December 2023

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer, and today we’re going to be talking about the state of real estate investing as we come to the end of 2023 and head into 2024. To help this discussion, we have Kathy Fettke, Henry Washington, and James Dainard joining us. Thank you all for being here as always, we really appreciate it. How are you guys feeling right now? Just give me a quick summary. Kathy, what’s your feeling about 2024? Are you feeling optimistic?

Kathy:
I am, yeah. I think more and more people are getting used to the new normal, and that’s what they’ve been waiting for. They were sort of wondering what would happen, and I think we have a better idea. I think.

Dave:
Henry, if you had to name one thing you’re going to be looking at going into 2024 to make some decisions about what would that be?

Henry:
The word for me in 2024 is growth. It is a scary time because there is still some uncertainty, even though we’re starting to see some things flatten out and maybe feel more normal. But I am trying to follow the Warren Buffett principles this year, which is, be greedy when everybody else is fearful, and so we are focused on doubling our portfolio in 2024 to take advantage of what seems to be a great time to get lower prices.

Dave:
Awesome. What about you, James? What do you think the key to 2024 is going to be?

James:
I’m really excited for 2024. 2023 was kind of a flat year, and especially when you’re doing development and longer projects, you have to get through the muck. So 2024 is the year of the reset, where you just got to reset all your deals in 2023, and then you get to see the reward in 2024. So I think it’s going to be a really, really strong rebound year for people that didn’t get on the sidelines. If you got on the sidelines, 2024 is going to be lame.

Dave:
All right, I like it. Call it like it is. Well, for me, the word of 2024 is affordability. I just think of all of the economic indicators of all the data that we look at. Housing affordability is what I think is going to drive the market next year. If prices, if mortgage rates stay around where they are, I think we’ll have a sort of a boring year, which is not a bad thing, by the way. I think prices being up a little bit, maybe down a little bit, a boring year would be a great thing, but we obviously don’t know which way things are heading. Obviously, in the last couple of weeks we’ve seen mortgage rates go down a little bit, but there is still a risk that they go back up, and if there’s a serious recession or a big uptick in unemployment, we can see rates go down pretty significantly, and that might supercharge the market.
And so for me, what I’m going to be looking at most closely is affordability. So that’s just obviously one of my many opinions about the housing market right now. If you want to understand my full thoughts about the 2023 and 2024 housing market, I have a special treat for you. It is the state of real estate investing 2024 report. If you guys remember last year, this is the time of the year where BiggerPockets basically locks me in a room for a week or two and just makes me dump everything I’ve talked about over the last year or two into a single report. And then we give it away for free. It’s filled with all sorts of context, advice, tips, and there’s actually a download where we’re going to rank all of the markets in the country based on affordability. So you can check that out. If you want to download it, go to biggerpockets.com/report24. That’s biggerpockets.com/report24.
And then, in the rest of this episode, we’re going to discuss a couple of the tactics that I think are going to work well in 2024 with the rest of the crew here. All right, let’s just jump into this. So the first tactic that I wrote is kind of true all the time, but I personally think it’s just super important right now, which is underwriting conservatively. I think in an environment where things are as uncertain as they are now, it’s better to be pessimistic. I’m usually sort of an optimistic person, but I think right now I’m trying to underwrite deals pessimistically. Henry, you’re trying to double your portfolio. So tell us how you’re going to underwrite deals next year.

Henry:
With extreme caution.

Dave:
Okay, good.

Henry:
Yeah, I think this is, you’re right, this is something everybody needs to pay attention to all the time, but when a market is as unforgiving as the market is now, meaning, if you screw up, your screw-ups are magnified in this market. Three years ago, you could make a mistake, and as long as you sat around for another six months, then your value’s gone up by 50, 60, 70 grand, right? And it’s just not that way anymore. If you screw up now, you’re really getting your teeth kicked in.
And so the focus on underwriting conservatively, I’ve always underwrote my deals conservatively, but one thing I have made a change in underwriting is previously I wouldn’t factor too much into my underwriting for holding costs because I’m doing single families. It’s paint, it’s floors, I got crews, we can get them in and out of there. It just wasn’t that big of a deal to me because I knew we could get a property turned, it’s my bread and butter. And so if a deal penciled even without a massive holding cost calculation in there, then I was typically buying it. I do not do that anymore.

Dave:
That’s good advice

Henry:
Because money is more expensive in general. When I was underwriting a deal a couple of years ago, if I could get money at two, three, four, 5%, it’s way cheaper than now. Sometimes I’m getting money at 11 and 12%, and so that monthly payment goes up drastically. And so then it magnifies any delays you have in terms of delays on your construction. And it also in terms of delays on just normal things that cause delay, sometimes just closing just takes a while because maybe there’s a title issue or maybe there’s some paperwork. All of these little things that you wouldn’t think about before are now costing you a lot of money. And so you want to make sure on the front end that you specifically calculate what it is that you think you’re holding costs are going to be. So that’s your cost of money, but also your cost of utilities.
Utilities are more expensive than they used to be as well. And so you really kind of have to get meticulous about and be realistic with yourself about how long you think a project’s going to take. If you are brand new and you are buying your first BRRRR deal or your first fix and flip and you’ve got a 90-day rehab window in your underwriting, add two months because you’ve never done this before and you might spend that first 30 days just trying to find a contractor who will even do the job. There’s just so many things that would be tedious things you would overlook that you have to really consider now in terms of what are your true holding costs and that cost of money because it’ll eat away your profits super quick.

Dave:
That’s great advice, I really like that. All right, so Kathy coming at it from a more of a buy and hold perspective. Are you underwriting rents to grow, property values to grow? How are you thinking about things?

Kathy:
We are not changing our underwriting. It’s the same old deal. It’s buy and hold, and we need the property to cash flow. I want it to grow in value, so I want to be in areas that have potential for that. Potential for that would be areas where there’s jobs moving in, where there’s infrastructure growth, population growth, migration patterns, and then as long as it cash flows, then I’m good because it’s a long-term play. So it’s a little different, obviously, than a fix-and-flipper who needs to know what the market’s going to be like in two, or three, or six months. And based on your report and what we’re seeing, there are areas of the country where we’re still seeing rent growth, we’re still seeing price growth, and those are the areas I’m going to be in, and I’m just keeping things like they’ve been for 20 years.

Dave:
Absolutely. So, Kathy, what do you make of this? I hear a lot of people talking about these days that things don’t need a cash flow in year one, that rents will grow and things will get better. Do you buy into that?

Kathy:
Absolutely, because your costs are higher in year one. You’re paying closing costs. Your rents are most likely the lowest they’ll ever be if you’re buying right, and in the right markets, and estimating those rents properly. Then you’re going to probably, over time, and I do mean over time, see those rents go up. It might not be next year, it might not be the year after, and the markets were in, it probably will be, but over time, what do you think those rents are going to be in five or 10 years? They’re going to be higher, but you’re in a fixed payment. So yeah, I’m still bullish on the same long-term, 10-year, 15-year plan. That’s the goal.

Dave:
What about you, James? You said this is the year of the reset. Are you resetting all of your underwriting principles?

James:
Yeah, I really liked what Henry had to say because that is what is getting all investors is the debt and the soft costs that are compounding on people. And so yes, we’re adding a lot more hold times in and just more buffers. And underwriting, when people ask me, they’re like, “Are you being more conservative?” And yes, we definitely are, but the next question is always like, “Well, how much are you reducing the values?” And it is about those core principles of underwriting. We’re not actually reducing the values because we are buying on today’s value.
How we’re being protective in our underwriting is by adding, like what Henry said, an extra 25% in there for the debt cost, adding an extra 10% in to the construction budget, and just adding buffers in. But we’re not changing numbers around, so we’re just making sure that the deals are a little bit fatter. The fatter they are, the more room you have or the more profit you potential you have. And honestly, we were being very conservative adding these pads in, and now it’s going to come to fruition in 2024. A lot of the deals that we performed nine months ago are now up substantially in value because they re-corrected, and now we’re going to be hitting five to 8% above what we thought on our ARDs.

Dave:
That’s great. And do you redo your underwriting? How frequently do you revisit these ideas?

James:
In a more volatile market, we do it about once a month.

Dave:
Oh, wow. Okay.

James:
Yeah, because the market is always changing and the price points are moving around. We all look at this as nationwide or even statewide, but it’s really citywide and it’s block wide and we’re being really aggressive in some neighborhoods because there’s good growth, no inventory, and a high amount of buyer demand. We will be more aggressive in those neighborhoods, but maybe a neighborhood 20 minutes down the road, we might be way more conservative. And so you just really got to get very specific neighborhood by neighborhood and timeframe by timeframe.

Dave:
All right. Very good advice. Well, actually, that’s a good transition to the next tactical piece of advice here, which is focus on affordability. And I know that a lot of us assume that means focusing on affordable markets, but I think even within a specific market, my advice or what I see is that affordability is doing better even if you’re in an expensive market. So James, let’s stick with you. Do you buy that, because Seattle, the Pacific, Northwest, obviously, very expensive area, are you focusing on more affordable things or are you still buying across the price spectrum?

James:
I think we’re focusing on the affordability in our market, but we’re not going to cheaper price points by the nationwide median home price. There’s definitely blocks of the market that are selling really well, and it’s not just about the affordability, it’s about what the product is. If you have a really good product that people feel like they can be in there for five, 10 years that’s priced in the middle, that stuff is flying off the shelf because they’re not as worried about the short term.
They’re looking at more as the long term. So we’re really focusing on what appeals to the masses. Bedroom, bathroom counts, size of lots, is it livable? That is more what we’re targeting than the affordability. Now chances are those are all going into the affordable price range of us. We have certain blocks like 750 to 900 sells like crazy in Seattle, 1,1 to 1,3 sells like in Seattle, above two million has gotten a lot flatter. So yes, we are staying away from that, but we want to target where the masses are, and that’s why we’re focused more on density, smaller units, more units, higher price per square foot on a single lot. And that’s been trading a lot better.

Dave:
That’s a really good point, James, that affordability is relative. Obviously, Seattle is more expensive than almost all of the other markets in the country, but the median income in Seattle is also a lot higher than everywhere else in the country. And so what’s affordable to people in Seattle might be very different from what’s affordable in other markets. So even though the median home price in Seattle is well above the average across the country, there are still places that feel relatively affordable to people who live in that metro area. Now, Henry, you’re in a market that was affordable. Is it still affordable, and what’s your strategy related to where you’re searching and sort of the price spectrum?

Henry:
Yeah, I would consider it still affordable. Yeah, I think the average home price is going up as more and more people continue to move to the Northwest Arkansas area. But my business model has always been focused on affordability. I like single-family and small multifamily real estate, that’s my bread and butter. And the reason I got into it was because, most people, it has the highest percentage of buyers in that first-time home buyer market and the highest percentage of renters in that lower-tier price point rent. And so it was just a numbers thing for me. I want to be able to limit my risk by catering to the market that has the most buyers and most renters. And that’s more important now because, as a whole, we’re starting to see things are slowing down, especially with properties on the market for sale. So if you’re going to have less buyers out there buying houses, I, at least, want to be able to market to the majority of those buyers. And so we’re definitely not taking risks on luxury flips or A-class apartment buildings, that’s just not my cup of tea right now.

Dave:
Nice. Okay, good to know. Kathy, I feel like you’re the affordability evangelist and have been for years.

Kathy:
It’s my jam.

Dave:
That’s just your jam. So educate us.

Kathy:
Well, on a buy-and-hold viewpoint, you want to attract renters, and so you want to have the biggest pool of renters. So if you buy in the affordable range, and to me that’s the most people who can afford what you have, you’d want to be right below the median because the median is what probably the average person can afford in that market. And if you’re under that, then you’ve got a bigger pool. So a lot of people have the false belief that affordable is low-income areas, and that’s not what I mean at all. It’s just simply that people in the area can afford your product, they can afford to live where you are. So you just have a bigger pool of renters.
Plus, from a vision perspective and purpose, we’re solving a need. Builders aren’t really able to build affordable housing today. It’s really hard. I know, we’re trying. It’s hard. And so if you can do it by buying an older house, renovating it, making it feel like new, then again you’re solving a problem of people who would like to have a nice place to live. They probably make a pretty decent income, but just need an affordable place. So again, we’re not changing our underwriting, that’s what we’ve always done. We look for the median price of the area, and we stay just underneath that.

Dave:
That’s great. And I just wanted to clarify why, I think, personally, I believe affordability is going to dictate the market. When you look at the variables that are impacting what’s going on right now, there’s a lot of strong inherent demand. Demographics are positive, people still need places to live, of course. The thing that’s slowing down the market so much to the point where we’re at about 50% of home sales that we were two years ago is that affordability is low. And so demand leaves the market because people just can’t buy. But personally, I believe that in markets that are relatively more affordable, they’re just going to be more resilient. They’re just not as sensitive to interest rate fluctuations because people are already more comfortable and able to pay for it. They’re not stretching as much. And so if interest rates go up 25 basis points, it doesn’t matter as much.
Of course, it matters, but it’s just not going to have the same aggregate effect. All right, so here’s the third piece of advice, and we’ve already talked about this a little bit, and actually, before I say what it is, let me just get a quick reaction for you. Henry, when people ask you cash flow or appreciation, what do you say back to them?

