\n<\/p>\n
If you want to invest in real estate<\/strong><\/a> in 2024<\/strong>, you need to prepare. This year could be a grand slam for those who know how to take advantage, but for everyone else sitting on the sidelines, don\u2019t expect your wealth to grow. Expert investors<\/strong>, like the On the Market<\/em> panel, are getting more aggressive than ever <\/strong>before as so many real estate investors give up on buying deals due to high mortgage rates<\/strong><\/a>, tight inventory, and a shaky economy. So, how do you get ahead of the masses?<\/strong><\/p>\n In today\u2019s show, we\u2019ll share expert tactics ANYONE can use to invest in real estate in 2024<\/strong>. Some of these tactics come from our panel, but many can be found in Dave\u2019s newest 2024 State of Real Estate Investing Report<\/em><\/strong>. This report includes even more data, tactics, strategies, and research you won\u2019t hear on today\u2019s show. And it\u2019s completely free (head to BiggerPockets.com\/Report24 or <\/strong>click here to download it!<\/strong><\/a>)<\/p>\n We\u2019ve got tactics for flippers<\/strong>, traditional landlords<\/strong>, passive investors<\/strong>, and those still searching for cash flow<\/strong><\/a> in this high-rate world. Wherever you\u2019re at in the investing cycle, whether you\u2019re a beginner or a real estate veteran, these tactics could help you build wealth no matter what happens to the economy.\u00a0<\/strong><\/p>\n Dave: Kathy: Dave: Henry: Dave: James: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: James: Dave: James: Dave: James: Dave: James: Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Henry: James: Henry: Dave: Henry: Dave: Kathy: James: Dave: James: Dave: Henry: Dave: Henry: Dave: Henry: Dave: James: Dave: Kathy: Dave: James: Dave: Kathy: Dave: James: Kathy: Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey, everyone. Welcome to On The Market. I\u2019m your host, Dave Meyer, and today we\u2019re 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\u2019s your feeling about 2024? Are you feeling optimistic?<\/p>\n
I am, yeah. I think more and more people are getting used to the new normal, and that\u2019s what they\u2019ve been waiting for. They were sort of wondering what would happen, and I think we have a better idea. I think.<\/p>\n
Henry, if you had to name one thing you\u2019re going to be looking at going into 2024 to make some decisions about what would that be?<\/p>\n
The word for me in 2024 is growth. It is a scary time because there is still some uncertainty, even though we\u2019re 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.<\/p>\n
Awesome. What about you, James? What do you think the key to 2024 is going to be?<\/p>\n
I\u2019m really excited for 2024. 2023 was kind of a flat year, and especially when you\u2019re 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\u2019s going to be a really, really strong rebound year for people that didn\u2019t get on the sidelines. If you got on the sidelines, 2024 is going to be lame.<\/p>\n
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\u2019ll 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\u2019t know which way things are heading. Obviously, in the last couple of weeks we\u2019ve seen mortgage rates go down a little bit, but there is still a risk that they go back up, and if there\u2019s 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\u2019m going to be looking at most closely is affordability. So that\u2019s 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\u2019ve talked about over the last year or two into a single report. And then we give it away for free. It\u2019s filled with all sorts of context, advice, tips, and there\u2019s actually a download where we\u2019re 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\u2019s biggerpockets.com\/report24.
And then, in the rest of this episode, we\u2019re 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\u2019s just jump into this. So the first tactic that I wrote is kind of true all the time, but I personally think it\u2019s just super important right now, which is underwriting conservatively. I think in an environment where things are as uncertain as they are now, it\u2019s better to be pessimistic. I\u2019m usually sort of an optimistic person, but I think right now I\u2019m trying to underwrite deals pessimistically. Henry, you\u2019re trying to double your portfolio. So tell us how you\u2019re going to underwrite deals next year.<\/p>\n
With extreme caution.<\/p>\n
Okay, good.<\/p>\n
Yeah, I think this is, you\u2019re 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\u2019s gone up by 50, 60, 70 grand, right? And it\u2019s just not that way anymore. If you screw up now, you\u2019re really getting your teeth kicked in.
