Ep 41: Why 2023 Is the Perfect Time to Invest In Real Estate

We're kicking off 2023 and we need to start thinking about the real estate environment that we're in because it is changing fast.

Everywhere I look, I feel panic, stress, and anxiety.

Everybody's trying to figure out what they should do, especially real estate investors.

But what I'm also seeing is experienced real estate investors chomping at the bit. They've been waiting to capitalize in a market like this.

Just like they did during the pandemic. They saw an opportunity when everyone else panicked.

I bought some of my best deals during that time period.

So today that's what I want to talk with you about. The opportunities that lie beneath the panic of 2023.

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Full Transcript

Tim Murphy 0:00

Today we're back on the value driven investor podcast. Thanks for joining us. You know what, it's the end of 2022. And we need to start thinking about the environment that we're in because it is changing fast. And everywhere I look, I just feel panic, and stress and anxiety. And everybody's trying to figure out what should I do, especially real estate investors. Now, what I'm also seeing is the real estate investors with tons of experience, the real estate investors who've been waiting to capitalize in a market just like this, waiting and capitalizing on the market when COVID hit, and everybody else was in a panic, and they jumped on opportunity. The opportunity that's about to arise in 2023, is going to be bigger than the opportunity that hit when COVID, the COVID pandemic made an impact and shut everything down. I was buying properties right in the middle of that, and I bought some of my best deals. In 2008, when the market crashed, and I first got into real estate investing, I was freaking out. I was like, How can I do this? How can I invest when values are going down? The second after I closed on the property. But I did. And I found out that there was still plenty of money to be made. So now when 2023 hits and all I hear is everybody freaking out. Everybody's saying that get out. Don't do anything, shut it down. lock yourself up.

Unknown Speaker 1:34

Real estate investing in 2023. You're crazy.

Tim Murphy 1:40

Well, you know what? Maybe I am crazy. Because I just locked down over $3 million in loans on my next projects that will be executed in 2023. So you know what? I guess I'm putting my money where my mouth is. And we'll see what happens. Well, I When will I lose? I guess you you guys will have to stay tuned to find out. But let's talk about this topic. The eye buyers are dead. Think about this. Zillow saw the writing on the wall. And they backed out of their eye buyer program losing billions of dollars, trying to figure out how the heck they're gonna get rid of all their inventory. Finally, in 2022, they got rid of all their inventory. One Step Ahead of businesses like Redfin, who realized that the only reason they got into the eye buyer program was because they thought it was a great strategy to give their agents more opportunities to get listings. Well, now that they're losing money hand over fist, in their eye buyer program, they decided to bail on it, no matter if it does get listings for its agents or not. And then open door, open door, the founder of the eye buyer program. They were fantastic. And you know what, I have to give them props, because they gave it a try. But right now they're realizing that when interest rates go up, and when demand drops like a rock their business plan doesn't work. Why? Why doesn't it work? That's what I want to talk about today. Because that high buyer, it could be a good strategy, but trying to be a scaled investment company buying properties on thin margins. These are very risky things, trying to have an algorithm determine if a property should be purchased or not purchased, having layer upon layer upon layer of individuals between management and rehab and accounting and agents, and managers of agents and managers of the accounting and technology and all the different layers that they have. That they not only have to account for from an overhead perspective, but they also have to account for from an a decision making perspective. It makes buying real estate deals and making good real estate investments. Very, very complicated, especially at scale. So why did the eye buyer strategy not work in a high interest rate environment with less demand? I will tell you this. As I watched the eye buyer opendoor come into my market, which is the Minneapolis market. I asked myself this question. You know what, man, this company with billions of dollars is now coming in to my market, the Minneapolis market and I believe this was like called five years ago. I don't know exactly how the heck am I going to compete against that? And then I asked myself, Okay, well, the first thing is, is what is their buying criteria? Well, I can tell you this. They had a buying criteria that they tried to match up with an algorithm that they created down in Arizona, because that was one of the first markets that they entered And when they came to Minneapolis, their buying criteria was very detailed, very specific. And I was actually able to get most of their criteria because I sat down and met with open door, I said, Hey, if you guys have opportunities that you don't like that don't meet your criteria, I would love to have a chance at purchasing them from them. And never, nothing ever came of that. But I did get a good idea of what their buying criteria was. And when I can tell you is one of the criterias is location, location, location. But when I say that they weren't in the best locations, because of their buying criteria. Now, their buying criteria was vast, it allowed them to buy properties in more rural locations, it allowed them to buy properties in suburban locations. But what it restricted them on, which I believe was one of the detriments as they entered in the Minneapolis market was it didn't allow them to go into some of the best locations. Now we all know, as seasoned real estate investors, location, location, location, that is the number one rule when it comes to real estate. Well, in my locations that I'm investing in, I didn't have to worry about open door, because many of the different criteria like the age of the house, the size of the house, the demographics of the certain house, it didn't fit in their checklists. So I didn't have to worry about them coming into my southwest Minneapolis market that I like to invest in, I didn't have to worry about them coming into my Dinah market that I like to invest in, because it didn't hit their checkboxes. So the algorithm removed these options from their ability to invest, and that hurt them in the long run. Now talking about the algorithm, how do you create an algorithm? That's right, every single time when it comes to making real estate investment decisions? Is that even possible? Well, I could tell you this, I would think that their algorithm was probably pretty accurate. I think they did pretty well. But the thing is, is that the algorithm can't

