Buying Real Estate in HOT Markets – Episode 407

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[00:02] Welcome partners. Real estate is one of the most talked about topics in the financial world right now. And the large institutions are getting in, especially into the residential markets. We’re going to unpack that in this episode. So this is such an amazing space and I’ve got a whole bunch of people in my family and extended friend group that are in their early 20s just out of college, just into the job. Maybe they didn’t go to college, but they’re into the job environment and clearly not wanting to pay rent. And the friend group that I’m associated with has some pretty entrepreneurial kids. And so not only are they not wanting to pay rent, in other words, they’re wanting to buy a home so that every monthly payment

[00:54] is going to an asset instead of just to an expense. They’re wanting to even take that one step further and buy large homes where they can rent out rooms, buy duplexes, triplexes, quads, et cetera, et cetera. Even small apartment buildings, which I think is six units and above technically, or maybe it’s nine units and above, whereby it’s a large building and it has say 10 doors to it, 10 apartments inside the building. And these kids are going after these transactions in an effort to have their own living expenses largely offset by all the other renters. So I’ve got a son that bought a large home and he has two renters in it. I’ve got a daughter that chose to buy a home just so that she could get out of rent.

[01:49] I’ve got a friend’s son who bought a duplex. And I mean, the stories just go on and on and on. And there’s some challenges. So yeah, Spencer, talk to me about where some of the money is coming from that is causing these kids to either have good results in this area or to be very frustrated. Yeah. So right now what’s happening and to give you context, and I may have told the audience before, in my 20s, I owned a real estate brokerage. And in my late 20s, I started an investment firm with a friend of mine. And so I’ve owned a lot of real estate. And what we’re seeing now versus what we saw years ago is that permanent capital is coming in. So you may be asking, what is permanent capital? Think of large hedge funds, big money.

[02:44] And this permanent capital, they’re coming into cities across the country and they’re buying houses that the owners will never occupy. And due to just basic supply and demand, we’re seeing this permanent capital come in, purchase properties with cash or depending on how they’re set up. And they’re beating out a lot of these first home buyers. The other problem and challenge that we’re seeing is the migration away from large cities where Silicon Valley, New York City, retained the human capital because they had to go into the office. And due to the changing environments, that’s no longer the case. And so they’re taking the earned income they have in those large cities and they’re moving to middle America

[03:40] or wherever that may be. And so people, as you mentioned, your son who is purchasing a house and renting it out to others, they’re seeing not only the house prices rise on a weekly or monthly basis. In some cases, it’s a daily basis that they’re seeing it rise. Yeah, it’s a market place that is just a tad out of hand right now. And I think super frustrating for some of these young kids. And yet it’s part of what happens in life. Supply and demand dictate things and people don’t want to live in cities right now. They’re flocking, as you said, to the Midwest and the upper and outer reaches of cities beyond the suburbs where they can have a little bit of space, maybe some land. There’s a huge desire to do things like

[04:38] gardening and having yards and whatnot that people of even just 10 years ago just didn’t want to have. And so it’ll be really interesting to watch long-term what this does. But for today’s consumer that’s looking to get into a home, it can be a bit of frustration and a cause to have them go even further afield if you were. Maybe they were looking at an outlying suburb and now they’re going to look out literally in the country in order to find that space. And I also think that a lot of them are really looking for flexibility so that they can travel more and be involved in the things that they want to be regardless of location. And because so many jobs are remote now and so many of that age of person doesn’t

[05:33] have other tie downs like children in school or a spouse that also works at a particular job, et cetera, they’re able to be further afield. And they’re also able to really make decisions around their living situation that are so flexible. We’ve got a friend’s child that’s going to go to Hawaii and live with a friend for a couple of months and rent out his room in a duplex. So somebody’s renting the other side, but now his side will just get short-term rentals. And then of course, there’s a whole Airbnb world that is just all over the place. It was awesome. And then it was horrible because all the cities shut it down or COVID shut it down or then it came back up and then the city shut it down again or they shifted. And it’s just a

[06:24] landscape that’s going to, unfortunately, probably pull forth some winners and also cause some losers. And it’s just like all real estate. One must have the staying power, some vision and the cash to be able to deal with a change in, for example, a city’s Airbnb rules or the landscape of a community that all of a sudden where everybody’s virtual and they only want homes that have offices in them as an example, because for a long time, it was a two and three bedroom home that was normal. Well, now it’s three and four bedroom because people want that quote office space and it’s just really kind of fun to watch, but it’s also a little bit scary. Yeah, it is. We know there are, there’s opportunities that come with this though. And so that’s what’s wonderful.