And so the focus on underwriting conservatively, I\u2019ve always underwrote my deals conservatively, but one thing I have made a change in underwriting is previously I wouldn\u2019t factor too much into my underwriting for holding costs because I\u2019m doing single families. It\u2019s paint, it\u2019s floors, I got crews, we can get them in and out of there. It just wasn\u2019t that big of a deal to me because I knew we could get a property turned, it\u2019s 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.<\/p>\n
That\u2019s good advice<\/p>\n
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\u2019s way cheaper than now. Sometimes I\u2019m 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\u2019s a title issue or maybe there\u2019s some paperwork. All of these little things that you wouldn\u2019t 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\u2019re holding costs are going to be. So that\u2019s 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\u2019s going to take. If you are brand new and you are buying your first BRRRR deal or your first fix and flip and you\u2019ve got a 90-day rehab window in your underwriting, add two months because you\u2019ve 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\u2019s 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\u2019ll eat away your profits super quick.<\/p>\n
That\u2019s 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?<\/p>\n
We are not changing our underwriting. It\u2019s the same old deal. It\u2019s 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\u2019s jobs moving in, where there\u2019s infrastructure growth, population growth, migration patterns, and then as long as it cash flows, then I\u2019m good because it\u2019s a long-term play. So it\u2019s a little different, obviously, than a fix-and-flipper who needs to know what the market\u2019s going to be like in two, or three, or six months. And based on your report and what we\u2019re seeing, there are areas of the country where we\u2019re still seeing rent growth, we\u2019re still seeing price growth, and those are the areas I\u2019m going to be in, and I\u2019m just keeping things like they\u2019ve been for 20 years.<\/p>\n
Absolutely. So, Kathy, what do you make of this? I hear a lot of people talking about these days that things don\u2019t need a cash flow in year one, that rents will grow and things will get better. Do you buy into that?<\/p>\n
Absolutely, because your costs are higher in year one. You\u2019re paying closing costs. Your rents are most likely the lowest they\u2019ll ever be if you\u2019re buying right, and in the right markets, and estimating those rents properly. Then you\u2019re 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\u2019re going to be higher, but you\u2019re in a fixed payment. So yeah, I\u2019m still bullish on the same long-term, 10-year, 15-year plan. That\u2019s the goal.<\/p>\n
What about you, James? You said this is the year of the reset. Are you resetting all of your underwriting principles?<\/p>\n
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\u2019re adding a lot more hold times in and just more buffers. And underwriting, when people ask me, they\u2019re like, \u201cAre you being more conservative?\u201d And yes, we definitely are, but the next question is always like, \u201cWell, how much are you reducing the values?\u201d And it is about those core principles of underwriting. We\u2019re not actually reducing the values because we are buying on today\u2019s value.
How we\u2019re 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\u2019re not changing numbers around, so we\u2019re 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\u2019s 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\u2019re going to be hitting five to 8% above what we thought on our ARDs.<\/p>\n
That\u2019s great. And do you redo your underwriting? How frequently do you revisit these ideas?<\/p>\n
In a more volatile market, we do it about once a month.<\/p>\n
Oh, wow. Okay.<\/p>\n
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\u2019s really citywide and it\u2019s block wide and we\u2019re being really aggressive in some neighborhoods because there\u2019s 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.<\/p>\n
All right. Very good advice. Well, actually, that\u2019s 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\u2019re in an expensive market. So James, let\u2019s 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?<\/p>\n
I think we\u2019re focusing on the affordability in our market, but we\u2019re not going to cheaper price points by the nationwide median home price. There\u2019s definitely blocks of the market that are selling really well, and it\u2019s not just about the affordability, it\u2019s 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\u2019s priced in the middle, that stuff is flying off the shelf because they\u2019re not as worried about the short term.