Tim Murphy 7:23

determine or predict interest rates going from, let's say, 3% to 7%, in less than a year, the algorithm can't predict that demand goes down by I don't know, 20 25%, it can't predict that if the margins are too thin, then the profit won't be there if you have to carry the property for a certain period of time, outside of the median, or the mean or the average days on market that you're used to, or that the algorithm has data on. So an algorithm is fantastic if everything stays consistent. But that's the thing about a real estate transaction. That's the thing about a real estate investment, is it's never the same twice. That's why I love real estate. And that's why it's so hard for these tech companies to break in. Because every deal is unique. Every deal has a situation that you've probably never seen before. Every deal has to factor in so many different variables. It's almost impossible, in my opinion, for an algorithm to take into account all the variables that it's going to take in order to get a profit margin. Now, what does that lead us to the margins, thin razor thin margins, open door, especially as I watched open door, I realize that where they're buying at and where they were selling at their margins were razor thin, like 5000 10,000, maybe $15,000 on most of the properties that they purchase based on what I could find. But then, if you follow my social media, you'll realize that they were playing a little cat and mouse with the home sellers. Well, they got bit because they had a $63 million loss to come down on them by the Federal Trade Commission. And they lost. They lost because they were deceiving sellers when it came to how they were manipulating the numbers and showing the seller that oh, we're paying you full market value. Except we need you to pay this fee and oh, we're gonna have this rehab cost and we need you to pay for that. And oh, by the way, and oh yeah. And just sign here. And sure sellers. Real Estate Transactions are complicated, so plenty of sellers sign And then the dotted line thinking, You know what, this is almost as good as just listing with a real estate agent. But in reality, when you saw the bottom line, I think open door is making most of its profits off of its negotiations and its fees. And sure, sometimes it was making some profits off of buying it right, and being able to sell it in a highly appreciating environment. But when you mix it all together, I guess the fact is, these companies are getting out of business, these companies are losing billions of dollars. And I believe it's because they were in the wrong locations, buying the wrong properties, the algorithm just couldn't keep up. And their margins were too thin. And once the FTC came down on them, and said, Hey, you got to do business just like everybody else. Well, you know what? They couldn't. So I think that's why the eye buyer model is failing. Will we see a comeback? There's a good potential, we'll see a comeback. But for now, they're gone. And 2023, that just means more opportunity for you and me? Well, how do we capitalize on that opportunity, then? That's probably what you're asking yourself, because I know that's what I'm asking myself. And over the last 20 years of real estate investing, I've had to ask myself that every single year? How do I make my model better? How do I get bigger margins? How do I find better locations and invest in those locations? How do I reduce my competition? These are all things you need to be asking yourself regularly. Because if you want to have a great real estate investing company, especially a company that's like Rich Dad, Poor Dad would say, crazy stupid to be a flipper, crazy stupid to be a new construction builder. You're right, if you don't know what you're doing, it's super risky. It could be stupid in certain instances, and maybe going into 2023 with $3 million on the line. I'm stupid. But we're gonna find out, because that's what life's all about. So why do I feel like I can put $3 million on the line and enter into 2023 when everybody's freaking out. Because of location, location, location, I last 20 years have researched the locations that I invest in, in the Minneapolis market. And I believe that number one, the location that I'm in, which is southwest Minneapolis, and Edina, and some other locations, these locations have low supply. So one of the biggest things in economics and investing is supply and demand. Yes, demand has gone down. However, supply has gone down just as much. And with one month of absorption in the markets that I'm in. That's not a lot when you think about it, because six months or more and right around six months is a balanced market. But we only have one month of supply. So that's telling you that there's still plenty of demand in my location. Number two, price stability, because there's plenty of demand in my location because it's a more affluent location that has a higher price point. Those buyers are less sensitive to the high interest rates, they're less sensitive to inflation, and their groceries and all these costs going up. So that allows me to have more opportunity to sell the product that I'm bringing to market. These factors are very prevalent when you think about location. Because if I was in a lower income location than the market, today's market would drastically affect my ability to do my projects, how I'm doing that. The next thing, supply, supply and demand. That is a number one variable that I am paying attention to every single day. Because the true risk factor for the locations that I'm in will come down to oversupply. If there's oversupply of the product that I'm offering, then I have a ton of competition and it will drive price down no matter what. But if supply stays like it is at one month of absorption, then I am going to be delivering one of the best products to the market with very little competition. And my biggest hurdle will be price. However, I believe that if you're in a fantastic location, and you're delivering one of the best products The market will pay a higher price. And we'll see about that in 2023. The other thing that I'm paying attention to is competition. One of the reasons that I got into the affluent market was because I knew that investors trying to do what I'm going to do would look at the risk and say, it's not worth trying to take advantage of the opportunity. Well, what do I mean the risk? Well, I believe that there's low risk, because location is fantastic. But some people believe that, yeah, you have to pay for the opportunity, meaning you have to pay 300 400, and sometimes $500,000, just to acquire a property in some of the locations that I'm investing in. That is way too risky for most people. That reduces the competition. Number two is the carrying costs, because you're now investing in these high dollar properties, the carrying cost, the interests, the construction costs, everything goes up exponentially. And that for some investors is way too risky. So it reduces the competition.