Henry:
Yes.

Dave:
Okay, good. And just so you know, I don’t know if everyone listening to this hears this, but I feel like it’s just this debate like cash flow versus appreciation, which one’s more important? So Henry just says, yes, he wants it all. Kathy, what’s your opinion on this?

Kathy:
Same. Yes, please. Again, it depends on your stage in life and even though I’m getting older, I still am building a portfolio for a time when I won’t be working at all. So to me, it’s not so much about the cash flow today. I don’t need the cash flow today, but I need the investment to cover itself and hopefully have some cash flow to cover reserves and issues that come. But I’m really looking long term, this is 10 years from now when maybe I’ll still probably want to be working, but if I didn’t-

Dave:
Kathy, you’re going to be hosting this podcast in 10 years, we are not letting you retire.

Kathy:
Yes, I’ll be here, but it’s just having that optionality. So if you are at a stage in life where you don’t want to work and you don’t like your job, then cash flow is going to be much more important. But you have to have money to cash flow, and that’s the confusion. People think they could just cash flow right away with no money, and it just doesn’t work that way. You got to build the portfolio. I usually look at it like you need a million dollars to invest it to have a $70,000 salary income or even less.

Dave:
100%

Kathy:
Anyway, you’ve got to know your goal. And if you have that, if you inherited a million or you have a couple million, yeah, go find yourself some cash flow, and you might be able to just not work. But until then, it’s going to take a while.

Dave:
James, I know where you stand in this. You’re just all equity, right?

James:
Give me the juice, the equity. Give me the juice. The equity is the juice in the deal. I love what Kathy said. I will always be a juice guy and a nerdy juice guy until-

Henry:
Its just Monster.

James:
That’s my other jungle juice. But until I’m ready for financial freedom and to get that passive income, kick the cash flow down the road, get the appreciation, keep rolling it, stack it, and grow it, that has always been my juice.

Henry:
I want to add some color to this as somebody who’s kind of a small self-investor, which is, I think, what most people listening to the show probably are. I get it, cash flow and appreciation. You want to buy cash flow. Here’s what I’ve learned as a real estate investor, that cash flow is a myth because one bad maintenance item in your property can eat up your whole year’s worth of cash flow. Now, a lot of people get into this because they want to retire off cash flow, right? They want to replace their job income with cash flow. That was easier to do when interest rates were lower. It’s not as easy to do now. I still think you should buy something that cash flows. I’m not saying go buy a bad deal, but real wealth is not built through cash flow.
Everybody who is a real estate investor who’s now looking to retire, they got wealthy off equity and appreciation and holding onto their properties for the long term. So you just have to keep that into perspective. Don’t go buy bad deals, but don’t, what’s the phrase? I always get it wrong, but it’s like you step over a dime or step over something to… I think people pass up on a deal where they might make 60, 70, 80, 90, $100,000 in equity over a two to three-year period because it only made them $100 cash flow when they underwrote it when they first were going to buy it. And I think that’s shooting yourself in the foot.

Dave:
All right, well, you got the second idiom right, at least, the shooting yourself in the foot. I don’t know what that first one is either. It’s like tripping over a penny to pick up a dollar.

Henry:
I always get it wrong.

Dave:
Tripping over a dollar to pick up a penny. I don’t remember. It’s something like that. Anyway, well, I like this. Having this conversation before I said what my tip was, because I think we might disagree on this, but the way I look at cash flow as appreciation is sort of as a spectrum. On one end of the spectrum, there’s a pure cash flow deal that’s probably not going to appreciate. On the other end of the spectrum, there’s probably what James is talking about, a flip, a luxury flip, where you just build a ton of equity with no cash flow. And as Kathy said, where you land on that spectrum is very much dependent on where you are in life, your own risk tolerance, your resources, all these different things.
For me, I am always sort of being more towards the appreciation side of things, but I think in a correcting market, personally, I move more towards the cash flow side. And that’s for two reasons. The first one is because even then if the market goes down for a year or two, you’re still earning a return on your money. So even if the market goes down 2% for a year or two, that’s a paper loss, but you’re still with amortization and cash flow earning a positive return, which is great. And the second one is especially if you’re new and this is your first investment, I think the most conservative thing to do in a time like this is to make sure that you don’t have what’s called forced selling. So the thing that you really want to avoid is selling the property before you want to, before you’re ready to.
And before it is the optimal time to. Like Kathy said, buy something and hold onto it. But if you don’t cash flow and maybe you lose your job, you might have to sell that property during these short-term volatile times in the housing market, where it’s down 2% or 4%. Whereas, if you just cash flow and you can hold onto it for 10, 15, 20 years, that gives you more optionality. And so I agree with Henry saying that it’s not how you’re going to build wealth, but if you’re concerned about the market right now and you want to be a little bit more defensive, particularly if you don’t have a lot of other income to cover any shortfalls in a property, I recommend just making sure you have strong cash flow next year. But feel free to disagree any of you.

Kathy:
No, I think I agree, and I assure you, those 10 years will pass. And I have made that mistake where we had some negative cash flow properties in 2008, and it wasn’t fun. It wasn’t fun, especially when you saw the asset value go down. And so I am all about making sure that the expenses are covered and some so that you have extra money for future expenses because there will be, it’s a business, there’s going to be expenses.

James:
The only thing I would say about that is in a declining market or a market they could be shifting down, there’s a lot more fear behind it. The margins get substantially wider.

Dave:
For flipping.

James:
For flipping or even your multifamily fixer property right now. Two to four units, the rates are the worst, right? Commercial rates are better than a two-to-four unit by about a point. There’s not that much buyer demand for it. People don’t want to have to come up, they can’t really make it pencil very well. And they also don’t want to be negative on this higher interest rate for a six to nine-month period as they’re turning that property. And so the demand for that has fallen so greatly that you can now walk in with 20, 25% margins after stabilizing the house on a small multifamily, which was not possible 24 to 36 months ago. You can get better cash flow because the rates were better, but you couldn’t get that SWOT. And that’s the only thing is, like what Henry said in the beginning, when people are fearful, the margins get bigger. And so that’s why I’m still always going to be an equity guy.

Dave:
He’s a juice guy. I mean, once a juice guy always a juice guy

Henry:
Once you taste the juice, man.

Dave:
Well, that actually brings up my next point because one of my things, and just to be honest, I’m not a flipper. I’ve done some renovations, but not the kind of stuff you do, James, or you do, Henry. And so, to me, it looks riskier. So I’m curious, that’s one of my things is to do it with caution, especially if you’re new to it. I know that both of you have a lot of experience, you have systems in place, you know how to do this, but Henry, would you recommend people who are new to the value, let’s just call it the value add game, taking some big swings right now?

Henry:
No.

Dave:
All right, well, there we go.

Henry:
Here’s why. So I don’t think you shouldn’t try to flip a property. I think you can flip a property in any market. It’s more about you’ve got to make sure that you’re buying an extremely good deal because if you’re new and you’re getting into the fix and flip game, you’re going to screw up and you’re going to make mistakes, and you’ve got to have the cushion to cover those mistakes. It’s easier to buy a loser right now in this market and flip a loser because the cost of money is higher because there’s less buyers out there buying the property once you’re finished with it. And so you’ve really got to ensure that you’re buying a really good deal. And so you just got to be careful. Your deal has to be a good deal.
And I wouldn’t recommend anything that you’re going to have to spend six, seven, eight months rehabbing like a gut job. You want to do something where you can paint floors and put it back on the market fairly quickly. So I don’t recommend you taking big risks in the flipping game. You want to do something that’s going to be easier to get that rehab done, and that property turned around quicker, and something with a second exit strategy, it’s got to be able to cash flow as a rental property too. Because if you go to try to sell it and you don’t get, like right now, it’s hard to predict. I’ve got properties that I thought should have been sold months ago, and they’re not. And I’m a seasoned investor, so you got to be able to pivot.

Dave:
Yeah.

James:
And you can also mitigate. For new people, getting a value add is risky, and I don’t advise heavy value add, but if you pivot how you’re doing it, it’s totally safe. Right now, value add got harder, construction got harder. We started partnering with generals and cutting them into the deal, and it’s made it way simpler for us, way easier for us. They go faster, our budgets are lower, and then actually, by giving away 30% of the deal, we’re actually making more money by not having staff costs, the overages in debt times, and we’re getting in and out of the projects quicker. So you just mitigate the risk and bring in partners, right? If you’re new and you want to get into big margins, then partner with the right people.

Dave:
All right, well, what about some alternative ideas? I have one that I suggested here that I think Kathy you recently employed. So this other tactic that I am recommending is new construction, which is usually not a great prospect for real estate investors, but Kathy, why don’t you tell us why you recently bought new construction?

Kathy:
Well, if you follow Warren Buffett that he recently invested or Berkshire Hathaway invested, I think it was over $800 million in builder stocks, specifically in affordable with D.R. Horton, I believe it was. So if you think that he might do his research, he’s taking the bed that inventory, that supply is needed, not that we’re going to get flooded with supply, which means he doesn’t think there’s a housing crash coming, there’s an inventory crash. So that is obvious to me, too. There is such a need for housing, and yet it is still risky. Construction is risky. We’ve had projects we’ve knocked out of the park with 30, 40% annualized returns, and we’ve others where there were losses because COVID, sites were shut down, material costs soared. I mean, it’s a tough, volatile market. So now, like the guys were saying, being conservative is so important.
So we’re back at a time where there is distress out there, and this is an opportunity. I’m sorry for anyone feeling distress. Some of us are anyway with some of our projects, but it is also an opportunity. So we found a developer in distress. He wasn’t an experienced developer, he just had a bunch of money, bought a bunch of beautiful land in Oregon, Klamath Falls, on a lake, and tried to develop it, got the horizontal in, the roads, the infrastructure, but couldn’t get the project to the finish line. My partner, who’s been developing for 40 years, was able to negotiate a lease option where we don’t even have to buy the lots, we don’t have to do any horizontal development, it’s already done. We are just optioning it, and we’re getting the lots for half of what their current market value is, but we don’t even have to pay for them until the final buyer comes.
So we’ve really mitigated risk by being able to build on these homes and not have to acquire the land, which would be 10 million. I’d have to raise $10 million and be paying interest on that. We don’t have to. We’re getting these lots for $60,000 and don’t have to pay for them. The buyer pays at the end. So we’re mitigating risk that way and yet providing much-needed housing in an area where you don’t see builders flocking to Klamath Falls, Oregon. And yet there is a lot of actual job growth there in the military, Air Force, and officers coming in, moving in who want housing. And why not have one overlooking a beautiful lake?

Dave:
That’s awesome. Yeah, it just definitely seems like a great, great thing to be in if you can get into it right now. One of the other sort of alternative ideas here is something, James, I know you do a lot of, which is, learning to be a lender or trying to lend out money. Why do you do it?

James:
Oh, because it’s so easy. You spend 30 minutes vetting a deal, you click a button and the money goes out and you get paid. There’s no contract.

Dave:
Well, is that how it is for everyone?

Kathy:
It’s not like that for most. Ask commercial lenders today.

Dave:
Right, exactly.

James:
No, I mean, I love working money. I mean, me and Henry just did a loan this week, and it works out great because Henry gets to get his project done and gets him moving through, getting his goal for doubling his transactions this year. And investors are looking for more capital. The reason I love working money is we have numerous businesses in the Pacific, Northwest, we have eight that we run constantly. Those require a different amount of time at different businesses, depending on the cycle. And right now, what we’re really focused on is reshaping our businesses, reformatting some, that takes a lot more time in the infrastructure and the organization of your business. And as you lose time, that means I have less time to go spend in the field on a flip property. And again, that’s why we’re bringing these generals as partners to free up time.
But in addition to, because we might be buying a little bit less product, we have working capital that we can put to work, and that’s why I love hard money and lending it out. It pays you a high return, you know when you’re getting your capital back. It can’t get locked up, in theory, if you underwrite the deal correctly, and it’s this capital you make a good return on that you will have access to. I want to always know I have access to gunpowder if I really, really need it. If I get a home run crossing my plate, I want to have access to liquidity, and that’s what hard money does for me. And so it’s a great business, and you’re seeing it really get popular because running projects is not that fun right now. Construction is still unenjoyable. Working with wholesalers can be unenjoyable. Digging through hundreds amounts of deals before you find that gold mine can be unenjoyable. Hard money lending, again, it’s like vet it, find the right people, wire the money out, you can go do whatever you want, and it frees up a lot more time.

Kathy:
He’s so white collar now. Look at him just looking on the computer.

Dave:
Yeah, beep-boop, beep-bop, make a million dollars. Well, I am personally aspiring to learn, and James has offered to teach me how to do some of this, and I think we’re actually going to make an episode out of this, so definitely check that out because I know, hopefully, it’s just clicking buttons like James says, but I suspect there’s a little bit more to it than that. So I would like to learn a little bit more details here. Henry, what about you? Do you have any other alternative strategies or things that you’re pursuing next year?

