, what else do you see here and focus on the transformation, if you’re going to buy this thing as an apple and pay a little bit more money than maybe you’d like to, but you’re going to transform it into a pineapple, that is where your opportunity will really come.
Number three, focus on the terms and by terms, I mean, the financing terms that you have negotiated with your seller terms, the interest rate, the amount of down payment, the payment structure, the term of the note the duration of the note when the maturity is all of the provisions in your promissory note and your agreement with the seller are by themselves a separate topic. And if you negotiate those well, and you apply the principles of supercharged seller financing, the terms themselves have their own intrinsic value. Now most people think, oh, the terms are just sort of basically how I deliver on paying the price. And that’s fine. But the terms themselves can have their own level of value that can more than compensate for other things that you think are less ideal about the property like for instance, the price, right, because if the property is in a hot seller’s market, but you’re able to negotiate amazing terms, you can still get a massive win out of giving the seller the price that they want. But having the terms that you want, that actually facilitates your vision for what you’re going to do at this property even better. So, financing can absolutely make or break a deal. And if you need to rethink that, just think about this for a second, if you if you looked at the same exact rental property, let’s just call it a single-family home. And you finance that with hard money, or you finance it with a bank loan, you’re going to have two very, very different outcomes, exact same property, exact same rent, you’re going to have two very different outcomes. So, the financing itself can absolutely make or break a deal. And when you use the principles of supercharged seller financing, then the terms alone can make the deal by themselves regardless of the price.
Point number four is- I want you to focus on demand. And by demand, I mean demand locations and demand types of properties. What is demand? Well, demand simply means that you have something other people want, right? You have a product that other people want, or you have a product that’s located in a place that other people want. And there’s so much of our talk in the real estate investing world about different markets that create different levels of cash flow, and this and that. And the people might say, Well, why would you buy a property and you know, San Francisco where the prices are so high? The rents are high too, but the prices are way too high for those rents and you can’t generate cash flow? Well, the answer is because that’s where people want to be. That’s demand real estate right there. People for centuries have shown that they want to be in that precise location. And when you have high demand, that means there’s always other people who are willing to buy your property from you rent your property from you, or anything else. And so what has high demand, and as limited supply is rare. And Rarity is something that creates tremendous value. So if you’re going to be going out into the world of buying real estate during a hot market, where there’s not a lot of inventory, it would be important to make sure that you are buying properties in high demand locations, because high demand locations have what an economist might call an inelastic dynamic, that means that people always want to be there, whether times are good or times or bad, this is where people want to be. So that makes them more financially resilient. But if you buy properties in areas with lower demand, and people are there, kind of because maybe it’s more affordable to live, but it’s not really where they want to be, then when something better comes along, they will likely move but high demand locations, high demand property types are always full, there’s always a lot of people who want to be there. And when there’s more demand, that means actually, there’s also more competition. And when there’s more competition, you tend to end up with higher quality tenants, and higher rents and things along those lines that come from simply the fact that you have something that other people want badly. high demand also translates into the resale market, right? If you have got high demand property that’s rare, that there’s not 800 other properties just like it that are available at the same time. If you want to sell something, you also can command a premium, you have usually much lower days on market and all sorts of things like that. As opposed to if you own more of a utilitarian or commodity product that’s in an area where there’s a lot of other similar types of things. Now you’re competing against a lot of things that are just pretty much identical, which really, really means that things are very, very price focused. So, demand means you have more financial resilience, it means usually higher prices on rent and higher prices on resale value and those things protect against the downside that you might be worried about in the idea of buying in a hot seller’s market.
