\n<\/p>\n
The 2020-caused <\/strong>supply chain<\/strong><\/a> shortage<\/strong> went from bad to worse over the span of just a month. By the summer of 2020, builders were facing massive delays<\/strong>, a lack of labor, and material prices that made new homes look almost comically unaffordable. Lumber skyrocketed in price, basic building materials sat on ships for weeks, even months at times, and subcontractors left to get paid more by working for themselves. Is this nightmare finally over for the <\/strong>new construction<\/strong><\/a> industry?<\/strong><\/p>\n Joining us today is build-to-rent expert<\/strong><\/a> Chris Funk<\/strong> from Southern Impression Homes. Chris got into real estate investing around the same time as the last crash. He was buying <\/strong>foreclosed homes<\/strong><\/a> off the courthouse steps<\/strong>, then later built a property management company and a new development company he still owns and operates today. He realized that buying new build homes as rental properties<\/strong> significantly reduced his maintenance and management costs, without adding too much of a price premium.<\/p>\n Now, he\u2019s working with investors across the nation to offer new-build quality at regular residential pricing to those who want a headache-free investing experience<\/strong>. But Chris doesn\u2019t just supply the homes, he also works with investors to get property management set up from day one, so it\u2019s as turnkey as can be. Chris gives his read on today\u2019s market, what investors should look for before they buy<\/strong>, and whether or not our supply chain nightmare<\/strong> is over!<\/p>\n Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Chris: Dave: Chris: Dave: Chris: Kathy: Chris: Kathy: Chris: Kathy: Chris: Dave: Kathy: Chris: Kathy: Chris: Dave: Chris: Kathy: Chris: Kathy: Chris: Kathy: Chris: Kathy: Chris: Dave: Chris: Dave: Chris: Dave: Chris: Kathy: Chris: Kathy: Chris: Kathy: Chris: Dave: Chris: Kathy: Chris: Dave: Chris: Kathy: Chris: Kathy: Chris: Dave: Kathy: Chris: Dave: Chris: Dave: Chris: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: \u00a0<\/p>\n \u00a0<\/p>\n<\/div>\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. Joined today by Kathy Fettke. Kathy, what\u2019s going on?<\/p>\n
Oh, so happy to be here again and see you.<\/p>\n
Thank you. Well, today we have a guest who you recommended and is your friend. How do you know Chris?<\/p>\n
He\u2019s one of the property managers through Real Wealth that we recommend to our members there. And he\u2019s helped our members buy properties for years. We\u2019ve seen the struggles. We\u2019ve seen prices go up and people get angry about that. So we\u2019re constantly trying to educate and let people know what\u2019s really going on in the new build-to-rent world because it has had a lot of challenges.<\/p>\n
Yeah. Chris, who is, like you said, a property manager, a builder, entirely focuses on build-to-rent, super knowledgeable, articulate guy. I don\u2019t invest and build-to-rent currently or new homes, but I learned a ton today. What do you think our audience should be listening for in our conversation with Chris?<\/p>\n
Well, again, if you are somebody who\u2019s in a contract to buy a new home already, you really need to read your contract and see what your rights are because people didn\u2019t really think they had to do that before. One of the big benefits of buying a new home as a rental is that you\u2019re locked into a price and it\u2019s probably going to close a year later or six months later, and the price might be higher when you close. We just did that. We bought a town home and it\u2019s gone up $400,000 since we went into contract. Fortunately, my contract was bullet proof and they couldn\u2019t raise the prices on me. But many contracts today are different because builders don\u2019t know what the end price is going to be and then you might not be able to close. So that would be the most important thing to pay attention to is if you\u2019re going to buy a new home or if you\u2019re in the process of buying one, make sure you understand your rights or the rights that you may not have in your contract.<\/p>\n
Yeah, that\u2019s excellent advice. I really loved learning from Chris just why buy for rent is taking off and why it\u2019s such an appealing option for some of the larger investors. And from our conversation, it seems like build-to-rent is potentially an option for smaller investors than I sort previously assumed. And Chris has some advice if you want to get into this particular niche on how you can do that. So with no further ado, well actually a little bit of further ado, we do have to take a break, but right after that, we are going to welcome Chris Funk, the president and CEO of Southern Impression Homes.
