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How not to be the average real estate investor

by Jonathan Twombly
Last Updated: October 23, 2023

I call the average real estate investor “Joe Herdfollower.”

You find Joe in every real estate investment company.

He’s responsible for strategy. He has a checklist for picking markets that includes size of market, population growth, economic diversity, landlord friendliness, median income vs. median rents, etc.

This analysis comes up with a small list of markets. Then, to check himself, Joe looks to see what the other Joes are doing, and notices they’re all picking the same markets.

“I must be picking the right ones!,” he congratulates himself.

All the Joes at the lenders like those markets, too, so it’s easy to get debt.

And all the Joe Herdfollower LPs, listening to the same podcasts, want to invest in those markets, too, so LP capital is easy to raise.

Soon all the Joes doing the same analysis at the same time with the same results are borrowing from the same lenders and raising money from the same LP pool.

And they end up competing with each other to buy the same properties in the same markets, driving the prices beyond where they make sense.

But it fits the model, so it must be okay to keep doing the same thing.

That’s how you end up with all of the largest SFR companies in the country overly concentrated in the same 11 zip codes – out of 41,000 zip codes in the US.

It’s how you wind up with more than 50% of new multifamily construction being concentrated in just 10-12 submarkets across the entire United States, back in 2012ish.

It’s how you wind up with the largest oversupply problems and rent declines in the very markets that were the most popular with investors just a few months ago.

It’s how you wind up with people no longer asking “What cap rate should I pay to obtain a return that will compensate me appropriately for the risk of buying a C property?”

And instead asking only, “What cap rate must I pay right now to buy a C property?”

Everyone doing the same thing at the same time is what leads to bubbles.

And that kind of lockstep thinking has always made me instinctively anxious.

Instead, I’ve always looked to go wherever Joe Herdfollower wasn’t going. Especially when I could seen an opportunity he was overlooking because of groupthink.

That thinking helped me to spot Greenville, South Carolina a decade before people priced out of Texas started piling in.

It led me to look at upstate New York and New England, seeking bargains, which in turn caused me to stumble onto the overlooked goldmine of independent hotels – for both rehabs and apartment conversions.

The point I’m trying to make right now is not to criticize anyone for being part of the crowd.

It’s to encourage you to be creative.

Don’t bemoan the fact you can’t find good deals where everyone else is looking, where everything is overpriced.

Instead, realize that there’s opportunity almost everywhere.

In your back yard. Right under your nose.

You just need to:

1. Notice the opportunity

2. Have confidence in yourself – just because no one else around you is doing it doesn’t mean you’re mistaken

3.  Roll up your sleeves and get to work

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