In what has become a very common term across all types of investment markets, fear of missing out or FOMO is definitely making its presence known in the real estate market.
What is it to FOMO?
When something is appreciating continuously – whether a stock, a cryptocurrency or even homes, people get worked up and scared they are missing out on the action. They are missing out on the chance to make some big money!
This leads people to chase investments, such as overpaying for a home in a hot market because it “has to go up” since the whole market is ripping higher.
Dancing in a Field of Landmines
When people succumb to the feeling of FOMO is generally when mistakes are made. This is when you buy some magic beans because you believe anything will work in the given market.
Listen, there are times to be aggressive and times to be conservative. Times where you can be looser on your underwriting and times when you cannot.
Which of those environments do you think we are in right now?
In my local market there isn’t much for cash flowing deals. Multifamily proprties that were picked up for pennies on the dollar back in 2010 or now priced something outrageous. Who can blame the sellers though, if someone is willing to pay it.
I’m seeing it a lot. People paying prices for properties where I have no idea how they expect to cash flow positive.
Maybe it’s a wealthy buyer looking for tax advantageous assets or someone doing a 1031 exchange so its basically a free roll for them. It would make more sense in that case at least..
For the rest of us though, it sounds like a lot of risk for a very small return.
Buying Right Has Never Been More Important
This isn’t the time to relax your underwriting requirements, and trust me the temptation will be there as finding deals is a hustle right now. It will wear down those that are not steadfast in their investing goals.
So be sure to always run your numbers and work the deal so it makes sense for you.
Be aware of the feeling of FOMO in Real Estate
This market cycle is just over 10 years old. We will see it level off and/or pullback at some point. Who knows when that will be, but I want to have some free cash ready when it does.
I still want to keep acquiring properties, thus I shifted gears and found markets that are not as volatile and it’s strictly about cash flow.
Remember, the point is to build some wealth and then keep it.
Keep aware of your emotions
As humans we can get caught up in the hype. That doesn’t mean we shouldn’t invest, but it means we should step back and take a rational look at the facts.
The fact that everyone and their brother is now a real estate investor lets me know the market is heated, which means I need to be more prudent in what I acquire.
As for a rental properties, it is a bit easier. Make sure it will cash flow and you are in good shape. Use realistic rental estimates that have a little room in case you can’t get quite that much.
Use the property calculator so the numbers do the talking for you and take the emotion out.
There is a fine line between being a scaredy cat and not doing deals and chasing deals like there’s a laser pointer running up the wall.
In the end, work hard to hunt down deals, but don’t chase when it comes to price.