Chris Funk, president and CEO of Southern Impression Homes. Welcome to On the Market. Thank you so much for being here.<\/p>\n
Well, thanks so much for having me. Appreciate it.<\/p>\n
Well, we\u2019d love to hear all about your business and what you\u2019re thinking and doing in today\u2019s market, but we\u2019d love to just start by understanding your history and involvement in the real estate investing industry.<\/p>\n
Well, our history began back in late 2009 when it was a different place and a different time in the real estate world right after the last crash. We were buying foreclosed homes at the courthouse steps. Like many real estate investors today, that\u2019s where they started their careers. And so we were buying renovating and leasing homes. So we\u2019ve always had a focus on rental real estate. And through that process, we started a property management company. We started a building company and then ultimately a title insurance company here all in the state of Florida.
And at some point, we went from being renovators and fixed and flip sort of folks to build-for-rent. As the market started to increase in price over the years, we started to see that we could take advantage of the fact that we could get new product at the same price as old product and have a lot less maintenance related to that product because it\u2019s new. So from about 2015 and \u201916, we made that conversion until today we\u2019re 100% built-to-rent and we actually don\u2019t do any renovations in rentals anymore. So no more REO-to-rent for us.<\/p>\n
That\u2019s incredible. Sounds like you\u2019ve done a little bit of everything. Could you just tell us a little bit about the scale? How much build-to-rent are you doing right now?<\/p>\n
Sure. So this year we\u2019re going to finish right around 800 units of build-to-rent. That\u2019s down from where we wanted to be. Our plan was 1,100 units this year, but as we\u2019ve all seen with the shortage of materials and the supply chain issues, we weren\u2019t able to hit our goals. But still pretty respectable number. Now, we\u2019ve also, in addition to that, put about 600 lots on the ground that we\u2019ve sold to other builders, National Home Builders, properties that we don\u2019t construct. Those are kind of our two main business models right now in addition to, of course, the management of the finished properties.<\/p>\n
Chris, are you building homes on one-off lots? Or are you building full build-to-rent subdivisions?<\/p>\n
A combination of both. So right now we have a mixture of about 6,000 lots in our pipeline. And of that, about 3,000 of those are what you would consider traditional subdivisions where you see 150 houses being built typically by the same builder, a couple builders, track home sort of style. That\u2019s about half of our pipeline. The other half is infill, which is scattered lots in our various markets. So there might be an existing community that there were a couple of lots left over that nobody ever built on and we would buy those. There\u2019s some other areas like Palm Coast and Ocala where there\u2019s quite a few more infill lots available due to the way that developers used to develop in those markets many years ago, and they would sell off lots to individuals from up north that maybe thought they were going to retire down to Florida but they never retired or they never built their home. So all these individual people own these lots that never got built on.
So we have a pretty robust acquisition strategy to find these individual lot owners so that we\u2019re able to make that nice product mix between traditional subdivisions and infill. And then in our traditional subdivision side of things, that even segments out further where we have traditional single family home subdivisions, but we also provide a product that\u2019s a quadruplex and duplex product that provides more of an investment vehicle as opposed to just single family homes, which are both investment and for sale to retail home buyers. Not by us, but they might be at a later point in time. So the quadruplex product is also about half and half between infill lots and new construction communities.<\/p>\n
Yeah. When built-to-rent came into play in a big way, what was that? Four years ago, five years ago would you say?<\/p>\n
Yeah, I think that\u2019s when it really started to take hold. Yes.<\/p>\n
Yeah. And as you know, because we\u2019ve had lots of conversations, I was always really concerned about a community of single family homes that was all rentals. So just tell me a little bit about the risks to that model and what you\u2019ve seen play out in reality.<\/p>\n
Sure. It really depends on the buyer type. So we see a lot of institutional investors that only want to own a whole community of rental properties. And in that case, that\u2019s more of a management style that they want to have. They want to know that they own the whole community, that there\u2019s nobody else there and that they can treat it like a horizontal apartment complex. Whereas our model has primarily been selling some lots to national home builders that sell to retail clients and then we would build rental properties in and amongst those communities to sell to our clients, because we don\u2019t sell to any retail home buyers, we only sell to investors looking for rental properties.