They\u2019re looking at more as the long term. So we\u2019re really focusing on what appeals to the masses. Bedroom, bathroom counts, size of lots, is it livable? That is more what we\u2019re 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\u2019s why we\u2019re focused more on density, smaller units, more units, higher price per square foot on a single lot. And that\u2019s been trading a lot better.<\/p>\n
That\u2019s 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\u2019s affordable to people in Seattle might be very different from what\u2019s 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\u2019re in a market that was affordable. Is it still affordable, and what\u2019s your strategy related to where you\u2019re searching and sort of the price spectrum?<\/p>\n
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\u2019s 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\u2019s more important now because, as a whole, we\u2019re starting to see things are slowing down, especially with properties on the market for sale. So if you\u2019re 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\u2019re definitely not taking risks on luxury flips or A-class apartment buildings, that\u2019s just not my cup of tea right now.<\/p>\n
Nice. Okay, good to know. Kathy, I feel like you\u2019re the affordability evangelist and have been for years.<\/p>\n
It\u2019s my jam.<\/p>\n
That\u2019s just your jam. So educate us.<\/p>\n
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\u2019s the most people who can afford what you have, you\u2019d want to be right below the median because the median is what probably the average person can afford in that market. And if you\u2019re under that, then you\u2019ve got a bigger pool. So a lot of people have the false belief that affordable is low-income areas, and that\u2019s not what I mean at all. It\u2019s 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\u2019re solving a need. Builders aren\u2019t really able to build affordable housing today. It\u2019s really hard. I know, we\u2019re trying. It\u2019s hard. And so if you can do it by buying an older house, renovating it, making it feel like new, then again you\u2019re 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\u2019re not changing our underwriting, that\u2019s what we\u2019ve always done. We look for the median price of the area, and we stay just underneath that.<\/p>\n
That\u2019s 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\u2019s going on right now, there\u2019s a lot of strong inherent demand. Demographics are positive, people still need places to live, of course. The thing that\u2019s slowing down the market so much to the point where we\u2019re 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\u2019t buy. But personally, I believe that in markets that are relatively more affordable, they\u2019re just going to be more resilient. They\u2019re just not as sensitive to interest rate fluctuations because people are already more comfortable and able to pay for it. They\u2019re not stretching as much. And so if interest rates go up 25 basis points, it doesn\u2019t matter as much.
Of course, it matters, but it\u2019s just not going to have the same aggregate effect. All right, so here\u2019s the third piece of advice, and we\u2019ve 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?<\/p>\n
Yes.<\/p>\n
Okay, good. And just so you know, I don\u2019t know if everyone listening to this hears this, but I feel like it\u2019s just this debate like cash flow versus appreciation, which one\u2019s more important? So Henry just says, yes, he wants it all. Kathy, what\u2019s your opinion on this?<\/p>\n
Same. Yes, please. Again, it depends on your stage in life and even though I\u2019m getting older, I still am building a portfolio for a time when I won\u2019t be working at all. So to me, it\u2019s not so much about the cash flow today. I don\u2019t 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\u2019m really looking long term, this is 10 years from now when maybe I\u2019ll still probably want to be working, but if I didn\u2019t-<\/p>\n
Kathy, you\u2019re going to be hosting this podcast in 10 years, we are not letting you retire.<\/p>\n
Yes, I\u2019ll be here, but it\u2019s just having that optionality. So if you are at a stage in life where you don\u2019t want to work and you don\u2019t like your job, then cash flow is going to be much more important. But you have to have money to cash flow, and that\u2019s the confusion. People think they could just cash flow right away with no money, and it just doesn\u2019t 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.<\/p>\n
100%<\/p>\n
Anyway, you\u2019ve 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\u2019s going to take a while.<\/p>\n
James, I know where you stand in this. You\u2019re just all equity, right?<\/p>\n
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-<\/p>\n
Its just Monster.<\/p>\n
That\u2019s my other jungle juice. But until I\u2019m 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.<\/p>\n
I want to add some color to this as somebody who\u2019s 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\u2019s what I\u2019ve 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\u2019s 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\u2019s not as easy to do now. I still think you should buy something that cash flows. I\u2019m not saying go buy a bad deal, but real wealth is not built through cash flow.