Henry:
We’re going to focus a little more on midterm rentals. So we’re about to launch our first midterm rental, and if it goes well, we’re going to probably convert a few of my other long-term rentals to midterm rentals as the leases come due on those. So I’ve got a seasoned investor in my market who is doing midterm and corporate rentals in a few of his properties, and he’s shown me the numbers and the occupancy rates, and it’s really impressive. And so we’re going to give that a go. Now, I’m not going to do it on properties that don’t cash flow as a long-term rental.
That’s always my cover, is if I need to pivot, I can throw a tenant in it, and it’s still going to cash flow. But part of growth in your business, in your real estate business isn’t always acquisition of more doors. Growth can be like, what can I do? How can I leverage my current portfolio to increase the cash flow that it has? Maybe I can make some repairs that give me a higher monthly rent. Maybe I can convert a long-term into a midterm or a short-term. If you feel like you can operate that properly and then your dollar, you’re getting a higher percent on what you spend than if you go and buy something new.

Dave:
Dude, I’m so happy you said that. I feel like portfolio management is the single most overlooked part of real estate investing. Reallocating capital, figuring out if your current deals are performing at the right rate. If they’re not, should you sell them? Should you switch tactics? Should you do something else? It’s not talked about enough. So I love hearing that you’re doing that. It sounds like a great plan for next year. All right, well, James, Kathy, Henry, thank you so much for joining us. Hopefully, this conversation has helped you all understand that you can invest in any market. It really is just about adjusting your tactics and choosing the right tactics that work given the current situation. If you want to learn more about the current situation and some potential ways that you can get involved in the market next year, make sure to download the report I wrote, spend a lot of time on it, at least a couple of you have to read it, so just go to biggerpockets.com/report24. You can download it for free right there.

Kathy:
It’s so good, Dave.

Dave:
Oh, thank you.

Kathy:
It’s so good, yeah.

Dave:
You read it?

Kathy:
I loved reading it. And my company wants me to sequester in an office and write mine for two weeks. I’m just going to give them yours.

Dave:
There you go. Just put a new logo on it or just send them all to BiggerPockets. It’ll be fine.

Kathy:
Yeah.

Dave:
All right, well, thank you all. Hopefully, you guys enjoy it as well, and we’ll see you for the next episode of On The Market. On The Market was created by me, Dave Meyer, and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

David:
This is the BiggerPockets Podcast show 854. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the planet. Every week, bringing you the knowledge, how-tos and market insights that you need to make the best possible decisions in order to improve your financial position and build the life you’ve always wanted.
I’m joined today with two real estate studs, Dave Meyer and James Dainard, to analyze the state of real estate going into 2024. We’re going to help you understand where we are, the market forces that shaped how we got here, and how you can identify opportunities as well as mitigate your risk going into 2024. Welcome gentlemen. What can we expect from today’s show?

Dave:
Well, my hope today is to help everyone listening to this understand some of the complex and yes, sometimes confusing market forces that are driving the economy and the housing market and real estate returns right now. I know that sometimes these things seem a little bit daunting, but I think if you work to understand them a little bit and the things that we’re going to talk about today, you’ll see that you can invest in any type of real estate market. You just need to adopt the appropriate tactics.

James:
Yeah. We’re going to jump into also covering strategies that have became more riskier as the market and the cost of money has gone up, everything’s got riskier, but what are the solutions around that? Because higher the risk, higher the reward.

David:
Making more money while mitigating your risk, all that and more on today’s show. But before we get into it, I’ve got a quick dip for all of you. Dave Meyer, one of our guests here wrote the State of Real Estate Investing report for BiggerPockets, and it is available to you as a loyal BiggerPockets podcast listener for free at biggerpockets.com/report24. This report is going to have all the information that you need to know to make good investing decisions and we’re going to be drawing largely from that report in today’s show. Well, let’s get this thing started and let’s start with 2023. So Dave Meyer, can you tell me what happened in 2023 and where we are now?

Dave:
Sure. This might be recap for some people, but I will go quickly through this so everyone is on the same page and set the stage for our conversation. When we started 2023, the residential real estate market and for anyone residential is basically just anything that’s four units or fewer. The residential market was in a bit of a correction. It was certainly not the crash that a lot of people were calling for, but we entered the year where things were pretty slow, prices were down two to 3% and that was mostly due to affordability or the lack thereof. Affordability you probably know what it means, but it’s basically how easily the average American can afford the average price home and it’s not doing very well. As of actually right now, it’s the lowest it’s been since 1985. That has really just pulled a lot of demand out of the market.
That’s how we entered the year, but buyers didn’t want to be in the market, but neither did sellers. Anyone who’s been a part of real estate this year knows that there has been not a lot of inventory on the market. Prices have recovered a little bit. They’re as of now about up one to 2% year over year depending on who you ask. But home sales volume, as I’m sure both of you as real estate agents have seen, has really cratered a lot. It’s down almost 50% from where it was in 2021, and the whole market just feels sluggish and slow. That’s what we got for sales.
In terms of rent, it’s actually done pretty well. We’re up about 5% year over year, but it is much slower than it was over the last couple of years and we’re starting to see vacancies tick up a little bit, and so I think there’s reason to believe that rent’s growth is going to stagnate a little bit, but that’s where we’re at, is a sluggish market with relatively stable prices.

David:
All right. James, like me, you have your hands in a lot of different elements of real estate and you definitely have boots on the ground in several markets. So based on what Dave just said, have you seen that playing out in practical terms?

James:
Yeah. I mean Dave just summed up everything. It’s just slow and steady right now, and that’s across the board for us, whether we’re flipping properties, developing, renting, we’re just seeing this slow, slow absorption and as rates have increased, it’s just strangled the market and slowed it down, which has honestly been a little bit refreshing for us because it was so fast 24 months ago you couldn’t even think about before what you bought, but it’s been this slow grind, this transition down the last 12 months. We’re seeing it get slower and slower every month, but things are still absorbing and moving. The rates are starting to stall out. We’re starting to see a little bit more activity because buyer confidence is back and we’re just trying to push through this mud. 2023 was the year of the mud where it’s just everything is getting scrapped, your boot’s getting stuck in there and you’re pulling it back out and it’s just pushing through getting to some dry DIRT, which we’re getting to now as rates have steadily down and we’re just getting through it.

David:
I like that. Trying to find the dry DIRT. It’s a great way to put it.

Dave:
You going to steal that analogy now, David?

David:
Yeah. I’m hoping that not enough people listen to this that they don’t know that it came from James and people can assume that I came up with that because that’s really good. The year of the mud.

James:
It’s because I was just offroading and glam all weekend, so I’m still trapped in offroad. Don’t get stuck. Got stuck way too many. I got stuck more times this weekend than I did in 2023, so that is the good sign.

David:
All right. Good stuff. So that’s what we’ve gone through in 2023, but what should we as investors be looking forward to in 2024? What strategies look the most promising and what do we need to avoid? More on that coming after this quick break.
With all these market forces and uncertainty in mind, let’s move into what we can do in 2024. Dave, in your report you cover nine suggestions or tactics that you think people need to be aware of for 2024. We’ve isolated four of those and we’re going to go over them in today’s show. Let’s start with the risks that people need to be aware of.

Dave:
Yeah. So we’re going to highlight just a couple of the suggestions that I’ve made and just so everyone knows, these are suggestions that I personally am pursuing and just that I’ve gathered from talking to dozens of other experienced investors about what they are doing in the next year. And we’re going to go over a few if you want to see all of them, make sure to check out the report. Again, you can see this for free. But one of the main ones I wanted to ask James about actually is I am feeling cautious about BRRRRs and Flips. That’s not my sweet spot, but just looking at some of the numbers as an outsider looking in on this industry, I’m curious what you think about this value add business model heading into 2024.

James:
I think value add is really where the strategy is right now because again, if you can’t find cashflow, the only way to rack a return is to implement the right planning and force that equity up. In times where everything’s more money… It’s like every time you go to lunch, it’s a hundred bucks now where it used to be like 20 or everything has got more-

Dave:
Where are you eating lunch?

James:
I feel like I’m not eating lunches at the fanciest places, Dave. I will send you pictures of my receipt, but I do have kids and it just adds up.

Dave:
Okay. For the whole family? Okay. I thought you were eating all by yourself.

James:
The whole family. No, not for me. No. I’m always on the chase of that $10 teriyaki to be fair, but it’s about trying to get those huge equity gains and people get nervous about these two strategies for fair reasons. They are very risky and the reason they’re risky is your cost of debt on your takedown financing is three to four points higher. Things take longer. When you are selling a property, you are keeping them for a longer period of time. As the market slows down, things are transacting and they’re transacting for what they’re listed for. We’re not seeing those huge drops off lists, but they take time and you’ve got to ride it out and you have to ride it out with expensive debt. So that’s where the risk is, is this cash suck of where you’re just constantly feeding these investment beasts until they are through their stabilizations and the sales.
So it’s about calving cash reserves right now as you go into the deal. The good thing is there’s big margin deals in today’s market in all markets and you don’t have to do as many. You can pick one, work through that, but you have to have the reserves, whether it’s a fix and flip or a BRRRR, it takes more time and you have to be able to keep up with that debt and service it. The biggest risk with BRRRRs right now is that floating rates. There’s been plenty of times I bought rentals in 2023 and I performed my rate at like 7% and all of a sudden it says 7 1/2 and you’re going shoot. I mean when you have a half point adjustment, it can really knock down your cashflow, it can take two to three points off your return.
So it’s about just kind preparing and padding everything out. If you’re buying a short-term investment, add an extra two to three months to your debt cost and your hold times. That will get you through. It lets you plan for your liquidity. If you’re buying a rental property and you have a longer stabilization period, throw an extra half point on your rate, see how that works. And then the underwriting is so essential now. People got a little bit, I hate to use this word, but lazy 2020 to 2022. You would buy something and if you did not underwrite it correctly, it was still going to have growth. Now if you don’t underwrite it correctly with the right values, the right income projections, all of your gunpowder, all of your cash is going to get locked up in the deal and that’s the risk of BRRRRs right now.
The point of BRRRRs is to grow your capital, grow your assets and keep your money. If you miscalculate, the banks are only going to leverage you so much with 75% loan to value and making sure that your DCR, or that your debt covers at that point. So you got to make sure you have your coverage. If you don’t underwrite correctly, your money’s getting trapped. So you just want to really slow down on those deals, work through the angles, make sure that you have the right team put together and then lock your debt now. It is not the days of let’s go buy something, figure out the debt later. If you’re buying a property to keep it, make sure you are fully pre-qualified with a mortgage broker, that you understand the rent income and that you can cover. And if you can’t, you might want to look at the next deal or make sure that you work that into your gunpowder and what your cashflow projections are going to be.

David:
Okay. So take things a little bit slower, spend a little bit more time upfront underwriting and spend a little bit more time on the back end actually executing on the plan. That’s a problem that I’ve noticed in 2023, things were moving so quickly that it was very difficult to pay attention to all the moving pieces once you got into the construction when you were trying to execute on the deal. But like you said, things worked out because of how much the values were increasing and even the rents were increasing and then rates were usually going down. So at the end of every deal it was sweeter than when you went into it. Now you’re saying hey, you actually want to assume the worst. Assume that rates are going to go up a half a point or so, and assume that you’re going to have to spend a lot more time executing and making sure that the things get done that need to get done on the deals that you’re buying. Dave, I want to throw it to you. What are two strategies that you see an upside for in 2024?

Dave:
All right. I have one conventional advice for you and one unconventional one. So I’ll start with one that you’ve all probably heard of which is house hacking. And house hacking works in pretty much any market conditions and in almost any market throughout the country. If you’re unfamiliar with the strategy, it’s basically just an owner occupied rental property where you live in one unit, rent out the others or live in one bedroom and find yourself some roommates. But in 2024 there was something very exciting happening with house hacking. There’s some new rules for FHA mortgages that allow you now to put as little as 5% down for small multi-families. So that’s any property that has two to four units. Previously you had to put at least 20% down if you wanted an FHA mortgage on those types of properties. Now you’ll be able to get into some of these small multi-families for a lot less cash down.
There’s also some rules that allow you to now count rental property from an ADU, which is an accessory dwelling unit. People call it a mother-in-law suite or basically you have a shed in your backyard that’s hopefully up to code and safe and everything. You can now count that towards your mortgage so you can now qualify for more when you’re looking for that type of property. So those are two different new mortgage rules that make house hacking more affordable and more accessible than ever before.
The second one is a little less conventional and that is to look at new construction. And I know during normal times for investors, it is not typically worth the premium to pay for new construction because you don’t get enough rent out of it. It’s similar to buying a new car. You buy something that’s brand new, there’s a premium on that and for investors, it’s not usually worth it. But right now we are seeing really good deals on new construction because builders, their business model is different than a homeowner who’s trying to sell or an investor who might just wait something out. They have to move inventory. They’re building and they got to sell those things quickly, get that stuff off their balance sheet. So what they’re doing to move inventory right now is doing rate buy downs. We’re regularly seeing home builders get buy down your rate 1%, 2%. So rather than buying something in existing home that is used for a 7.5% rate, you could buy something new for 5.5%.
And it’s worth noting that buy downs are not permanent. Those are for a year or two or three depending on the particular product, but it is a really good option for people depending on your particular market and what they’re offering. But I think new construction is more attractive now than it has been anytime in my investing career and it’s at least worth looking at right now. In the era of super low inventory, now new construction accounts for 30% of the deals on the market. Normally it’s like 10. So if you want to get in the market, this could be a good option for you.