So what that does when you have that mix, and particularly the single family properties because it can be both a home buyer product and an investment product, it really gives a lot of upward momentum to the sale price for the investor that buys it. So typically as builders build their way through a community, meaning retail home builders, the price goes up as they go through the phases. So we have a community in Panther Creek here in Jacksonville, Florida that\u2019s an 800 lot community. We\u2019re building 50 or 60 lots for rental properties, the rest we\u2019ve sold to National Home Builders. And every phase that they go through they raise the price. So it really helps boost up the values for the folks that are buying from us.<\/p>\n
Kathy and Chris, both of you, you said that build-to-rent got popular around four or five years ago. Were there specific market conditions that made build-to-rent become more attractive around that time period?<\/p>\n
Absolutely. Right, Chris?<\/p>\n
Yeah.<\/p>\n
I mean first and foremost it was really hard to find existing homes. And then like Chris said, they were about the same price as a new home. So why would you buy an old one, an old cranky one when you could get a new fresh one?<\/p>\n
Exactly. Exactly.<\/p>\n
I\u2019m curious because something I\u2019ve always thought, I mean it makes so much sense, Chris, you said earlier, right? If they\u2019re close in price, the maintenance is lower, you have a nice product that\u2019s really appealing to your perspective tenants, I probably falsely always assumed that build-to-rent only worked at subdivision scale like what Kathy was asking about. But it seems that you\u2019ve been able to achieve that on infills and individual one-off lot. Is that because you have the scale of a large building company or is this something that small investors can also achieve financially even if they\u2019re sort of outsourcing they\u2019re building?<\/p>\n
Yeah, I think I\u2019ve got kind of two answers to that. One of it depends on where that investor lives, first of all, and how they\u2019re going to manage those properties. So one of the things that we really see sets us apart and that our clients really like, and I think why we\u2019ve seen so much success in the build-to-rent market with Main Street investors, individual investors, is because it comes from a full service standpoint. Meaning we build the homes and then we immediately hand it over to our property management company that manages the homes. So we have scale to that effect where we manage a couple thousand houses at this point in time. So the clients that are buying from us are able to really get that institutional style management on a one-off basis where they might not be able to get that if they bought two, three houses and they\u2019re trying to manage them themselves.
If you\u2019re trying to manage a property yourself, you\u2019re the leasing agent, you are the maintenance technician, you are the property manager and the complaint department and everything wrapped into one. Whereas we have 160 employees on our payroll right now, each one of them has a specialty in one of those segments. So we\u2019re able to provide that institutional type management to folks that may only own one or two houses, but their houses get treated the exact same way as a large institutional buyers would. Which is again, that\u2019s really part of our goal and our business model, is to supply that type of product to Main Street investors versus all the institutional Wall Street guys being able to get all the product and make all the money.<\/p>\n
Yeah, I mean again Chris, I\u2019ve known you a long time and we talked about taking on these subdivisions. And my fear was that if you have so many different owners, landlords in one subdivision, somebody might mess up. They might be in a situation where they need to rapid sell. They\u2019re going to lower rents, they\u2019re going to lower prices and then that starts to spread throughout the community. Back in 2009 when I was buying foreclosures too, I went to one of those communities and that\u2019s where my fear stemmed from. I went to one where a group like mine, like Real Wealth but a different one, not us, went in and sold out the entire community to individual investors. And then when the market tanked, then literally I\u2019m walking through the subdivision and it was for sale signs, like hundreds of them. It was awful. So suddenly this investor group, all these individuals are competing against each other trying to rent, trying to sell, not getting anywhere on any of it.
So maybe that particular area, and it was El Paso, Texas, so not a growth market like Florida for sure. So it could have just been market related, but that\u2019s always been my fear. I get if an institutional company\u2019s coming in and they\u2019re buying the whole thing out and they\u2019re managing it like an apartment but it just happens to be homes, that\u2019s controllable. But how do you control it when you have so many individuals that could potentially be in competition with each other when it comes to rent and to sell?<\/p>\n
Sure. Again, two things on that. One is just how we manage it internally and one is just kind of a general market condition. So how we manage internally is when we sell a property in the community, it comes with a two year property management agreement. So at least for the first two years our property management company is stabilizing the community at the rents that we anticipated that we\u2019ve underwritten. So there\u2019s not a competing nature because it\u2019s all one property management company leasing the properties. So everybody\u2019s on the same page, incentives are 100% aligned. Now I will tell you, even here in Jacksonville and Florida back in 2008, 2009, the scenario that you mentioned very well could have happened here.<\/p>\n
That\u2019s true.<\/p>\n
I did not get in until 2009.<\/p>\n
You got to pick up the pieces.<\/p>\n
Right. I\u2019m not 100% sure what happened. But what I\u2019ll tell you, and I\u2019ve done a lot of research on this today. As you can imagine with a very large lot pipeline, one of the things that\u2019s given me a lot of comfort to have that pipeline, because as a developer we need to be planning three, four years into the future with our product lines because it just takes so long to get these entitled and developed. So when we are looking at it, we\u2019re really looking from that time period in that 2008, 2009 time period, what did the inventory look like? Inventory went up from 2009, \u201910, \u201911. \u201911 was about the peak of inventory.