Everybody who is a real estate investor who\u2019s 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\u2019t go buy bad deals, but don\u2019t, what\u2019s the phrase? I always get it wrong, but it\u2019s like you step over a dime or step over something to\u2026 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\u2019s shooting yourself in the foot.<\/p>\n
All right, well, you got the second idiom right, at least, the shooting yourself in the foot. I don\u2019t know what that first one is either. It\u2019s like tripping over a penny to pick up a dollar.<\/p>\n
I always get it wrong.<\/p>\n
Tripping over a dollar to pick up a penny. I don\u2019t remember. It\u2019s 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\u2019s a pure cash flow deal that\u2019s probably not going to appreciate. On the other end of the spectrum, there\u2019s 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\u2019s for two reasons. The first one is because even then if the market goes down for a year or two, you\u2019re still earning a return on your money. So even if the market goes down 2% for a year or two, that\u2019s a paper loss, but you\u2019re still with amortization and cash flow earning a positive return, which is great. And the second one is especially if you\u2019re 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\u2019t have what\u2019s called forced selling. So the thing that you really want to avoid is selling the property before you want to, before you\u2019re ready to.
And before it is the optimal time to. Like Kathy said, buy something and hold onto it. But if you don\u2019t 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\u2019s 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\u2019s not how you\u2019re going to build wealth, but if you\u2019re concerned about the market right now and you want to be a little bit more defensive, particularly if you don\u2019t 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.<\/p>\n
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\u2019t fun. It wasn\u2019t 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\u2019s a business, there\u2019s going to be expenses.<\/p>\n
The only thing I would say about that is in a declining market or a market they could be shifting down, there\u2019s a lot more fear behind it. The margins get substantially wider.<\/p>\n
For flipping.<\/p>\n
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\u2019s not that much buyer demand for it. People don\u2019t want to have to come up, they can\u2019t really make it pencil very well. And they also don\u2019t want to be negative on this higher interest rate for a six to nine-month period as they\u2019re 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\u2019t get that SWOT. And that\u2019s the only thing is, like what Henry said in the beginning, when people are fearful, the margins get bigger. And so that\u2019s why I\u2019m still always going to be an equity guy.<\/p>\n
He\u2019s a juice guy. I mean, once a juice guy always a juice guy<\/p>\n
Once you taste the juice, man.<\/p>\n
Well, that actually brings up my next point because one of my things, and just to be honest, I\u2019m not a flipper. I\u2019ve 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\u2019m curious, that\u2019s one of my things is to do it with caution, especially if you\u2019re 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\u2019s just call it the value add game, taking some big swings right now?<\/p>\n
No.<\/p>\n
All right, well, there we go.<\/p>\n
Here\u2019s why. So I don\u2019t think you shouldn\u2019t try to flip a property. I think you can flip a property in any market. It\u2019s more about you\u2019ve got to make sure that you\u2019re buying an extremely good deal because if you\u2019re new and you\u2019re getting into the fix and flip game, you\u2019re going to screw up and you\u2019re going to make mistakes, and you\u2019ve got to have the cushion to cover those mistakes. It\u2019s easier to buy a loser right now in this market and flip a loser because the cost of money is higher because there\u2019s less buyers out there buying the property once you\u2019re finished with it. And so you\u2019ve really got to ensure that you\u2019re buying a really good deal. And so you just got to be careful. Your deal has to be a good deal.
And I wouldn\u2019t recommend anything that you\u2019re 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\u2019t recommend you taking big risks in the flipping game. You want to do something that\u2019s going to be easier to get that rehab done, and that property turned around quicker, and something with a second exit strategy, it\u2019s got to be able to cash flow as a rental property too. Because if you go to try to sell it and you don\u2019t get, like right now, it\u2019s hard to predict. I\u2019ve got properties that I thought should have been sold months ago, and they\u2019re not. And I\u2019m a seasoned investor, so you got to be able to pivot.<\/p>\n
Yeah.<\/p>\n
And you can also mitigate. For new people, getting a value add is risky, and I don\u2019t advise heavy value add, but if you pivot how you\u2019re doing it, it\u2019s totally safe. Right now, value add got harder, construction got harder. We started partnering with generals and cutting them into the deal, and it\u2019s 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\u2019re actually making more money by not having staff costs, the overages in debt times, and we\u2019re getting in and out of the projects quicker. So you just mitigate the risk and bring in partners, right? If you\u2019re new and you want to get into big margins, then partner with the right people.<\/p>\n
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\u2019t you tell us why you recently bought new construction?<\/p>\n
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\u2019s taking the bed that inventory, that supply is needed, not that we\u2019re going to get flooded with supply, which means he doesn\u2019t think there\u2019s a housing crash coming, there\u2019s 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\u2019ve had projects we\u2019ve knocked out of the park with 30, 40% annualized returns, and we\u2019ve others where there were losses because COVID, sites were shut down, material costs soared. I mean, it\u2019s a tough, volatile market. So now, like the guys were saying, being conservative is so important.