David:
So if it’s hard to find a deal, maybe you build a deal. James, what are you seeing in this space?

James:
I love what Dave said because I mean it works in all different aspects. Like a home buyer, you get to work with these builders, they’ll buyer rate down and you can get your payment more affordable and it’s all built in the pricing. But on the investment side, we love development right now and there’s a couple main reasons why. DIRT was at its all time high price wise 18 months ago. It has fallen, at least in our local market and I’ve seen it pretty consistent through any of the major metro cities, is DIRT pricing’s down nearly 25 to 30% on cost. Not only that, the structure has changed because as debt has gotten more expensive on us builders across the market, all of the builders have switched their mindset to going, “Hey, I need capital, I need gunpowder right now and I do not want to sit on these projects for 24 month times.”
The good thing about the building community, it’s a lot more logical and they move in waves over the smaller investors. Smaller investors have so many different plans, but builders are all on the same plan, buy a piece of land, develop it, build it for a certain cost, sell it per profit, it’s all the same and they’re all going for very, very similar margins. So now what it’s done is we’ve had to buy these properties in cash or with hard money and lever as you’re waiting for permits.
Almost every deal we’re doing now is a close on permit, job. So we don’t have to be in that deal that long because it takes us 9 to 12 months to build the product. We’re closing on permit, cost of DIRT is down 30%. And also the cost to build. If you look at the renovating versus new construction, new construction costs are down below renovation and that’s because the trades that are working. The volume has slowed down, the amount of land has gone down the trades, there’s a lot more gaps in their schedule than there is for that mom and pops contractor that’s working for the smaller investor. They are constantly busy, they’re using their own hands and they’re busy and their pricing hasn’t given. So it’s gotten cheaper across the board.
And the last thing I really love about, and this is something that everyone wants to think about, we were talking about with the risk and Flips is that cash suck. Where you got to make that 12% hard money payment now on your deal for the next 9 to 12 months as you’re stabilizing it, with new construction, the debt’s better. It’s cheaper by one to two points and a lot of times they’re going to give you an interest reserves, which helps with your cashflow in times where things are just getting eroded right now.
And the interest reserve is when we buy these deals and we structure them with close on permits is we don’t need to make a payment on that for 12 months. They have built our payments into our loan balance, which helps us maximize our cash returns. It helps us with our liquidity and the overall investments more stable than it is in the fix and flip market. So we love dev right now and we didn’t really like it 24 months ago. So the opportunities are here.

David:
Yeah. It’d be wonderful if we could step up the construction of more products. If the pressure that was put on builders and the deals making more sense actually led to us building more homes. It’s always been in the investing community as long as I’ve been a part of it, look for something that’s already there because you’re going to get a better deal on a used car rather than a new car. But if the car inventory is down or in this case the home inventory is down, we need to make more of them. So that would be a huge blessing. If it could be more profitable for builders to build more homes, we could build more homes and we could actually get the affordability of homes lower as well as the price of homes lower so more people could get into the market.
A big fear I have going into 2024 is that deals won’t make sense for the average American who doesn’t have a ton of cash and is spending $100 on lunch, but it will make sense for BlackRock and other institutional funds that are strapped with cash and have access to cheaper capital than the people like us that are listening to this podcast do. So my fingers are crossed that builder step up and start building. All right. James, I want to ask you, what does success look like in 2024 and is it different than what it’s looked like in the previous five to eight years?

James:
So as the market changes, there’s always a different definition of success. I think the last 24 months or 24 months ago when the rates were low, definition of success was buy any asset, slap cheap debt on it and let it grow. And that was the strategy because the cheap money was growing everything and the definition of success when you go into a transitionary market, it’s no different than it was when it was 2009, ’10 and ’11 where there wasn’t a lot of that instant gratification of like, I just bought this property and I’m getting rewarded today. And the instant gratification needs to go away. It’s about that long-term growth and long-term plan.
And for me it’s the year of making big equity gains to use for big purposes in 12 to 24, 36 months down the road. I like loading my vault up in markets like this today, and that’s getting into the game, finding the property, strategizing behind it, and then letting that asset grow or walking into that instant forced equity with the right construction plan. And because the market has slowed down so much right now and the transactions are down, sellers are down, buyers are down, there is some massive opportunities going on. So it’s all about finding those huge equity pop big growth plans for the future, not for today. Again, going back to 2009 and ’10, we didn’t have a whole lot of success on paper during those years, but those years were huge for us for growth than the last 20. It was getting that inventory in that would help us move forward.

David:
So give me a practical example of what a good deal would’ve looked like in 2023 and maybe what a good deal will look like going into 2024?

James:
I mean, a good deal of 2023 was just finding any margin. It depends on what asset class it is too. In 2023, I think for a BRRRR property, my goal was a good deal was to break even. And if I could break even on my interest rate or cover with the rents after all expenses and get a huge maybe six figure equity spread or even a 50,000, a massive equity spread, that was a win for me in 2023, especially if it had any other extra investment kickers in there, like development density plays, path of progress, and if I could buy something break even, I know that there’s upside in 2025 to 2026 once rates come down.
Some other good, I think definitions of deals in 2023 was you didn’t have to work as hard, which sounds weird, but because the transactions were down from ’20 to ’22, we were having to BRRRR properties and buy properties that were heavy, heavy fixers to get that deep discount to be under that 75% loan to value to make it cashflow. Now we can buy a lot simpler projects because they’re breaking even and most investors are staying clear from them and we just have to ride out the interest rates and not do as much construction, but just ride those ways of rates.
So for me, if I can get into an asset break even with some additional upside, that is 100% a win. In 2024, I think that the definition is going to be, there’s a lot more instant gratification this year because as the investors have pulled out, we’ve been able to acquire some very good inventory on some very good discounts that are going into dispo. And just because the market is slowing down does not mean we’re not selling that property. Things are still selling, still moving, there’s not a lot of inventory. So I think 2024, the profitability of in the now is going to be a lot bigger than it was in 2023. And we’re already seeing that in our P&Ls in our cashflow forecasting.

David:
Dave, anything to add on James points there?

Dave:
I just really like what James was saying about trying to break even, and I know that’s not the sexiest or coolest thing to say, but I generally agree that right now, particularly in this type of market, my personal goal is to try and do better than break even when I look across different profit drivers. So I understand that prices next year are probably going to be flat in some markets they might go down a little bit. In some markets they might go up a little bit. But if I have cashflow and amortization and tax benefits, as long as those things can carry me through any short-term volatility in the market, I’m still going to buy anything that has long-term potential. Like James said, I’m looking to see what this deal is going to do in 2025, ’26, ’27, even further out. And as long as I have enough cashflow and short-term benefits to carry me through personally, I don’t need to hit a home run in the next year. I just want to do something 3, 5, 7 years down the line.

David:
That’s interesting because I believe that’s how real estate has typically operated in most markets that didn’t have massive amounts of quantitative easing. Usually when people were buying real estate, they were taking a long-term approach and they want to know about the location, that demographics of the area. If businesses were moving in where rents were headed. It wasn’t always just about what is it right now in this moment and how big of a chunk of equity or how much cashflow can I get when I first buy it? So while this sounds like a change, it’s almost like a return to what real estate has been for the majority of time it’s been around. Would you two agree?

Dave:
Yeah. In my experience, yeah. I mean real estate is a long-term industry. Getting back to the point where appreciation is two or 3% is normal. In normal times over the last 50 years, real estate has appreciated a little bit more than inflation, like 1% more than inflation. So this idea that we need 5, 10, 15% year-over-year price growth to make it a return is not true. It was nice for a little bit, it was super easy, but that’s why everyone got into it. And this is just getting back to understanding the full suite of different ways you can make money in real estate and applying them over a long period of time. And when you do that, it’s a very relatively low risk way to invest.

David:
So James, in order for somebody to jump on a good deal, they have to know what a good deal looks like. What are some factors or metrics that you think people should be keyed in on 2024 that scream, I’m a good deal, buy me?

James:
I think it comes down to always setting your buy box and in knowing what your expectations for return are and every year you got to change it. My 2023 buy box is different than it is going into 2024. It’s actually dramatically different. The definition of a good deal, it’s going to change for Dave, it’s going change for you and change for me. We all have it. We’re in different markets with different goals, but how you get through these and you work through those math is you use, it’s all in the underwriting. Establish your buy box and then go through that in-depth underwriting and working through the calculations, does this get me in my goal on a two year period? And I think it’s very important for today to set your buy box that has 2 and 3 year goals on it, not six and 12 month goals.
There always will be the 6 and 12 month flip deals, the wholesaling deals, those instant cash creation types of properties, but you really got to establish those and that’s about working through the underwriting, working through the calculators, utilizing tools like the BiggerPockets calculators to go through and go, “Hey, in 2024, if my cash on cash return for rentals is at 10% or to have at least a two X factor on equity gain for the cash I’m investing at that point, I know what I want to buy.”
Then it’s about underwriting. Pulling the right analysis with the right team, using the calculators and BiggerPockets is great for that. You can do the buy and hold calculator, go through your BRRRR strategy, how do you maximize your cash, and then is it hitting that true return? But I think the biggest thing is make sure that your goals are defined over a longer period. Then set your buy box, work through the calculations, does the deal work or not? Move on to the next one if it doesn’t work.

David:
So do you have a hypothetical set of criteria that you would recommend people look for in an average market? Like a cash on cash return or some equity that you’d like to see in a deal?

James:
Yeah. Typically, with the BRRRR strategy or even Flips, I’m a heavy value add guy. If I’m not walking into a 25% equity position, whether it’s a Flip, a BRRRR property, a development piece, all in with my purchase price, my rehab, or my bill cost and my soft cost, I’m not that into it. We own a lot of property in Seattle and we have great cashflow. We cashflow around 10%, but that is not what I’m looking for today. That’s the long-term approach. It’s about building those huge equity spreads. So if I’m not getting 25% out of it, I’m not interested because at the end of the day, it’s not going to cashflow that well with the rates. But the equity is what you’re building. If you can put $25,000 down on a cheaper property and create $25,000 in equity, that’s 100% return that you can make in a 12 month period. That is Huge.

David:
Great point. And James, you’ve always had a different way of looking at real estate. I remember the first time I heard you saying, “Hey, I can buy a property and I can hold it as a rental and I can get a 5% cash on cash return or I can flip it and I can get a 45% return on my money or something like that.” I just remember thinking, you don’t hear people mention it like that very often, but if you’re looking at capital growth as opposed to passive income, it does make sense. Dave, what are some things that you’re looking for in deals going into 2024 from a metric position?

Dave:
For me, I consider myself an IRR investor because I think it is the best way to, and for anyone who doesn’t know what that means, it’s internal rate of return and it’s a metric that you can use to evaluate deals that uses the time value of money to combine both equity and cashflow into one metric. So you can see how the big picture is impacted. To me, I just look at that because I am in a position in my career, I work full-time and I don’t need the same level as cashflow right now as someone who might be approaching retirement or wants to retire early.
So for me, I’m just looking at how I can maximize my IRR at all times. And to me that’s typically a combination. Trying to find deals and I mostly invest passively, but trying to find deals where there is some element of value add and then there’s a cashflow hold. But getting your money out in five to seven years instead of keeping it into a property for 20 or 30 years, because typically your IRR, your time weighted returns tend to decline over time if you do that. So for me, I look for five to seven year holds and places where I can maximize my total return. And that really hasn’t changed much over the last couple of years and I doubt it will for me anytime soon.

David:
Guys, this has been fantastic. Dave, any last words you want to leave the audience with moving out of here? Where can they find your report?

Dave:
No, thank you for having me. Hopefully everyone learn something. And if you want to learn more, just check out biggerpockets.com/report24.

David:
James, how about you? Any last words for the audience?

James:
Don’t get spooked by the media. Build your buy box. Go find some good opportunities out there and read Dave’s report. BiggerPockets, they do such a great job giving you that information. That’s how you build your buy box. Read through it, then build your buy box. Don’t build your buy box first.

David:
All right. So head over to biggerpockets.com/report24 for deeper analysis and more suggestions for what you could do to empower yourself in 2024. We’ve also mentioned several strategies on the show. If you want to learn more about any of those, head over to biggerpockets.com/store. And there are books that BiggerPockets has published that will teach you just about everything you need to know about those topics. Please, if you haven’t already done so, subscribe to the podcast, leave us a review, let us know what you thought about today’s show and keep listening to further BiggerPockets episodes so you can stay up to date with what’s going on in this ever-changing market. I am David Greene. For Dave Meyer and James Dainard, signing off.

U.K. property sales will improve over the next six months amid falling inflation and speculation over rate cuts from the Bank of England, says Tom Bill, head of U.K. residential research at Knight Frank.

Zillow just released its outlook for 2024, and a lot of investors will want to pay attention to what it says. From mortgage rates and prices to top markets and home flipping activity, the report offers predictions for all of it.

Here are the main points you’ll want to take away.

More Housing Supply Will Be Unlocked

According to Zillow’s economists, as well as general expectations surrounding the Federal Reserve’s moves next year, interest rates, including those on mortgages, are going to stay high for some time. 

