While chasing hot trends may work as a consumer (i.e. getting the newest technology, clothes style, etc.), it can be a huge mistake as an investor. When chasing a trend as a consumer, worst-case scenario you are out a few hundred dollars. However, chasing a real estate trend can cost you thousands, if not hundreds of thousands of dollars or more.
For example, I interviewed a guest on my podcast who got caught up in the massive appreciation trends in Florida leading up to the financial crash and ended up losing over 100 properties.
In a recent conversation with lender and investor Ben Shaevitz, this was his best real estate investing advice ever. “My best advice ever for real estate investors would be to not chase a trend,” Ben said. “I think that if you’re chasing hot markets, if you find out that a market’s hot, it might be too late already.”
Ben was personally negatively affected by neglecting to follow this advice. He said, “I made the mistake of chasing a trend. I was very young and I had just started making some money, and downtown LA was exploding. I bought a new construction, a condominium with huge HOA fees and a mortgage and a 6.625% [interest rate] amortized over 30 years. It was a mistake.”
Ben said if you chase a trend like that, “everyone says ‘oh, this area is blowing up!’ The people that are telling you that got in way before you did, and that’s probably too late.”
Ben firmly believes that investors should avoid investing in a hot market, unless you can find a stellar deal (Related: How to Find Deals in a Hot Market). Instead, you want to be a contrarian investor. Find the investment niche or market (within reason) that is not on everyone else’s radar.
The first deal I bought with my business partner, for example, was a 250-unit apartment building in Houston. That was in August of 2015. At the time for almost every news organization and newspaper was talking about how oil was never going to come back and that Texas economy was doomed. “If you’re in the oil industry or if you’re in Houston or anywhere near, or even if you have a relative in Houston, you are going to be in trouble,” and similar statements were dominating the Texas news cycle.
We closed on that deal in August of 2015 when nobody else was buying there. We bought it for $14.1 million dollars and put in $2 million worth of renovations. In December of 2016, 16 months later, oil is still here and our property appraised for over $21 million. This appreciation can be attributed to multiple variables, but one of the main reasons was we were contrarian investors. We invested in Houston at a time when every single news channel was saying oil was never coming back.
While this advice doesn’t apply to all situations at all times, being a contrarian investor and avoiding hot trends can pay off big time. Or in the words of Warren Buffett, “Be fearful when others are greed and greedy when others are fearful.”
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