Tim Murphy 16:18

The third thing is that there's not a lot of people that can find the financing, to do the kind of projects that I'm doing in the locations that I'm investing in. And so if you can't find the financing, like hard money, or like bank financing, or like a private equity company, then you're not going to be able to compete or purchase properties in the markets that I'm investing in. These are all things that I've considered, as I've taken this journey as a real estate investor over the last 20 years. So like I said, I'm betting on the algorithm that I've created over the last 20 years, I'm betting on the locations that I'm investing in, I'm betting on the location, and its low supply, and its strong demand. And I'm betting on my partnerships that I've created with my general contractors, and my lenders, so that we can win in 2023, we can be one of the few investors in some of the best locations, investing in some of the best assets in all of Minneapolis. So if you're interested in learning more about the investments that I'm making, and how I'm coming to the conclusion, while I'm building my own algorithm, well then reach out. Because that's what this podcast is all about. I want to share my journey of investing. And I believe that it's going to get more exciting as we go into 2023. Because it's easy to invest in real estate. When money's easy, when selling properties is easy. When everybody wants to buy. Everybody was a house flipper, everybody was an investor. But now, now that the market is getting competitive, now that you have to be savvy now that you have to take some chances. Well, I'm going to tell you this, there's going to be less investors out there. And you're going to have to find the right ones who are going to win. Thanks for listening to the value driven investor podcast where we lead by giving for more information about our community and what's new visit value driven investor.com

Dave Lawson 18:33

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