The Mortgage Bankers Association forecasts 30-year loan rates to remain above 6% for the entire year, while Fannie Mae doesn’t expect them to drop below 7%. 

Because of this extended timeline, Zillow projects that previously gun-shy homeowners will soon come to accept those higher rates and start listing their homes. 

“With mortgage rates rising over the past two years, homeowners have been reluctant to sell, opting instead to hold onto the ultra-low interest rate on their current mortgage,” the report reads. “More of these homeowners will end their holdout for lower rates and go ahead with those moves.”

Home Price Growth Will Slow

With more supply will come slower price growth. As the report puts it, “More homes on the market—even the gradual increase Zillow economists expect—would be good news for homebuyers, spreading demand and easing upward pressure on prices.”

In total, the company only projects prices to remain steady, only falling about 0.2%. But when combined with a slight decrease in rates, it could mean an affordability boost for many looking to buy a home.

“Taken together, the cost of buying a home looks to be on track to level off next year, with the possibility of costs falling if mortgage rates do,” the report explains.

Urban Locations Will Grow in Popularity

Downtown areas and urban markets suffered during the pandemic, but it seems interest in the areas is picking back up—which is good news for rental property owners in these areas.

According to Zillow’s Observed Rent Index, the gap between urban and suburban rents is narrowing, and in 33 major metro areas, suburban rent growth is actually outpacing those in urban areas. That said, New York City is one area where urban interest is growing, and “Zillow foresees more markets following suit, with rental demand surging near downtown centers,” the report says.

An important thing to note is that many urban areas have experienced what Zillow calls a “multifamily construction boom” this year, which could pose a challenge for buy-and-hold investors in these areas. 

“A huge number of new homes have hit the market,” Zillow says. “More options for renters looking for a new place means landlords who are trying to attract tenants have more reason to compete with each other on price. That’s a key reason more rental listings are offering concessions.”

Landlords may also want to invest more into making their properties attractive to stand out from the pack.

AI Will Make Real Estate Easier

Advancements in artificial intelligence will make buying, selling, and shopping for properties easier next year, according to Zillow. The company predicts a slew of new AI-powered tools will hit the market in 2024—ones that improve listing descriptions, create 3D content, and offer other benefits that might be useful to agents, buyers, and sellers. 

Home shoppers can also expect “generative-AI-powered experiences” that help them gather valuable insights on properties and guide them throughout the mortgage process. 

Investors Will Have Some Competition

While Zillow does project more for-sale housing to hit the market in 2024, it won’t be enough to fully sate demand. This will push traditional homebuyers away from more move-in ready properties and into flipper territory, toward “homes that need a little work,” the company predicts. 

“Faced with limited choices, buyers will be willing to overlook small flaws, such as an outdated bathroom or kitchen,” the report reads.

For investors, this means more competition on these properties and, potentially, higher costs. As Zillow puts it, “These homes won’t come cheap.”

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This topic comes up so frequently on the BiggerPockets forums that I thought it could use its own article just to get a succinct train of thought from one very experienced person.

So what’s my experience? I was a general contractor (GC) in an extremely wealthy Southern California town for decades, as well as holding several other licenses in trades such as swimming pool construction, plumbing, concrete, and interior design.

Where the Contractor Fits in Picking Materials and Finishes

It is a common occurrence for a customer to want to pick out design finishes. Of course, they want to choose the electrical fixtures, such as area lighting, pendants, and plumbing fixtures, as well as faucets, toilets, shower heads, and the like. 

They will choose these with my blessing because I really do not want to be involved in such a personal choice. I will, of course, offer my opinion based on my experience with certain types of fixtures or even the quality and endurance of certain brands and models.

The same applies to cabinets and countertops. The customer should absolutely choose these because the myriad of colors, wood species, and materials make it an important and difficult decision for anyone, and the GC does not want this responsibility. 

Once again, I would offer my opinion on things like wood species, i.e., which is harder and more durable, as well as counters, stone, and tile materials—which will hold up better, take sealer better, last longer, hold a shine better, etc. I would even urge them to avoid certain species of stone that last well for a few years and then start to deteriorate (some types of granite have this issue). It is precisely my decades of experience that the customer is looking for and buying when they choose me over a newer/younger contractor.

But the customer’s involvement in the process must stop right there. Occasionally, a certain type of customer will want to order products themselves, usually because they think they are going to save money. Sometimes, they’ll say those dreaded words: “I want to get points on my credit card.” This is a shortsighted attitude—trading control of the project for a few measly dollars or miles. This is where a good, experienced GC will put their foot down and just say no. 

A lot of people new to the construction business, either investors or just homeowners, cannot understand why it makes any difference who pays for the materials. Let’s discuss that now.

Why the Contractor Should Be in Control of Materials

It is a basic fact that the GC is and should/must be the “king” of the job site. It is not about ego or some personality issue; it is simply about this: Having ultimate control of a project is imperative for the project to go smoothly and end up finishing on time and on budget. 

The GC must oversee the schedule, subcontractors, his crew, the building inspectors and city building and planning departments, OSHA, federal and state laws, job site security, neighbors, and materials so that everything moves seamlessly through the remodel (or new build) process. 

Any and every aspect that moves into someone else’s arena is another accident waiting to happen. In other words, every facet of the project that the contractor loses control of is another thing, amongst the hundreds of moving parts, that can and will fall into Mr. Murphy’s wheelhouse.

What Can Happen When the Contractor Is Not in Control of Materials 

I can provide an example from my own past. A customer had ordered some finish material, furniture, and fixtures from Italy. 

We got to the point in the process where these items were needed, and needed now, to allow my crew and subs to keep moving ahead as planned. That was when I was informed: “Oh, I forgot to tell you. These are being shipped from Italy. They were supposed to be here a week ago, but they just told me that they’ll be two weeks late.” They were actually a month late and caused the project to be partially shut down because in construction, you have to install Part A before Part B, and so on. 

This Is Not About Marking Up Prices

Every contractor I know has stories about what happens when the customer tries to get involved with materials. They always seem to think they can find them cheaper and save the markup. 

But this “markup” is greatly misunderstood by the public. It usually does not really exist. Any good, long-time general contractor will have their favorite vendors, and they’re usually not the big-box stores.

From windows and doors to electrical and plumbing, a GC has probably bought hundreds of thousands of dollars worth of products from these vendors. That gets them volume pricing that a regular consumer just cannot touch. They will then add a percentage to this special pricing to compensate them for this variable, which I’ll discuss next.

The Customer/Investor Never Thinks of This

So, let’s say an investor (for example) insists on choosing and paying for their own products for a remodel, and the young contractor foolishly decides it’s not worth arguing about. Besides, they really need the job. The investor calls Home Depot and orders materials or sends the contractor with their list and has the materials paid for on their credit card (and they get their precious points). 

Okay, great. Why is that any kind of issue? Well, let’s examine this: Who does the following very necessary tasks?

• Load the materials onto carts in the store.
• Load them into their trucks.
• Unload them at the job site.
• Put them in a safe place in an already or soon-to-be partially demoed house.
• Provide security for the duration of the project.
• Take back the wrong products, like those that are the wrong color/size/brand/don’t fit.
• Deal with warranty service for those products that break or fail while still covered.

We all know that the customer will not do this—they will expect the contractor to do all of the above. And they will be outraged if the contractor expects to be paid for performing all of these important, necessary, and critical tasks.

Examples of When the Customer Can Be Involved in the Material Process 

Now that I’ve spent all this time destroying the concept of customers being involved in the material process, I must get into a circumstance where they can and maybe even should be involved.

In most large cities, there are supply houses attached to plumbing and electrical warehouses that have huge areas set up with many samples of their wares, such as dozens of sinks, tubs of all sorts, the latest and greatest in modern toilets, etc. There are other establishments (like Pirch, for example, in SoCal) that have two- to three-story facilities with kitchen areas set up, bathroom areas, outdoor living areas, and more so that you can take a customer there and walk the whole store where they can get a great overview of all the products available to them in today’s market. They will assign a rep to you and the customer to facilitate the process, babysit the customer as they select and purchase products, and even serve you lunch.

Yes, I said the contractor should select and purchase products. So why am I saying it is okay in these cases? 

Because the GC is still in control. The company rep essentially works for the GC because the GC will send them many customers every year. The rep will make sure that the customer chooses materials that the GC will approve and want to install. The GC will not necessarily receive a monetary kickback (although it can happen), but they are compensated in other ways.

Final Thoughts 

So, we can see that it is critical for the general contractor to have full control of the construction project, especially the management of materials and supplies. Some of these are automatic, like the wire the electricians use or the pipe the plumbers use. But even though a well-meaning customer might want to buy the materials, they should realize that this is a huge mistake. 

Pick out the materials? Yes, of course, within reason. But leave the rest to your contractor. Let them pick them up and pay for them. 

If you insist on getting some credit card points, perhaps you can work out a deal where the GC buys the materials, and you make a credit card payment to them for a single invoice that reflects the materials specifically. But you, as the customer, will be doing yourself a huge favor by staying out of the whole materials and vendor part of the game.

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Ashley:
This is Real Estate Rookie, episode 346. My name is Ashley Kehr, and I’m here with my co-host, Tony J. Robinson.

Tony:
Welcome to The Real Estate Rookie Podcast where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today, we have the one and only Andrew Cushman. If you guys are at all familiar with the BiggerPockets ecosystem, he’s had, I don’t know, 50 episodes on The Real Estate Podcast, but it’s his first time here on the Rookie Show. Andrew is an expert in the multifamily space. So we bring him on, and you’re going to hear his journey of getting started as a new multifamily investor, what a real estate syndication is, and why he made the transition from flipping houses to real estate syndication. You’re going to learn about how to build your buy box, your multifamily. We’re going to talk about is now a good time to even get started in multifamily, and you’ll be surprised, I think, by what Andrew’s answer is.

Ashley:
We recently had AJ Osborne on episode 340, and he talks about why now is a great time to get into self storage. So I’m very curious as to what Andrew has to say to us as to why now is a great time to get into multifamily.

Tony:
Now, before we keep going, I just want to give a quick shout-out to someone in the rookie audience by the username of Kdemsky79, and Kdemsky left a five-star review on Apple Podcasts and said, “I love this podcast because it gives me the inspiration to pursue my real estate investing dreams. There’s a good spread of expert guests,” like today’s episode, “and rookies telling their story.” So if you are a part of the rookie audience and you have not yet left us an honest rating and review, please do because the more reviews we get, the more folks we can inspire, and inspiring folks helps them take action and hopefully get their first deal which is what we’re all about here at The Rookie Podcast.

Ashley:
Andrew, welcome to the show. Let’s jump right into it. Andrew, I want to know, is right now a great time for a rookie investor to get into multifamily?

Andrew:
Contrary to what the news headlines would have you believe, yes, it is. One big thing to keep in mind is if you’re looking to get into this all this negative crazy stuff that you’re hearing about interest rates going up, and people can’t make the mortgage payments, and syndicators are collapsing, all this stuff is happening, and it’s true, but it only affects deals that were bought in the past. If you are new, if you’re looking to get into new deals, all this actually benefits you because prices have come down 20% to 30%, and it’s a myth that interest rates make apartments not work. What happens is when interest rates go up, the cost of debt goes up, and therefore, the price has to come down in order to be able to have the property generate enough income to pay for the debt. So if you’re going into a new deal, all that means is you just buy it at the right price, you go get a loan, doesn’t matter if it’s 6%, 7%, 8% as long as you bought the property for the right price, and if it cashflows and works today, you’re good to go.
So all of the turmoil that you’re hearing, if you’re looking to get into the business, this is the chance you’ve been waiting for for the last 10 years because the refrain for the last 10 years is, “Oh, it’s so hard to get a deal. It’s too hard. There’s so much competition. Everyone is overbidding,” and that was all true. That is all going away, and now is definitely the time to get in because, again, competition is way down, pricing is down 20% to 30%, seller motivation is up. Right? It used to be you had to put hard money which means before you even do any due diligence, you can’t get your deposit back, so there’s a huge risk there. That is going away.
Also, keep in mind it is impossible to perfectly time the market. We will only know when the bottom is when we’re looking back going, “Oh dang, that was it. I wish I bought more.” So if you take advantage of the disruption now and pick up the right properties that you can hold long-term, nobody has ever regretted buying a nice multifamily property 20 years ago. You cannot find that person. So if you be that person who starts buying now, then you’re setting yourself up for success down the road. Again, now is the chance you’ve been waiting for for the last decade.

Tony:
Andrew, you said that some of the properties that aren’t performing well or that are struggling, those properties that were purchased in the past, what were some of those mistakes that you think those buyers made that set them up to struggle given this current economic climate, and what can we learn from that as new investors?