And so when we look at those numbers, I say, what does it look like today? Because what really caused that scenario was the fact that lenders were lending to anybody and everybody. So everybody wanted to become a landlord that, A, shouldn\u2019t have been qualified to buy the house to begin with, but then, B, they was just so much overbuilding in the market that there were these properties that created all of these issues where people were competing with each other, which it\u2019s just a downward spiral where there\u2019s no stabilization.
In today\u2019s market, we have such a shortage of housing. So we have about a third of the inventory on the market from a for sale standpoint today than we did in 2011. When you look back at the numbers, I\u2019m very familiar with the Duval County numbers. That\u2019s our home office here. It\u2019s in Jacksonville. In this five county area around Jacksonville, in 2005\u2026 So remember, the peak of inventory was 2011. In 2005, there were 18,000 permits pooled in this market. This year we\u2019re only on track for 16,000 permits. So we\u2019re almost two decades later. So huge population growth. Probably over 20% population growth in that time period and we\u2019re still pulling less permits today than we did at the peak back in 2005. And we see further inventory issues arising as we go along just due to the fact that development has become harder and harder to do and there\u2019s less and less lot inventory coming online. So all of that\u2019s to say not that there couldn\u2019t ever be one of those issues again, but right now we just don\u2019t see an overbuilding in the market that we saw back in 2005 to 2008.<\/p>\n
And what\u2019s so cool is that you get a view of both sides. Most builders have absolutely no clue about the rental side of things. But you\u2019re able to gauge that. So how has the rental demand been over the last few months when\u2026 Or I would say just this year, but specifically the last few months when rents have gone up so high that it\u2019s becoming really challenging for people to pay?<\/p>\n
Absolutely. It\u2019s the good and the bad, right? I mean with inflation, as a landlord, as a property owner, you\u2019ve locked in your basis. So you\u2019re now a fan of inflation. For your tenant, not so much. So we\u2019ve really seen some turnover in properties as rents have gone up and we\u2019ve seen new tenants coming in at much higher prices. So when we\u2019re speaking with our property owners, that\u2019s really a decision to make. The rent could be 200 or $300 more on a unit in the market today than it was when the property was rented a year ago, a year and a half ago, two years ago. But you have a potential of a turnover over cost and whatnot if the tenant does not accept that rental increase. So it\u2019s been a lot of conversation with our investors to say, \u201cHey, this is what we think we can get in the market. Would you like us to increase the property to that amount? Would you like to keep the existing tenant?\u201d And in most cases, people are looking to increase those rents. That\u2019s why everybody\u2019s in real estate. You expect it to go up over time.
Real estate prices and rents have\u2026 You look it at a chart, they\u2019re always up into the right. They have been for as long as they\u2019ve been keeping score of those things. But it has put a little bit of a strain on the leasing staff. You really have to make sure that you\u2019re vetting folks at these higher prices. When you\u2019re giving an increase that\u2019s 200, $300, does that tenant still qualify for the new increase, even if it\u2019s an existing tenant? So it certainly brings its own set of challenges as we\u2019ve seen rents escalate really more than they ever have in this given time period in history.<\/p>\n
Chris, you were talking about all this data that you look at with inventory and population growth. Can you just tell our audience a little bit about what the key factors and variables that you look at when you\u2019re deciding which lots to pursue and what types of developments you\u2019re pursuing strategically based on that data that you\u2019re looking at?<\/p>\n
Absolutely. So Kathy mentioned it earlier, but our number one key component is, is there net-in migration coming to the area that we\u2019re buying lots in? So if we\u2019re going to be putting new housing inventory on the grounds, we want to make sure that there\u2019s new people coming to that market to fill that gap. Fortunately, we live in Florida so you\u2019re hard pressed to find a town or city or county in Florida that is not growing. We\u2019ve been the beneficiary of a lot of COVID related relocation and we\u2019re thankful for all these folks coming to town. So that\u2019s the number one key component.