So we\u2019re back at a time where there is distress out there, and this is an opportunity. I\u2019m 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\u2019t 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\u2019t get the project to the finish line. My partner, who\u2019s been developing for 40 years, was able to negotiate a lease option where we don\u2019t even have to buy the lots, we don\u2019t have to do any horizontal development, it\u2019s already done. We are just optioning it, and we\u2019re getting the lots for half of what their current market value is, but we don\u2019t even have to pay for them until the final buyer comes.
So we\u2019ve really mitigated risk by being able to build on these homes and not have to acquire the land, which would be 10 million. I\u2019d have to raise $10 million and be paying interest on that. We don\u2019t have to. We\u2019re getting these lots for $60,000 and don\u2019t have to pay for them. The buyer pays at the end. So we\u2019re mitigating risk that way and yet providing much-needed housing in an area where you don\u2019t 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?<\/p>\n
That\u2019s 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?<\/p>\n
Oh, because it\u2019s so easy. You spend 30 minutes vetting a deal, you click a button and the money goes out and you get paid. There\u2019s no contract.<\/p>\n
Well, is that how it is for everyone?<\/p>\n
It\u2019s not like that for most. Ask commercial lenders today.<\/p>\n
Right, exactly.<\/p>\n
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\u2019re 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\u2019s why we\u2019re 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\u2019s why I love hard money and lending it out. It pays you a high return, you know when you\u2019re getting your capital back. It can\u2019t get locked up, in theory, if you underwrite the deal correctly, and it\u2019s 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\u2019s what hard money does for me. And so it\u2019s a great business, and you\u2019re 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\u2019s 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.<\/p>\n
He\u2019s so white collar now. Look at him just looking on the computer.<\/p>\n
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\u2019re actually going to make an episode out of this, so definitely check that out because I know, hopefully, it\u2019s just clicking buttons like James says, but I suspect there\u2019s 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\u2019re pursuing next year?<\/p>\n
We\u2019re going to focus a little more on midterm rentals. So we\u2019re about to launch our first midterm rental, and if it goes well, we\u2019re going to probably convert a few of my other long-term rentals to midterm rentals as the leases come due on those. So I\u2019ve got a seasoned investor in my market who is doing midterm and corporate rentals in a few of his properties, and he\u2019s shown me the numbers and the occupancy rates, and it\u2019s really impressive. And so we\u2019re going to give that a go. Now, I\u2019m not going to do it on properties that don\u2019t cash flow as a long-term rental.
That\u2019s always my cover, is if I need to pivot, I can throw a tenant in it, and it\u2019s still going to cash flow. But part of growth in your business, in your real estate business isn\u2019t 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\u2019re getting a higher percent on what you spend than if you go and buy something new.<\/p>\n
Dude, I\u2019m 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\u2019re not, should you sell them? Should you switch tactics? Should you do something else? It\u2019s not talked about enough. So I love hearing that you\u2019re 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.<\/p>\n
It\u2019s so good, Dave.<\/p>\n
Oh, thank you.<\/p>\n
It\u2019s so good, yeah.<\/p>\n
You read it?<\/p>\n
I loved reading it. And my company wants me to sequester in an office and write mine for two weeks. I\u2019m just going to give them yours.<\/p>\n
There you go. Just put a new logo on it or just send them all to BiggerPockets. It\u2019ll be fine.<\/p>\n
Yeah.<\/p>\n
All right, well, thank you all. Hopefully, you guys enjoy it as well, and we\u2019ll 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.<\/p>\n