Andrew:
I’d say there’s two main mistakes that buyers of all kinds made from mom-and-pop to syndicators to big institutions. One of them is that people got a little too aggressive with their assumptions, and this addresses a broader topic of when you’re looking at deals of making assumptions that have a high probability of coming true. So a given example is I saw deals get sent to me where the person or the group buying it was assuming 7% rent growth for the next five years. That’s unlikely to happen, or property taxes only going up 2% a year for the next five years. Again, not likely to happen, especially if you’re in places like Texas where it’s like it’s a whole game to see how high they can jack up your property taxes. So the number one mistake that has led to current distress was overly optimistic, overly aggressive assumptions in underwriting.
The second big one, and this is one where it’s a mix of some people were being irresponsible, some people just got caught off guard, and also, just the fact that nobody saw a 500 basis point interest rate increase coming. So what happened is something like 70% or 80% of commercial real estate including apartments in 2021 and 2022 was purchased with floating rate loans. Most single-family houses, you buy a mortgage, you buy the property, you get a mortgage, the rate is fixed for 30 years, you’re good to go. In the commercial world, the debt works quite different, and it’s often due in 3 years, 5 years, 7 years, or 10 years. There’s some exceptions, but much shorter timeline, and a lot of the mass… majority of the properties in the last couple of years were bought with loans that were due in two, three or five years. So, again, that means they’re due this year or next year, in 2025. On top of that, the interest rate moves as the market moves.
So someone bought an apartment complex, they might have been paying a 3% interest rate, and today, they’re paying 8%, which means they can’t make the mortgage payment anymore, which means the lenders might foreclose, or the values come down 30%, and they can’t refinance into another loan. So, now, they have this huge balloon payment that’s due in three months. They can’t refinance, the property is not worth enough to sell, they can’t make the mortgage payment, and all of a sudden, you’ve got sellers that have to sell and have motivation. That is something we have not seen in a decade, and that’s part of what’s leading to both the distress and the opportunity.

Tony:
Yeah, Andrew, too, and super incredible points, and I couldn’t agree more. Just on that first point about being overly optimistic, and Ash, I want to get your thoughts on this too, but I think for a lot of new investors, it is tricky to walk that line of how aggressive or optimistic should I be when I’m analyzing a deal because when the market is hot like how it was in 2021, 2022, if you were too conservative with your numbers, you would miss out on every single deal. If you weren’t conservative enough, you could end up in a situation where you buy a deal that doesn’t necessarily pencil out. So, Ash, I want to ask you first. As you were looking at properties 2021, 2022, how were you striking that balance of not being too conservative that you were missing out on everything, but also not being too lax where you would potentially buy a bad deal?

Ashley:
Yeah. I’m definitely very conservative when I run my numbers. I definitely don’t say like, “Oh, maybe I can get cheaper dumpster service for the apartment complex,” or anything like that. I am very good at being diligent about sticking to my numbers and also over-inflating my expenses a little bit. So what I did to pivot through this change in the market is I found where I could add additional revenue to properties. So one of the things was like, “Okay. We’re buying land. Can we sell any of the timber that’s associated with it? What other multiple income streams can we generate? Can we charge people to park their RVs in this huge parking lot?” Things like that.
So that was where I had to learn I have to think outside of the box is somebody is looking at this property, and they’re saying, “Okay. I can rent this house out for that amount. I can rent the barn out for this amount. What other ways can I generate revenue off of this property where I can now create the income that will make this deal work for me?” or maybe another investor coming in and saying, “I can’t pay this price because it doesn’t make sense,” or, “I can’t use this type of lending where I could.” So that’s where I had to pivot and change is to finding different ways to generate revenue off of properties.

Andrew:
Yeah. Ash, I really like some of those creative things that you mentioned, and that’s… In multifamily, the money is really made in operations, and some of the things you just mentioned, those are perfect examples of what makes someone a really good operator versus just an okay operator. In the last 10 years, you could get away with being an okay operator. Now, you’re going to have to do the things that you were just talking about.
Tony, you nailed what has been the dilemma for the last five, six years is you wanted to be conservative and realistic so that you hit your numbers, you bought a good deal, you were able to pay your investors, all of those things. But if you overdid it, you just never get a deal. If you find the easy, concise answer to that, please let me know because we’ve analyzing literally thousands of deals. I’m not quite sure the answer, but this is what I boil it down to. A phrase that one of my old original mentors told me is he said, “It is better to regret the deal you didn’t do than to regret the deal you did do.” So when it’s tough to decide, that’s what I lean on.

Ashley:
That is great, Andrew, and I think that’s great advice to any new investor looking forward as to what they’re looking at to buy right now and as to if… “Okay. can I fudge the numbers a little bit?” “No, you can’t to make this deal work.”

Andrew:
No. You’ll probably regret it later.

Ashley:
Yes. Okay. Well, Andrew, this is all great information and just a starting point of what we’re going to talk about in today’s episode going forward, but first, let’s take a short break. So we just heard from Andrew about how past problems that buyers are having are now surfacing in multifamily. Let’s get into some consideration is if you want to start multifamily investing, what you should be doing today. So, Andrew, let’s start from the beginning. Do you have an example of a deal that you could go through with us where maybe everything did not work out okay and you had some lessons learned?

Andrew:
Yeah. I mean, since we’re on The Rookie Podcast, I’ll start with the first one. I wasn’t a rookie to real estate. I’d been flipping for four years, but I was a rookie to multifamily, and my first… and I did have a mentor and a coach that I had hired. We’re actually still friends and business partners to this day. So I wasn’t just going and completely winging it. However, people said, “Well, how did you get that first deal?” Well, it was really a combination of enthusiasm and being a little too naive.
Our first deal… Now, this is back in 2011 when you could literally just go on LoopNet and pull up a huge list of properties and say, “I want to go look at these 10.” I’ll come out in three weeks, and they’ll still be there. Not the case for the last 10 years, but that’s what it was then, and that’s how I found the deal. Literally, just looked on the map at a market that I thought would be good, didn’t have all the good screening procedures that we have in place now, started talking to a broker that had a ton of listings in that market. He saw a sucker coming from a mile away and said, “I’m going to talk to this guy,” and I ended up buying a mostly vacant, like 75% vacant, 92-unit 1960s and 1970s construction property out in Macon, Georgia on the complete opposite side of the country from me, and that was our first deal.
I had to raise a total of $1.2 million to get that done. It was not financeable. It had to be all cash. I completely underestimated how hard it would be to raise that money in that environment, and we are getting back to that environment today where everyone is scared of real estate like they were in 2011. I had to extend the contract period twice by adding more money to the deposit, non-refundable, just days before I had to close, got just enough money raised to close, and then took six months after closing to have to finish raising it. Fortunately, our documents allowed us to do that. That is probably the biggest reason why I started turning… my hair really started turning gray about that time because it was major stress.

Tony:
Andrew, at least you got some hair. You could join the Shady Head Club with me.

Andrew:
But see, you got a strong presence on the lower side of your head. I have even more gray there, so I’m just like, “Not going to work.” Some of the mistakes that we made, number one… Well, actually, I’m going to start with some of the things we did right. You said, “Well, why did you do that on the other side of the country?” Well, for one, my philosophy is live where you love to live and invest where the returns are the best. I live in southern California. You could not pay me enough to be a landlord here and have to deal with the garbage the legislature makes you go through, so we said, “All right. We want to be in the Southeast United States where the economics are good, the demographics are good, it’s business-friendly, it’s landlord-friendly, all of these things.”
Why did we go straight to 92 units, which I don’t recommend most people actually do, is because, well, we said, “Well, we want a property that’s big enough to hire and support its own full-time staff that works for us because I’m going to have to asset manage this thing from the other side of the country.” I’m not going to be flying out to fix a water heater because, number one, I don’t know how to do it anyway, and then two… So I want people who were there all day, they live there, that’s their job to run it. So that’s why we went big, and we’re really glad we did that.
Some of the mistakes were dramatically underestimated the cost of the renovations in addition to… Those old neglected properties are like a rotten onion. You peel off a layer, and the layer underneath is even worse. We had multiple episodes of vandalism where people would rip out the copper pipes, not even turn off the water. They must have gotten soaked. Yeah. If I was going to vandalize, I’d at least make sure I’m not getting wet so if the cops see me on the street, it’s not obvious if it was me. So not only did they rip out the copper, they flood the unit, so there goes $50,000.
It was a rough neighborhood. When we walked into the head of the police, the police chief, and we said, “Hey, here’s what we want to do. We want to partner with you guys to clean this up,” he looked at us and said, “Good luck.” That’s not the response I was going for. Now, we did get it cleaned up. We did get the crime reduced. When we bought it, it was collecting $8,000 a month on 92 units. We quintupled that basically five times over, and we did sell it for a good profit. However, lots of mistakes, lots of lessons learned. Don’t go buy a giant, neglected, highly distressed property in a bad area for your first deal.

Tony:
So, Andrew, just one thing I want to question before we get into the nitty-gritty of this detail or of this deal is you said you were flipping for four years prior to that. What was the motivation for transitioning from flipping to multifamily?

Andrew:
It is multifaceted. One flipping is a great way to get started in real estate, to generate chunks of money and build up some cash. But unless you’re one of these people who is going to build a seven-figure flipping business and have other people run it, it’s just another intense job, and you’re only as good as your last flip. You sell a house, you put some money in the bank, you got nothing left to show for it. I mean, again, it’s good. It’s a good business. It can be great money. But if you’re looking for something residual, it doesn’t typically provide that.
The second is we… My wife and I are business partners. When I say we, I’m typically referring to her and I. We had great 2009, 2010, 2011, great years because everyone, again, was scared of real estate. Prices were coming down. We had almost no competition. But then, everyone else started to figure out the opportunity, and no one had equity anymore, and so we said, “All right. Flipping is great, but it’s just another intense job. What would produce more residual, more long-lasting wealth?” We said, “Okay. We just had a huge recession which probably means we’re going to have a long expansion coming after that. Expansion means job creation, household formation, and everybody either got foreclosed on and can’t buy a house for the next seven years, or they know somebody who gets foreclosed on and they’re scared to buy a house for the next seven years. So that means, put all those things together, there’s probably going to be a whole lot of rental demand. So let’s go learn how to do apartments.” So that is how and why we transitioned to apartments in 2011.

Ashley:
You talked about that you raised money for this deal. So did you do a syndication? Was this private money you took on? Can you explain the funding of this deal?

Andrew:
Yeah. So the funding was… We did a syndication which, like you mentioned, is basically you put a deal together, you put a pro forma and a package together and say, “Hey, we’re buying this apartment complex. Here’s the business plan. Here’s what we think the returns are going to be. We need $1 million dollars to do this. Everyone can invest $25,000, or $100,000, or whatever you have.” So that’s how we funded it. As I mentioned, we ran short because I underestimated how hard it was to raise $1.2 million back then.
My very first check was my mom, and then the checks after that were the people who were giving us the money to flip the houses. We had some private lenders that funded those, and then the final $200,000, we didn’t want to retrade or go back to the seller and try to change the pricing, so what we did, we said, “Hey, look. The honest truth is this property has got a lot more work to be done than we anticipated, which is 100% true. We’re not going to ask you for a price reduction. However, we want you to help us out by carrying a note and loaning us the remaining balance of the funds.” I think we ended up settling on $200,000 or $300,000. That’s actually how we finished it off is we got the seller to carry some for us, and then we paid him off when we stabilized it and refinanced it a couple of years down the road.

Tony:
Andrew, one of the things you said which stood out to me was that you took these relationships that you have with your private moneylenders in your flipping business, and they were some of your early investors in this deal. In the Real Estate Partnerships book, Ash and I talk about the benefit of starting smaller with your investors, and then testing the waters there to move up to something bigger. So, in a flip, I mean, what? You’re probably holding money maybe six months to a year when you’ve got a flip that you’re working on. Maybe even shorter timeframe than that. So if for whatever reason that partnership doesn’t work out, it’s a six-month partnership, right? But since you’ve built that relationship with people, now it’s easier to go into a more expensive asset where the time horizon was, whatever, three to five years to get that thing stabilized.

Andrew:
That’s another good point. If someone is listening to this saying, “Okay. This is all great, but I don’t have any track record. I want to buy a 10-unit, but I have no track record multifamily,” start with the people who know your track record in whatever you are currently doing. Whether you’ve been flipping for five years and you have private investors, or you’ve been doing notes or maybe even working as a pharmacist for the last 10 years, and all your coworkers know you as someone who’s honest, and trustworthy, and hardworking, that is… Lean on any kind of track record you have in your network there.
Every single one of us in multifamily or anything started at zero at some point with no track record, and so don’t let that be a hurdle. Figure out what else do you have that counts as track record and say, “Yeah. Maybe I’ve never…” Again, this only applies if you’re raising money. If you have your own cash, this goes away. But if you’re looking to bring in other people, leverage the other characteristics and strengths you have, the other things that you’ve done to say, “Yeah, this is something new, but here’s why I should be successful at it because of all this other things that I’ve done.”

Tony:
Even if you have your own cash, think about all the big companies, even they’ve got cash. They’re still going out there and raising capital from other people because it allows you to do even bigger deals. Right? I’d love to, Andrew, break down the numbers on that first syndication because I think for a lot of investors, when they hear you got 92 units, that’s… “What is that? $1.2 million raise?” The pie gets split up quite a few ways when you do a syndication. Especially the first go around, the syndicators are typically a little bit more generous to the limited partners to make sure that they can get a good return. So if you can, first, break down the structure for us, Andrew, on what that deal looked like, and if you’re open, what was the actual profits that you generated from that deal?