But then, quickly there behind that, we\u2019re looking at the median household income in the market. Our goal has always been to provide housing that meets the widest range of tenants within a market. And so we look at, can the average person in a market afford three times the monthly rent? So if you annualize the rent, multiply by three, is the normal household making at or around that median household income? Because then we\u2019re hitting the widest range of the market from a tenant base.
And so those are really the two biggest factors that drive our decisions. The others dig a little bit deeper. What are the jobs in the area? How many jobs are in the area? We pull a lot of this data from ESRI. I\u2019m not sure if you\u2019re familiar with ESRI, but it\u2019s really the driving data behind CoStar and LoopNet, those sort of big data services. It really has a lot of granular information. Jobs and new jobs in the areas is a big one, college degrees versus not, or technical degrees within a particular community are a couple other things that we look at. And net worth. What is the net worth in each of these areas?<\/p>\n
Do you try and forecast out three or four years? Just out of curiosity. Because you were saying that as a developer you\u2019re planning several years out. Are you just looking at data now and presuming these trends are going to continue or how do you think that far into the future?<\/p>\n
It is very, very tough.<\/p>\n
Glad we\u2019re all the same page about that.<\/p>\n
We first try to make sure, does it make sense in today\u2019s world? And then we look at what\u2019s happening. So last year we saw rents go up over 20% on average. Certainly, that is not sustainable, that there\u2019s just no way that continue to happen. So we have much, much lower expectations of rental growth in what we\u2019ve seen. We still think that we\u2019re going to see plenty of rental growth this year and we\u2019ll reevaluate at the end of this year and see where things are trending. But we\u2019re looking more at what are rents today when we\u2019re making these decisions on property purchases. And if rents are able to go up over time, then fantastic. We\u2019ve seen a lot of our clients go under contract and think the house is going to rent for $1,400 a month. By the time they close on it\u2019s $1,550, $1,600 a month. So those are some really big pickups, but they\u2019re not guaranteed. There\u2019s no guarantees in real estate, that\u2019s for sure. So we really try to stay on the conservative side of that approach.<\/p>\n
So on the really challenging side of being a builder over the last two years as what you mentioned earlier, you shut down the world, keep people in their houses, you don\u2019t have production. And then you turn the lights back on, everybody gets to go outside and do things, and the world isn\u2019t ready for that. So obviously the builders felt the brunt of that in not being able to get the most basic of things. The things you wouldn\u2019t even thought would be an issue, starting of course with lumber. That\u2019s never, as far as I know, been an issue. Today it\u2019s concrete. What are some of the big surprises you\u2019ve had to face over the last couple of years?<\/p>\n
How long do you have? This has been a rough couple of years from a building perspective. Man, it\u2019s been literally everything. You mentioned that the biggest one right out of the gate was lumber. Lumber was just skyrocketed and it went up. It doubled and we thought, \u201cWell, it can\u2019t go up anymore.\u201d And then it tripled and it\u2019s, \u201cSneeze Louise. It was impossible.\u201d I mean we\u2019ve seen such massive 30, 40, 50% increases in build costs in these markets in these time periods. It\u2019s been incredibly hard to budget and to try and produce a product and give a price with the way it\u2019s been.
If I was sharing my screen, I would share with you one of these reports that you were asking about, Dave. It\u2019s the St. Louis Fed puts out a producer pricing index for inputs to housing. Oh my gosh, I mean for 20 years it was flat, flat, flat, flat, flat, and then all of a sudden it just went straight up. I mean, the last two years has been literally a straight up turn in the cost of materials. But lumber, again, to answer your question more specifically, lumber was the big one in the beginning. And then everything else started to pile on. As things got to be in short supply, it became more of instead of vendors bidding for our business, \u201cHey, this is what we can do the work for\u201d and us negotiating a price down, it was really as a builder, we were bidding up prices to see if we could actually get them to show up at the job site because there were way more people wanting to build homes than there were vendors to do the various parts.
So we\u2019ve seen shortages from everything from AC duct to garage door springs, to windows, doors, appliances for a while were a biggie. Oh geez, radiant ducts for fire rated systems in our quadruplexes. I mean, we finally found some of those and we bought a semi full of them. So we bought a couple thousand of them at once because we didn\u2019t want to let them go. But that\u2019s just perpetuating the problem, right? That\u2019s just making it worse because there\u2019s probably somebody else out there that needs them today and we have a truckload full of them. So it\u2019s really been tough.