[07:15] And I think oftentimes people can be scared. I was talking with a home builder the weekend before last, and he said that, and to back up typically how home building works is, you know, the developer after they’ve acquired the property and they’ve done improvements, they begin to pre-sell those properties because that helps out with, you know, the relationship that they have with financing and whatever that may be. Well, now in these hot markets, they’re not pre-selling anything because if you pre-sell something too early on three, four, six months down the line, that buyer comes in and they already have, they could have a hundred thousand dollars equity by the day they move in. So what these home builders are doing now is they’re not pre-selling anything.

[08:06] That is at least like the, the furthest out they will pre-sell is 30 days. Wow. Well, and I heard from a home buyer in Colorado that he is not able to price things properly because they sign the contract, then they go get the materials. And by the time they get all the materials delivered, their quote is out of sorts because the materials are costing so much more and they’re, they’re not, they’ve already signed the contract. They’re not able to go back and collect more for that. So they’re just not signing contracts. Yeah. The average lumber cost has gone up about 400%. Crazy. And steel, same thing. Yeah. Everything has been, but here are the opportunities. And I think with every situation, a person can become paralyzed or they can zoom out and say, where are the opportunities?

[09:05] So for anyone that happens to be in this situation, it’s time now to personalize. And so realize if, if you’re competing against permanent capital, you’re really competing against an entity, something that doesn’t really mean anything, or it could be against different investors or whomever that is. So if you’re buying your first time house and you have the capital, you’re in the range, you’re already qualified beyond, you know, submitting that you have your loan approval numbers, go through and plead your case, write your story out, let people know. And that’s actually making a difference in some of these situations. You know, if you’re in the same ballpark and they realize that a family’s coming in or it could

[09:55] be a student, a professional versus some entity, I’m hearing situations where the sellers are selling to a person that they actually care about. So there’s an opportunity. Interesting. I think too, it’s always important in a time like this to really know yourself so that you know what’s important to you and you’re doing things because they work for you and not because of fear missing out or because your brother-in-law said so, or because it’s what your parents wanted you to do, et cetera. And when we know ourselves better, I think we get more in alignment with how we’re using our money and we’re using our money based on our value system, not somebody else’s. Yeah. I think the fear of missing out is a really big one. You know,

[10:48] I wouldn’t ever suggest anyone to purchase based on speculation. You know, we saw that happen in the mid to late 2000s and it worked well for people that timed it just right. And it didn’t go well for a lot of others. And that’s a horrible thing. There’s an alternative path that’s happening. And you talked about this earlier, which is because of the technology changes we’ve had, you know, this is an internet service provider by Elon Musk called Starlink. And so what we’re seeing now is there are people that are going into nowhere Wyoming, nowhere Montana, nowhere Colorado, and they’re able to build a house completely off the grid using solar power with the satellite dish that they purchased from Starlink.

[11:39] And now they created their own reality at a price that they want. And in some cases, very soon we will see that those houses are even being 3D printed. That’s crazy. Yes. Austin, Texas, I believe, has got a bunch of 3D printed homes. There’s a city in California with the same. So that’s fun. I think that is forward-looking momentum. And holy cow, if we learned nothing from 2020, it’s that life does march forward. Somehow, some way you’ve got to figure out a way forward. And so if you’re really feeling stuck, one of the things that I think helps unparalyze is conversation. And so if we can be helpful in that arena, reach out to us. Let’s have a conversation. Maybe you have another mentor or even a co-worker,

[12:33] but do watch out for mindset. Because if you have a conversation with somebody that’s also struggling with a scarcity mindset, and aren’t we all at times, it’s going to drive the direction that way. And you want to make sure that you’re having this type of conversation with somebody that has that opportunistic, very prosperity-oriented mindset. And let’s realize, too, that opportunities need to be win-win-win, where all parties are able to rise because of the transaction that occurs. So well said. Just to touch in with the real estate background that I have, I would say that I hope that no one has FOMO right now. Don’t speculate. But realize, as permanent capital and as other pieces are brought into the puzzle,

[13:25] there are some strengths that you have and things that you can see differently, meaning the Airbnb concept or whatever. We’re seeing now people are building tiny homes in their backyards and renting those out as offices or as separate Airbnb’s. There’s something that you can do, but don’t go through and speculate. And most importantly, echoing Kem, this is a place where you can strengthen that mindset and you can see what can actually prosper you forward. So I really want to… I love these types of conversations. This is what gets me super fired up. So thank you, Kem. It’s a joy. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com.

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