Andrew:
Yeah. So when we closed on it, technically, I was supposed to get a $50,000 acquisition fee. I don’t think I actually took that until a year or two later. The split of profits from operations and sale was, back then, 70% to investors, 30% to sponsor. Today, it’s much more common for that to be 80% to investors and 20% to sponsor. When we sold it, we… What did we sell it? We bought it for $699,000 or something right around there, and we ended up selling it for $1.92 about five years later. I don’t remember what the internal rate of return and all that stuff was. I mean, it was good, but I truly do not remember what that was.
So, again, it was a lot of mistakes and lessons learned, but that was the buy, the sell, the splits. Like I said, we did refinance about two years in, and we refinanced, we paid off the seller, and then we returned… I don’t remember. Again, I don’t remember the percentage, but we returned the majority of the original capital to investors. So if someone had put in $100,000 at the beginning, when we refinanced a couple of years later, they might’ve gotten $70,000 back or something like that. But then, they still retained their ownership percentage. They don’t get diluted.
That’s still pretty much the structure that we use today where maybe we got a Fannie Mae bank loan or Fannie Mae’s government agency kind of, but it’s a primary mortgage, and then we syndicate the equity. We put in some ourselves. Profits are generally split 80-20, and we typically operate for about five years. Then, if there’s a refinance in the middle, then we’ll typically use that to give some of the original capital back so that there’s less risk. Right? If you put in $100,000 and you get $40,000 or $50,000 back, but your ownership percentage stays the same, now your risk level is down because absolute worst case scenario, you can only lose what’s still invested. So does that… Hopefully. I do want to differentiate because how things were done and structured 12 years ago is a little different than now, but that’s how it was done.

Ashley:
Andrew, I can’t even get past the 92 units for $699,000.

Andrew:
Yeah. Isn’t that crazy? Less than $10,000 a unit. I spend more in renovations these days on a unit than I paid to buy those things.

Ashley:
Yeah. Crazy. So what would your recommendation be? So that’s how you got your start in multifamily, funding and putting together a deal that way. What would be your recommendation today as a rookie investor as to how they can fund a smaller multifamily deal?

Andrew:
Recommendations in terms of the overall process, or just how to get started, or just how to fund it?

Ashley:
How do you think they should start? Say they have no money.

Andrew:
No money. Okay.

Ashley:
How should they go and fund a deal? Should they be looking for bankable products because it’s great to get a bank loan right now, or should they be doing a syndication, or try and get seller financing? Whatever advice you have as to this is a great way to try to find a way to fund buying your first multifamily.

Andrew:
So the good news is when it comes to multifamily commercial property, so five units and bigger, the debt is not necessarily based on your credit score and your personal cashflow. It’s based on the cashflow that the property produces. Yes, they’re going to look at your credit score. So if they pull your credit, and you’re a 321, they’re going to say, “Eh, maybe we don’t want to fully trust this person,” but you don’t have to have stellar credit. It’s not like getting a mortgage today where if you’re below 750, they don’t want to give you a mortgage anymore. You don’t have to have perfect credit. So that is the good news.
Also, the good news is the money for the down payment, for the renovations, for the transit, all of that does not have to come from you. Now, these days, we invest in every deal we do, but for a lot of the deals, we didn’t because we didn’t have the cash. So if you’re getting started and you’re saying, “Hey…” Let’s say you live in Dallas, and you find a great 10-unit that’s a couple of miles from home, you’re like, “Oh man, I really want to acquire this property, but I don’t have the money.” The ways to overcome that are, number one, you can do joint ventures, which means just you and a couple of people who have the money become equal partners in an LLC, and then you purchase the money, and you all have decision-making capabilities. This is what keeps it from being a syndication. You don’t have to worry about SEC rules as long as you are all… Again, it’s a JV. You all have management responsibilities, so you are putting in basically the sweat equity, you’re finding the deal, maybe you’re going to run the deal, and then you bring these people in, they provide the cash. That’s one way to do it, joint venture.
Another is to, again, syndicate. This is where you are finding the deal. You’re going to operate the deal. You put together a pro forma, and you say, “Okay. I need…” Let’s see, 10 units in Dallas. Maybe you’re going to go raise a million dollars. I mean, $1.5 million, and say you’re going to go out to people that you already know and have a relationship with and say, “Hey, here’s what I’m doing. Here’s an opportunity for you to earn some passive income and some wealth creation. Do you want to invest in this opportunity?” You’re not asking for money. You’re providing a service and an opportunity, and it’s important to make sure you frame it that way.

Ashley:
That is so key right there, that phrase you just said.

Andrew:
Yeah. Yeah. I mean, not only do you need to internalize that, but you need to project that when you’re talking to investors. It’s a 100% true, but it’s just ingrained in our nature like, “Oh, I don’t want to ask for money.” Well, you’re not. You’re literally providing a service and an opportunity, especially if you’re doing it the right way. So syndication is one, partners is one. You could get private debt. If you do that for a large… Let’s use some smaller numbers here. Let’s just say you need a total of $500,000, and you’ve got $100,000. Maybe you can get some private debt for $400,000 as long as you’ve disclosed that to the lender. Some will allow it, some won’t. Then, the one thing to keep in mind is unlike single-family, multifamily has much higher transaction costs. You have much larger deposits. You have very expensive attorneys involved going through loan documents and purchasing sale contracts. The appraisals are more expensive. I mean, there’s a whole host of other things involved that can add up to be $50,000, $100,000, $200,000 depending on the size of the transaction.
Now, if you don’t have that cash, that is where you definitely will need to find a partner. So going back to that very first deal in 2011 where we were raising $1.2 million, and again, it was all syndicated, I had to front $125,000 just to get it to closing. Now, that is a cost of the deal, and that is… As the sponsor, if you’re syndicating, that is refundable to you out of the raise because, again, it’s a cost of the deal, but you have to have that money upfront just to get to closing, to make the deposit, to pay the attorneys, all of those things. So if you don’t have that, then your first step is to find somebody who does and who wants to do this with you. Again, if you’re going to go buy a 5 or a 10-unit in your backyard, that amount is going to be smaller. It scales up.

Ashley:
What would you say would approximately be the dollar amount where it’s worth it to do a syndication?

Andrew:
That is a really good question. So your first one in terms of dollars is not going to be worth it, but you have to look at it differently in that if you are looking to syndicate apartments or really, any other asset, and build a large portfolio, and build a business out of it, making money yourself on your first deal or two is goal number four. Goal number one is to learn. You can learn a lot through podcasts, and coaches, and mentors, and books, but there’s a certain point at which you just got to do it and learning through guided experience. So, number one, you’re looking for experience. Number two, you’re looking to build that track record so that you can say, “Hey, I have actually done these type of deals before,” because you can get started without a track record, but it does get easier the bigger track record you have.
Then, the more you can go to the lenders and say, “I have experience. I have other loans. I’m in this market,” those things build on each other. So when you’re doing your first deal and if you’re looking to get into syndication, your goals are track record, adding investors to your list, building relationships with brokers, all of those things. Then, profiting from it, that’s hopefully a nice benefit of doing all those things. You got to really look longer-term, and realize and understand that the first few years typically of building a syndication business is not all that lucrative. It only gets… Well, I shouldn’t say only. It typically gets lucrative years down the road when you’ve built it the right way.

Tony:
So, Andrew, one of the things you said earlier that really stood out to me was that you live where you love to live, but you invest where it makes the most sense. You lived in Southern California, very expensive market, decided to invest in Georgia, a much more affordable place to invest, but how did you decide on what your buy box was as you moved into that market, and for rookie investors to today, what would your recommendation be for that first commercial deal on how to build that buy box?

Andrew:
My buy box back then was basically anything that someone would sell to me.

Ashley:
Is that your advice for rookie investors today?

Andrew:
That is my advice to absolutely not do, and candidly, that is one of the reasons that most investors start off in lower end properties is because they seem affordable, the seller is willing to give and sell it to you because no one else wants to buy it. What I like to say is those properties are cheaper and more available for a good reason. The grass is greener over the septic tank. Just don’t step there. Stay away. So our buy box now or someone who’s getting started, number one, just decide a number of things. Are you a cashflow investor, or are you looking for appreciation or a little bit of both? I would recommend, especially in the beginning and especially if you can’t take a big financial hit if something goes wrong, make sure you’ve got at least some good cashflow to sustain the property. So you can decide if you’re a cashflow or appreciation. Are you going to self-manage or use third-party?
Just in general terms, you want to look for properties that are in areas where… Now, this could be a city on the other side of the country, or this could be just picking the right neighborhood in your backyard, but the key things to success, getting started in multifamily, is buy in an area where you have population growth, job growth. Those two are the biggest. Beyond that, you want good median incomes or high median incomes. When we say high median income, that means high relative to the rent you are charging. $60,000 median income is pretty good in secondary markets in Georgia. That is the poverty level in Southern California, so you have to… Basically, what you’re looking for is can the average or median person easily afford the rent that you’re going to charge? You want to buy in areas with low crime, and especially in the beginning, I highly recommend buying properties that are not in flood zones.

Tony:
Yeah. I had a very bad experience with a single-family home in a flood zone. Yeah, worst deal I think I’ve done so far, but anyway, I want to talk a little bit because you said population growth, job growth, but low crime. As a new investor, where should I go to get this information? What are some tried and true data sources to identify, “Hey, what’s the median household income? Is the population getting bigger or smaller, et cetera?”

Andrew:
Yeah. I’ve got a couple of good sources for you. Number one, we did a… I guess it’s the OG BiggerPockets Podcast, episode 571. We went through the whole screening process that we use and how to do that, how to identify the neighborhoods that I just talked about. So go check that out, and then there was a follow-up episode shortly after that where we dove into some underwriting stuff. So check those two out. However, if you are open to investing, just, again, live where you want to live, invest where the returns are good, go to the Harvard Joint Center for Housing Studies. They have an awesome map on that website of every county in the United States, and it’s color-coded which makes it super simple for guys like me who just like it easy and visual. Basically, you want to invest in the counties that are dark blue because that is where you have the greatest population growth and greatest migration. So if you’re like, “Ugh, Andrew, I have no idea where I want to start. It’s a big country,” go get that map and start with the blue counties.
Some other really good places to get data is we subscribe to Esri, E-S-R-I. I think it’s only $100 or hundred-something a year. It’s not terribly expensive, but they have a tremendous amount of the demographic data that I’m talking about. Again, population, income, all that kind of stuff. That is what we use for every deal we’re looking at to this day. If you just google “FEMA flood maps,” F-E-M-A, that’s the government website that shows you the maps of what’s in a flood zone and what is not. You also want to go to the Bureau of Labor and Statistics, bls.gov. That is a wealth of information for job growth, population growth, income. Basically, all the government statistics, and then there’s another one. It’s called Rich Blocks, Poor Blocks. It’s exactly what it sounds. Just those four words all jammed together dot-com. It will show you median income for different neighborhoods.
That’s a key point is you’ll see a lot of broker pro formas and offering them rents where it’s like, “Three mile radius. Median income, $90,000.” Right? Well, if you’ve ever been to a city like LA or Dallas, sometimes if you just cross the street, it can be a completely different world, and so you do not want to just take a big average area and say, “Oh, the median income is good.” You really want to drill down to the neighborhood that your property is in. In terms of crime, there’s about a billion different websites out there like Crime Mapper and a whole bunch. Just google crime statistics in whatever city you’re in, and you’ll probably find about 16 different resources for that.

Ashley:
That was great, Andrew. There was a couple there that I hadn’t heard of, and I always love to watch Tony vigorously google things and look things up, but there’s two that I would add is brightinvestor.com, that’s a newer software, and then also NeighborhoodScout too is one that I have used. Yeah.

Andrew:
NeighborhoodScout is good. Also, let’s say you’ve already identified some markets. Let’s say you’re like, “Okay. I’m trying to decide between Boise, and Dallas, and Atlanta.” Go to the big brokerage sites like… Berkadia is really good, but Berkadia, Marcus and Millichap, Cushman and Wakefield, CBRE, all of these, and sign up to be on, basically, their distribution list. Those guys put out reports sometimes monthly, at least quarterly of all these different markets. They are brokers, so they’re a little optimistic at times, but they do typically provide all the sources for the material they’re referencing, and so they’ll list out all the announcements of new jobs, and new plants being built, and all that kind of stuff. So that’s another really good free resource is to go get yourself added to the list of the various brokerages that have offices in whatever markets you want to invest in.

Ashley:
That’s a great tip right there. That was a really great informational deep dive into different resources where you can find different stats and data to actually verify the market that you’re in. Anyone can go on the BiggerPockets Forums. They can go on Instagram, anywhere, and they can see, “You know what? Andrew, he’s really successful in Houston, Texas right now. You know what? I want to do what he’s doing. I’m going to go to Houston because he’s doing it.” Yes, maybe some investor is successful in a market, but that doesn’t mean that their strategy, or their why, or what their reason is for investing, or their end goal is going to align with yours. So just because somebody is investing in one market or location, it doesn’t mean that it is a good fit for what you want to do, so make sure that you are always going and you are verifying, verifying, verifying.
So we could have Andrew right now just tell us, “Okay. Right now, what’s the best market to invest in?” and Dave Meyer does this all the time where he’ll pick a random market, and he will just go through on BiggerPockets and say, “This is the good of this market, this is the bad of this market, this is who should invest there, and whatnot.” But that doesn’t mean that it’s going to be a perfect match for what you’re doing. So you always want to go, and you want to pull this information on your own. Getting a market tip, hot tip from somebody is a great starting point, but make sure you’re not just taking somebody’s word for it, and you’re actually going and verifying that data from a lot of these resources.