And I will tell you here over the last couple of months we\u2019ve started to see some leveling out, I would say, at least in pricing in some of our markets. In some markets it\u2019s still incredibly difficult. Southwest Florida, it\u2019s hard to even find truckloads of dirt to fill the lots down there, let alone find concrete and block in those markets today. But we\u2019ve seen Palm Coast, Jacksonville, Ocala, we\u2019re starting to see our build times come down, which means that the materials are a little more readily available than they have been in the past.
Block is still an issue right now. That\u2019s kind of our big, no pun intended, that\u2019s our big stumbling block at the moment, is blocking concrete. But we start to see those coming around. When I look at the averages of what we are paying to build a home today, it\u2019s still taking up slightly but not nearly as drastically as it has been over the last two years. So we look at our eight week average. Our eight week average right now is trending up about a thousand dollars. The total bill cost is about a thousand dollars per unit more than the average of the last eight weeks. I mean, in any given month during the last two years, that easily could have been 5,000 or $10,000 per unit. I mean, we\u2019re down a several multiples of what we\u2019ve been experiencing.
We still haven\u2019t seen any decreases in pricing, which is a little frustrating honestly. As a builder, we see lumber prices coming down. But as lumber has come down, drywall\u2019s gone up. Concrete\u2019s gone up. Paint\u2019s gone up. Every other input has really eroded any of the savings that we would\u2019ve thought we would\u2019ve seen from lumber. But to put a silver lining on it, it does seem to be flattening.<\/p>\n
What have you had to change in your contracts? Your contracts with subs, with trades, with buyers. Because think of the builders who didn\u2019t write the right contracts at the beginning and they\u2019re stuck in these prices and can\u2019t raise the prices and they\u2019re just losing money. I mean, how have you changed the wording in your contract?<\/p>\n
Yeah. Well, and you\u2019ve seen a lot of builders go out of business for that fact. Everybody thinks that this is such a great environment. A lot of people have been buying houses, but a lot of people have been losing money on houses too from a builder perspective. So to answer your vendor question, our vendor contracts have changed drastically because a lot of our vendors, we can\u2019t even get to sign contracts anymore. I think those tides might be turning or might be starting to turn. But for the past two years, nobody would commit to a price. They\u2019d say, \u201cHey, we think that we\u2019ll have the material for you and we\u2019ll let you know what it\u2019s going to cost when we get it.\u201d And so we\u2019re really starting these houses without great budgets. We know what we think it should cost, but we\u2019re really at the mercy. If AC units are in short supply and the vendor comes and says, \u201cHey, I got 12 guys that want one AC unit, how much are you willing to pay for it?\u201d Those are some of the conversations that we\u2019ve been forced to have.
And even right now, trusses for instance. They\u2019re still in short supply. So even though lumbers come down, truss prices haven\u2019t come down hardly at all because the truss manufacturers are going, \u201cWell hey, you still can\u2019t get them so we\u2019re going to keep charging the price not because it\u2019s what the material costs, it\u2019s because nobody else has them.\u201d So from a vendor perspective, it\u2019s been difficult. We\u2019ve really gone away from a lot of contracts because they\u2019re not honoring them and\/or they won\u2019t sign them.
So from our perspective on when we\u2019re selling home side, we\u2019ve had to institute causes into our agreements that say, \u201cHey, this is the price right now, but when we go to build your home, if the price has increased, we\u2019ll tell you what the increase is and then you have the option to terminate the contract or move forward at the increased price.\u201d When we were seeing such delays to materials coming in, we really had to institute those sort of measures because we didn\u2019t know when we were going to be able to start a house. And that was 2020, 2021 and early part of 2022.