The fifth and final point I wanted to make is such an important one. And you have to keep in mind that there are always people meaning sellers, who have different priorities in their own life, they have different ways of thinking about their own property. right at the beginning of this episode, I said, one of the things you hear a lot in a market like we have today, is people saying oh sellers will never sell property off market, they’ll never sell it with seller financing. Why would anybody ever do that when they can just put it on the market and get top dollar and get a cash offer? Well, there are major major assumptions built into that statement. First of all, you’re assuming that someone would consider a cash offer better? Well, if that person has got capital gains considerations, getting a cash offer might not really be the best thing for them, they might really be way better served. And they might know they’re way better served by an installment sale structure that allows them to kind of feather out their capital gains bill over time as you pay down the principal on the loan, right. And if somebody has got a property that is now selling for more than it would have sold it for before, and they want to do a 1031 exchange? Well, gosh, it’s a great time to sell, but it’s not a great time to buy. And for those types of people. They might not be thinking, well, this market is really a perfect opportunity for me to just put it on the market with a realtor and get a big fat cash offer that actually creates new problems for that. So some sellers have priorities that are related to things that maybe wouldn’t be relevant to you, but they are very relevant to that seller such as capital gains deferral. Some sellers have very strong feelings about caring about what happens with the future of their property, right. If a seller has been lovingly caring for this property for the last 30 years, they very well may have an interest in making sure that the next person who owns the property is going to continue that level of care. I bought lots of properties from people with that type of mentality, including even one this week where it took a while for that seller to realize and to believe that I was going to maintain the same levels of care for the property that he had given to the property himself and once he felt like that, then he was finally comfortable with passing the baton to me. And that is what actually unlocked the deal. There are some people who just don’t like “the man,” they don’t like the system, they don’t like the administration, they don’t like the idea of putting a property on the market and paying a commission to real estate agents, not necessarily because they are opposed to spending the money, maybe therapists to spending the money, but sometimes just in principle, they think why should this person get paid to do something I can do when they’re not really working very hard. Now, I’m not saying that you should agree with that perspective. I’m not saying I agree with that perspective. But I’m telling you, there are absolutely sellers who have those types of principles. There are also sellers who have kind of a, what you might call a moral code or a sense of ethics. And they feel like, gosh, I know the market has shot up in terms of price recently. But it just doesn’t feel right. To me, it feels exploitative, I can’t imagine this property is worth $600,000, I think it’s probably worth much more like $500,000. And they just simply don’t want to be a part of something that they don’t consider to be ethical, or grounded in reality, etc. So, when you find those people, and you understand that that’s what matters to them, you now can make deals in this hot seller’s market, where you are getting a win, they’re getting a win, and everybody is happy. So, there’s five points to keep in mind when your market is hot, and you’re trying to decide if you should buy a property.
So, let’s wrap this up. Let’s put a bow on it. Let me ask you, should you buy a property in a hot market? Here’s my answer, reflected in everything we’ve just talked about. Should you buy a property in a hot market? I would say, buy the property when you have created a deal. That makes sense. I personally would not look at the market as a whole and say, I’m going to create a blanket rule that says no, the market is too hot, I will not buy. That’s not how I do it. And I’m much more of an entrepreneur, though, than an investor. And I hope that you are feeling that way too. So, the question is, does the deal that you are looking at right now, your vision, your ability to negotiate other things besides price, your understanding of demand, your understanding of the seller and what matters to them? When you put all of that in the blender; What comes out? Is it a deal that makes sense in the moment, regardless of what everybody else is saying about, quote the market? If the answer is yes, I would encourage you to consider proceeding with that deal. If the answer is no. And it doesn’t really matter whether this is a hot market, a cold market, a buyers-market or a seller’s market. If the deal doesn’t make sense. It doesn’t make sense. But if it does, it does, and if you have the entrepreneur’s mentality, you will see more possibility in the deal than most people with the standard investor’s mentality.
That is it for today’s episode of racking up rentals. So again, Show Notes for this episode can be found at thoughtfulre.com/e93. Please do us a big favor by hitting that subscribe button in the podcast app. And if you would take a second to rate and review the show. I’d be so personally grateful for that. I see all of those and I really, really appreciate it. Did you know too that we have a Facebook group for thoughtful real estate entrepreneurs. It’s called the rental portfolio wealth builders. We’d love to have you join us there you can of course just search for that in Facebook or you can type in group dot thoughtful our e.com and the magic of the internet will take you right to that page. If you liked this episode, please take a second to screenshot it and post it to Instagram. tag us We are at thoughtful real estate.
I’ll see in the next episode. Until then, this is Jeff from a thoughtful real estate entrepreneur signing off.
Thanks for listening to Racking Up Rentals where we build long term wealth by being a win-win deal makers. Remember solve the person to unlock the deal and solve the financing to unlock the profits.