Tony:
Let’s talk a little bit, Andrew, about building out your team. So say that you’ve chosen your market, you’ve got an idea of what your buy box is, but as you actually go through the steps of purchasing, setting up, managing, et cetera, I’m assuming you’re not doing all this stuff yourself. Right? So who are the team members that you need to build out? How does it differ from traditional single-family investing, and then what steps are you taking to find those people?

Andrew:
So, first off, go get David Greene’s book Long-Distance Real Estate Investing even if you’re doing it in your backyard, and that will make sense in a moment. The big difference is when you’re going from single-family to multifamily, there’s some additional team members that you need that you may not necessarily need in single-family. So, a team in multifamily. That will often involve property managers. Do you self-manage? Do you use third-party? That’s a personal business decision that depends a lot on what your goals are. My recommendation would be if you are just getting started and don’t have any property management experience at all, either partner with somebody who does or hire a third-party, but pretend they’re not there. What I mean by that is you have to have the right third-party company to let you do this, but approach it as they’re co-managing with you, and you’re there to help them and to make, whoever is working on your property, their job as easy as possible so that you can see the systems that they have, so that you can see how they address problems as they come up, and learn on the job.
Again, what I don’t recommend doing is just… Unless you enjoy it, and you live right close by, and you want to be heavily involved, don’t go by 10 units and try to manage it by yourself with no mentors and no experience. Also, don’t buy your 10-unit and hand it off to a third property manager and say, “Hey, send me the report in a month,” because that won’t work out either. So do something in the middle. So you’re going to want to have property management as… Again, whether that’s going to be you hire an assistant to help you do it or you get somebody third-party.
You’re also going to need contractors. I guess that’s probably similar to single-family. However, if you’re buying 10 units, you’re going to need someone who probably has a little more bandwidth than the contractor that can handle one or two houses at a time. So make sure your contractor has the size and the ability to handle bigger jobs. You’re going to need attorneys. Again, if you’re syndicating, that’s a whole separate attorney. You have, basically, a syndication attorney.

Tony:
They’re not cheap.

Andrew:
No. Typically, they’re flat fee, and that flat fee can anywhere from $10,000 to $30,000 for syndication, and that gets back to the question like, “Ooh, at what point is syndication worth it?” If you’re just doing 10 units, it might not be worth it for the profit, unless you’re using that as a stepping stone. That’s exactly the perfect example of why because there’s… Boom, 15 grand gone just to get the syndication paperwork done. You’re also going to need an attorney to help negotiate and review loan documents and the purchase and sale agreement.
I know every state is a little different in single-family, but in California, when you buy a single-family, it’s just title and escrow. We don’t involve attorneys, and I know other states, I believe mostly on the East Coast, you got to sit down and have attorneys to handle everything, if I’m correct. In multifamily, whether you’re required to or not, actually, one of the biggest mistakes I see some people make is be their own attorney. Do not do that in the multifamily world. You will end up with some nasty clauses in your loan docs that you’re not going to find out until way down the road, and you are going to wish you had spent the money on the attorney. So you want to have a good attorney.
You want to have good lenders, and I have actually found it most beneficial to have a really good loan broker, somebody who can take the needs of your property and your finances out and match it to the best loan for your business plan and what you’re trying to do. You’re going to need a really good insurance broker for the same reason. Insurance. I’m sure most people listening have probably heard that has become a nightmare lately. I’ve got actually friends who their portfolio, their annual insurance premium last year was $1 million. This year, it’s $2.3 million. So, literally, their expenses went up 130% just on insurance.

Ashley:
Let me guess. Was this in Texas?

Andrew:
No. It was actually spread-

Ashley:
In Florida?

Andrew:
Yeah. Well, partially in Florida and partially several other states, but yeah, you’re actually right. Florida and Texas are the two and California are the three main culprits driving the insurance problem. Again, not to scare anybody, the silver lining on that is the free market works. What’s happening is insurance premiums are so high now that more carriers are coming back into the business because they can make so much money off premiums that most of the experts that I talk to now are saying that prices should level up and possibly even start coming down next year. Right? So you don’t need to underwrite 60% increases every year for the next five years, so don’t… Be careful with it, but don’t let that stop you.
A good insurance broker. I’m just trying to think. I’m sure I’ve missed a couple, but those are the key ones, and then the next question is typically, “Okay. That’s great, Andrew. How do I find all of these people?” Referrals, referrals, referrals. Go on BiggerPockets Forums and say, “Hey, I’m trying to buy 10 units in Dallas. Who else is invested in this area? Can you please connect me with your favorite lender, contractor, syndication attorney, et cetera?”
Also, if you’re buying a property, I’m going to assume you’re probably talking to a broker or agent of some kind. Ask that agent. Say, “Hey, if you were buying this, who would you want to hire to manage it for you?” That’s how I found our property management company that we’ve partnered with for 12 years now. I literally asked the brokers, “Who would you hire to manage this thing?” The same couple names kept coming up over and over again. Do that for lenders. Do that for… “Hey, if you were buying this, what contractors would you use?” Then, when you talk to the lender, say, “Hey, do you have a favorite attorney that you like to work with?” Just do that whole circle of referrals. That is the fastest and most effective way to build a high-performing, high-quality team of the third-party people that you need to do this business.

Ashley:
Another person that is a great resource, and I just recently put this together in the last year, is the code enforcement officer of that town or city. Especially if it’s a smaller town, they have more… There’s only one code enforcement officer, but anytime they go and do inspections of multifamily, so they’re seeing what operators take care of the building, what property management is taking care of it, what tenants are happy, which ones are dissatisfied, and they’ve actually become a wealth of knowledge for me as somebody who’s picking out as to how well is this property management company.

Andrew:
Yeah. I really like that tip. That’s a good one, especially for the under 50-unit properties. The only thing I would add is if I was asking the code inspector, I would say, “Hey, I’m considering buying something,” and I definitely wouldn’t be like, “Hey, I’m buying this property at this address,” because then they’re like, “Oh, cool. Let me go look at it.”

Ashley:
Okay. So before we wrap up here, Andrew, I want to know one last question. Based on today’s current market conditions, is there anything that you are doing to pivot today that maybe you didn’t do last year or the year before?

Andrew:
In some ways, yes. In some ways, no. I mean, we’ve always had very strict criteria of what we do buy and what we don’t buy. We’ve always had pretty conservative leverage. We’ve typically never gone above 75%, but some of the things that we have adjusted are instead of 75% leverage, now we might be 55% or 65%. So if it’s a million-dollar property, you would be looking at getting a $600,000 loan, which is 60% instead of two years ago, maybe you would’ve gone for $800,000. So taking lower leverage.
Also, we are looking at trying to purchase some properties all cash and getting no loan at all, and the reason for that is yes, it is harder to do because you got to raise that equity, and it’s a bigger commitment in a lot of different ways. However, what has changed in the market now is these days, from a seller’s perspective, the most important thing is how certain they can be that you as a buyer will close. If you can eliminate the risk of your loan blowing up, then that increases surety of close, and so that’s going to increase the chance that, number one, you’re getting it at a better deal from that seller. Two, what that does, it means you don’t have any debt service to worry about. Your interest rate is not going to fluctuate. You don’t have to worry about paying the mortgage, and then two, you can patiently wait until the market shifts, and it’s a really good time to refinance, and you do it then. You’re not forced to do anything.
So we’re looking at buying… again, looking at deals all cash. Also, if you’re looking at buying a property today, it was really popular the last few years to look at a two to three-year timeline. Don’t do that. That business model is on the shelf for now. It would be very risky to say that you have to exit two to three years from now because who knows where we’re going to be. Have a longer timeframe. So, typically, for us, we’ve always looked at five years. Now, we’re looking more towards 6, 7, and even 10 years because our best guess is the next two years might be a little turbulent, and then that is going to set up the next big bull market upcycle, and we want to sell well into that upcycle. So that’s a few things as we’re looking at lower debt, sometimes no debt, looking at longer hold times, but the fundamentals have not changed.

Tony:
Andrew, one last question before we let you go here, and it ties into that last point. You said that you’re looking at potentially holding properties for up to 10 years. That’s a decade. When I think about our rookie audience, I wonder if they might have challenges getting an investor to commit to a deal for up to 10 years. So if you were a rookie investor, how would you pitch a potential deal with a 10-year hold given that maybe you don’t have that super strong track record yet?

Andrew:
The investor that funded by far the biggest amount of my flips was a guy in his 70s. When I brought him that very first apartment syndication that was on a five-year timeframe, he looked at and said, “Yeah, Andrew, this looks great,” but he goes, “I’ll probably be dead by then. I’m not invested in that.” So you’re right on. It is definitely tougher to get people to invest for those longer timelines. There’s not a silver bullet to it. What I would say is… or how I would address that if I was getting started is I would build the pro forma and the projection maybe on five years. I do think five years is fine.
One of the beautiful things about real estate is time typically heals all wounds. The longer you can wait, generally speaking, the better it gets. That’s just how the US economy is set up. So what I would do is I would maybe focus on five years, but then set it up so that if for some reason in five years, it is either a bad time to sell or it’s very clear in five years that if you keep holding, you’ll make a whole lot more money, you have the option to do so. Right? That’s actually something that we’ve been very cognizant to do in our deals the last three years is maybe they were set up as five or six-year deals or even four-year, but we always made sure that the potential is there to hold longer if we either need to or want to.
I’ll give a perfect example. We have one in the Florida Panhandle that we bought in 2015. Our pro forma was to sell it in 2020. We still have it, so it’s going on eight years now, but that is because it makes so much money that all of the investors voted… We took a vote because doing something different than what we originally said, voted to keep. It was a unanimous vote, “No, let’s keep this thing,” even though it originally was five years. So that’s how you end up getting a 10-year hold with investors who would otherwise never agree to 10 years is you buy and say, “Look, our plan is five years.” But then, if you buy it right, and operate it right, and do such a good job with it, it’s not going to be hard to convince people to keep it even longer. Again, if your investor is like, “No, I really do want to get out,” there’s different ways to structure that without selling the property or hey, you know what? Sell the property. Put a check in the win column, and then move that money somewhere else.

Ashley:
Not even with syndications, but that example works with private money too. If you are amortizing it over 10 years, maybe you do the loan callable instead of… that it’s actually a balloon payment where they have to give so much notice. We’ve done them where they have to give eight months notice in writing if they’re going to call the loan or else it extends for a certain period of time.

Andrew:
That’s a perfect example actually. So I have a small property that is not syndicated, and we did that very thing. In order to not have to put quite as much cash into it, we got a number of investors to do private notes. It was a two-year term, and then we said, “Hey, at the end of two years, the notes just go month to month.” One of the investors said, “Yeah. I actually need my money now. Can you pay my note off?” All of the other ones, “Yeah, we’ll just let it keep going.” But if we had said, “Hey, can you give us a five-year note?” that would’ve been a lot harder, right? But now that they’re used to getting an ACH deposit in their account every month and there’s nothing better to do with the money, everyone is like, “Yeah, we’ll keep it.” So do a good job, and the problem goes away.

Ashley:
Well, Andrew, thank you so much for this mini masterclass on multifamily. Can you let everyone know where they can reach out to you and find out some more information about you?

Andrew:
Yes. BiggerPockets Forums, of course. Please connect with me on BiggerPockets, and I am not a social media guy. However, I’ve decided to slightly catch up with the rest of the world, and I am on LinkedIn now. So if you comment or respond, that actually is me posting and actually responding. So if you want to engage with different topics with me, then please do that on LinkedIn. Our website, just vpacq.com, short for Vantage Point Acquisitions. There’s a couple of different ways to connect with us there, and I look forward to hopefully talking with you. For those of you who are only listening to this on audio, go check out the YouTube because Ashley and Tony are the most color-coordinated hosts I have ever seen on a podcast. They look professional and perfectly match their backgrounds, both of them. Mine looks like business barf on the wall, and they’re perfectly coordinated, so.

Ashley:
Well, hopefully, they go, and they watch this YouTube one because no other episode will be like that. Andrew, thank you so much for joining us. You can also find out more information about Andrew and get even deeper into his multifamily deals. You can go to episode 571. It is a great starting point on The Real Estate Podcast, but Andrew is a celebrity there, and you will find more episodes and more information on multifamily. If you would like to learn more about myself, or Tony, or today’s guest, Andrew Cushman, please head to the description of this episode in YouTube or your favorite podcast platform to view the show notes.

Tony:
Well, Andrew, that was an awesome episode, man. Really, really appreciated that.

Ashley:
Yeah. Thank you so much.

Andrew:
It was fun talking to you guys, so.

Tony:
It’s always cool when we can break down the meteor, more intimidating rookie topics for folks and make it seem more attainable.

Andrew:
Hopefully. Hopefully, they’ll get some value out of that, so.

Tony:
Yeah. No. It was super good, man.

Ashley:
I’m Ashley, @wealthfromrentals, and he’s Tony, @tonijrobinson, on Instagram, and we will be back with another episode.