I am happy to announce though, as of June, we were able to get caught up enough on production to eliminate the need for that. Those causes are still in our contracts, but the cause states that we\u2019ll give you a price increase when the slab is poured. So since June we\u2019ve been able to wait until the slab is poured so we have a much better visibility in pricing before we sell a home. So we are, knock on wood, hopefully out of the woods, on at least new contracts on those. We\u2019ve still got a few working their way through the pipeline that are going to need some price increases but there\u2019s a light at the end of the tunnel.<\/p>\n
Does it still make sense for those investors? Again, most of your buyers are investors, whether they\u2019re institutional or individual and they knew they were going into this with the idea that prices could go up. But have rents gone up equivalently and does it still make sense? Or have cash flows reduced dramatically?<\/p>\n
Well, we\u2019ve seen two different things on that as well. For new product that we\u2019re selling, as lot prices have gone up over time, we\u2019re definitely seeing a compression in cash flow just simply because the interest rates have gone up so much here recently. Still positive cash flow on\u2026 The vast majority of the product that we build has positive cash flow. But to answer your question related to the people who have had price increases, the good news for those folks is we typically bought those lots at a lower basis. So even though there\u2019s a price increase due to material increases, there\u2019s not a full price increase to current market rates. So they\u2019re still walking into a fair amount of equity in those properties, which is a great thing. But to your point, the rents have also gone up significantly over that time period as well. So really in a lot of cases, they\u2019re the same or maybe slightly better in some cases, or maybe slightly worse in some cases, but very similar because we\u2019ve seen such rent growth.
The real wild card is interest rates. What are interest rates compared to what they were when they contracted? What are interest rates today and what are they going to be in six months from now? I think as we sit here today, we\u2019re probably going to be seeing another Fed rate hike. From my perspective, what I see in the world, I think we\u2019ve already overcorrected, which tells me at some point in the future here, probably sometime next year, we\u2019re going to start to see either leveling or maybe even backing off of some of those rates. So for me, in my portfolio, I\u2019m looking at it from a perspective of locking in my basis now, because as I mentioned, the build cost isn\u2019t going down. So locking in that basis and hoping for better interest rates in years to come.<\/p>\n
Chris, I\u2019m sure you have a lot of friends and colleagues who are building around the country. I\u2019m just curious what you\u2019re hearing from them as well because at least what I see at the data is that construction starts and permits are trending down and people are not building as much. Is that what you\u2019re hearing as well?<\/p>\n
We\u2019ve seen the same data. Duval County permits are significantly lower. In all markets we\u2019ve seen significantly lower permit levels. But what we haven\u2019t seen because I think there\u2019s a lot of properties still under construction, and that\u2019s why we have not seen any real decreases in that pricing. So we\u2019re hopeful that it\u2019s to come. I talked to a lot of other builders throughout the country. We all keep thinking that we\u2019re going to see some decrease, but it keeps not happening. So I don\u2019t know if we\u2019re just wishful thinking. Because some of this pricing gets very sticky. I mean, the material suppliers have now made commitments based on margins at higher price of goods that are paying their staff a lot more. So in some ways, it\u2019s hard for the pricing to come back because we\u2019ve all seen so much inflation over the last two years that we know we\u2019re not going to get it all back. We\u2019re never, never, ever, ever going to go back to pricing that we had pre COVID. That\u2019s not ever going to happen.
We\u2019re hoping for some sort of reprieve just as things stabilize and the supply chain straighten themselves out. But it always\u2026 Like I said earlier with the lumber, the lumber\u2019s gone down, but we\u2019ve had two or three other big things go up. So I\u2019m reluctant to say that we\u2019re going to see any sort of price decreases. I think from an inventory standpoint, I think we\u2019re going to see a peak of inventory in Q4, maybe Q1 of 2023. So end of 2022, beginning of 2023.
