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You’ve been listening to all the BiggerPockets podcasts, reading the blogs, interacting on the forums, and going to all the meetups. Every day, you’re analyzing deals from the MLS and from wholesalers that you’ve met. You’re networking, learning, and doing all the right things, but it’s just not coming together. 

You need to make a change in your life for yourself and your family’s future, and there’s no room for error here. How do people do this, starting from scratch?

The biggest thing holding you back that you haven’t even considered is your car payment. 

Check Your Car Payment

Many investors are looking for deals that cash flow at least a bit—maybe a couple of hundred dollars per door or so. Nerdwallet reports that in 2022, the average used car payment in America was $516. And new cars? A whopping $725. 

That’s per month, folks—and it’s the average. Stack that on top of the fact that most families have two cars, even if they were used, and that’s an average of $1,032 per month in car payments. 

How would you like that cash flow? Well, you could have it tomorrow if you got rid of those car payments. 

“But I need my car to get to work!” Do you mean that job that you are trying to get rid of? Seriously, there are so many alternatives: drive a junker, ride a bike or a skateboard, walk, public transportation, or carpool. The options are endless. 

Think about this critically: Why do you need that car payment? I mentor many aspiring investors in my market, and nine times out of 10, they pull up in a nicer car than I have. I always ask about it, and the answer is always the same: Either they “need” it for work, or they need a “safe” car for their family. 

Well, sure, a 2010 Camry is nominally less safe than a 2022 Tesla Model Y, with all its fancy navigation panels and automatic this and that. But do you really need the latter?

Or you might say, “I’m a contractor, and I need my truck.” If you are a contractor making less than $150,000, the last thing you need is a $1,200 truck payment. The bed of a 2008 F150 can haul a box of nails just as well as a 2023 F350 with a lift. 

Why Real Estate in the First Place?

Before we delve further into the car payment conundrum, let’s talk about real estate investment and why it’s a savvy financial move.

Real estate is a proven asset class for building wealth over time. Unlike cars, which depreciate in value the moment you drive them off the lot, real estate has the potential to appreciate, generating wealth through both property value increases and rental income.

Here are a few reasons why real estate is an attractive investment:

• Steady income: If you invest in rental properties, you can enjoy a consistent stream of income from your tenants.
• Appreciation: Real estate tends to appreciate over the long term, increasing the value of your investment.
• Tax benefits: There are numerous tax advantages to owning real estate, including deductions for mortgage interest, property taxes, and depreciation.
• Diversification: Real estate offers diversification in your investment portfolio, reducing risk.
• Leverage: You can use financing (mortgages) to purchase real estate, allowing you to control a valuable asset with a relatively small upfront investment.

Delaying Gratification

With car payments, the inverse is true in every single one of these real estate benefits. How can we say that we believe that real estate is an obvious path to wealth while we are working a W-2 job and driving a car well beyond our financial means?

Honestly, we all need to check our egos. In American culture, cars have always been one of the statements we make about ourselves, and car manufacturers have done a great job of taking advantage of that weakness in all of us. When was the last time you used that $1,500 built-in drink cooler in your armrest? It sure seems like an alluring option when you are rolling into your car payment. 

There are no shortcuts in real estate, and we all know the way to win in life is through delayed gratification. Why should having your dream car be any different? 

You can absolutely have your dream car, whatever that may be, but you can have it later. If you don’t have enough passive income to cover those payments, you need to examine your budget. If you stopped working your W-2 job tomorrow, how long could you keep making your housing payments, insurance, living expenses, and car payments? If the answer is not “forever,” then you need to get that car sold yesterday and find another way to get around. 

Now, back to the high car payments and their impact on real estate investment. One of the primary culprits here is the need for immediate gratification. We live in a world of instant everything—fast food, on-demand streaming, and, yes, even instant car loans. It’s all too easy to succumb to the desire for immediate rewards, like driving off in a fancy new car.

However, this desire for instant gratification often comes at the expense of future happiness. When you commit a significant portion of your monthly income to car payments, you have less money available for investing. It becomes a vicious cycle: You buy a pricey car to satisfy your immediate desires, but in doing so, you limit your capacity to invest in assets like real estate that can truly change your life for the better. 

All of that, and we haven’t even begun to discuss the debt-to-income (DTI) ratio. When people with average incomes begin to invest and scale, the limiting factor that will smack them in the face the quickest is being shut down by conventional lenders due to their high DTI. If you make $80,000 per year and have a $500 car payment, you’ll struggle to find a conventional lender who will be able to help you scale. 

I know, I know—private money and DSCR loans are where it’s at. Sure, but DSCR loans are really tough to get those ratios on right now, with 8% and higher interest rates. 

Newer investors always want the best deal, and conventional loans are always going to be the best rates and terms available—that rate and those terms are what will make your deal cash flow or not. If you want the best pricing on your loans, you need to free up as much DTI as you possibly can. Getting rid of your car payment is a painless way to make a big dent. 

Opportunity Cost: What Could You Be Missing?

To put this in perspective, let’s consider the concept of opportunity cost—what you forego by choosing one option over another. In this case, the opportunity cost of having car payments could be substantial.

Imagine you have a $700 monthly car payment. Over the course of a year, that’s $8,400. Now, what if you took that $8,400 and put it into a brokerage account to save a down payment on an investment property or contributed it to a retirement account? Over time, that money could grow significantly through compound interest or real estate appreciation.

In contrast, the car you purchased will lose value year after year. It’s a classic case of prioritizing short-term feelings over long-term freedom.

Finding Balance

The key takeaway here is to find a balance between your immediate desires and long-term financial goals. 

If you’re itching for a new car, set yourself an income goal that will pay for the car. For instance, if you buy three properties that cash flow $250 per door over three years, your car with a $750 payment is essentially “free.” Your tenants bought it for you.

High car payments, driven by the need for immediate gratification, are very likely to hinder your ability to invest in real estate. While the allure of a shiny new car is undeniable, it’s crucial to weigh that desire to have a shiny new car now against your goal of being financially independent. Is it really worth it?

By finding a balance between satisfying your short-term desires and earning a financially free future, you can ensure that you’re not just driving in style today but also building a solid foundation for tomorrow. It’s not about denying yourself pleasures; it’s about making choices that align with the future that you build for yourself. It starts today.

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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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