But being a lot developer that sells homes to retail home builders, so all the National Home Builders, those guys are pulling way back on their starts. They all got burned in 2008, \u201907 and \u201908 badly so they have a big knee-jerk reaction to what we\u2019re seeing in the world. So they\u2019re saying, \u201cHey. Psst. Stop. Starts, mothball development projects,\u201d which is going to in turn mean that we might have some increased inventory for a few months. But as that gets gobbled up, we\u2019re going to be back to maybe even more of a severe shortage than we are today because really the building and development world\/sector had really just started to catch its stride in being able to produce enough lots in homes to support the demand. And we were still at a major shortage, but we were starting to see that momentum to where we would have an equilibrium. Everybody putting the brakes on has really put a big damper in that. So yeah, we\u2019ll see what happens, but right now I see a lot of people mothballing projects.<\/p>\n
Even the build-to-rent institutional purchasers, are they slowing down?<\/p>\n
So the built-to-rent folks are not slowing down nearly as much, because as you can see with the retail home builders, not only are they pulling back on what they\u2019re building so they\u2019re going to have less supply ultimately, you have a lot less people that\u2019ll qualify. So if you had somebody that was going to qualify at 3% for a retail home, they may not qualify at 6%, and probably don\u2019t. Certainly not for the same home. So unless they\u2019re going to move down in housing type, they\u2019re probably not buying a home. So we have a lot more folks that are trending back towards rentals than really we had even anticipated previously. So the Institutional, again, some of the folks that we do work with, they\u2019re still buying development projects. We\u2019re just about to sign a contract with an Institutional to sell them another a hundred lots in one of our communities. So we see those guys still plowing ahead, but they feel the wind is at their back from a rental perspective. They\u2019ve been waiting for this moment.<\/p>\n
Well Chris, this has been super helpful. You are obviously a wealth of knowledge and I\u2019m just fascinated about this build-for-rent and think that it\u2019s a really helpful lesson for everyone who\u2019s listening to this, just learning from your experience here. But is there anything else that you think our audience of aspiring and active real estate investors should be considering about today\u2019s current market conditions as they go and build their portfolios?<\/p>\n
Well, I\u2019ll jump in with a couple of mine and I\u2019m sure Kathy has some. One of the biggest things that we\u2019ve seen change for our clients, our Main Street clients today, is they don\u2019t have access to the institutional capital that these institutional buyers do. And so we\u2019ve had to get creative with financing to help folks and figure out how to offset some of these higher interest rates. Everybody looks at that 6% rate that they hear on the news. That\u2019s only one component. So we\u2019ve seen a lot of lenders out there get very competitive. The lending market is rather disjointed at the moment. You see some lenders really hedging and putting big margins on their loans and then others are getting very aggressive and even offering rate by down solutions to clients to really bring that payment down. So we still see a lot of our clients doing Fannie and Freddie loans and buying the rate down to create that cash flow for the hold, for the investment that they\u2019re buying.
We\u2019ve also seen a lot of our clients move to some of these interest-only loans. So we\u2019ve seen some very interesting product, 5\/1 ARMs, everybody has a bit of a stigma of ARMs because that was one of the things that caused the problems back in 2005 and \u201906. But ARMs done the right way for investor clients are great. That\u2019s what these institutional guys are doing. They\u2019re not getting 30 year fixed loans, they\u2019re doing these adjustable mortgages that have some period of fixed rate. So I personally have been doing a lot of five year fixed rates. I found a product that\u2019s non recourse, it\u2019s five year fixed rate. At the end of five years it can adjust, but there\u2019s caps on how much it can adjust. And at the end of the five years, it doesn\u2019t balloon, it fully amortizes. So it\u2019s still a 30 year loan, so you\u2019re never stuck with that big balloon payment, you may get stuck with a higher interest rate.
But my thought is for my personal portfolio, I believe rates are going to go down in the next five years. I think they\u2019re going to go down in the next 12 months, but I certainly believe they\u2019re going to be lower in the next five years. So I anticipate that I\u2019ll refinance out of those and into longer term debt. So I think for investors out there, particularly Main Street investors, don\u2019t get stuck on the rate today. The beauty of real estate is you can refinance that property as often as you want to or need to maximize the return and the investment in that project.<\/p>\n
Yeah. Another loan that at least in our developments people are choosing is the construction-to-perm loan, because it is scary to go into a contract and have no idea what rates are going to be like when the project\u2019s finished and you got to close or else you lose your deposit. So I really like the, just get one loan, it covers construction, it converts to whatever your terms are, 5, 7, 10, or 30 year once the building is finished. So I\u2019m taking those as well. I think it offers a lot of security.<\/p>\n
I 100% agree.<\/p>\n
Sometimes, Chris, I don\u2019t know if you do this, but if the buyer is then buying the lot and getting their own construction loan, oftentimes that means you can get the price a little lower because the builder\u2019s not taking on that cost of debt.<\/p>\n
Yeah, absolutely. Debt is a\u2026 That\u2019s big number in the home building game. That\u2019s one of our biggest line items, is the finance cost. Individual line items anyway. So yeah, I think that\u2019s a great way to go about it. We\u2019ve done that on some of our personal building holds as well. I think all of these are things that we didn\u2019t talk about a year ago. You know what I mean? And Kathy and I talk a lot, but there was no need to talk about it then. As the markets changed, now you need to think of these creative solutions. The option is, think of a creative solution to do business or just sit on the sidelines and do nothing and see what happens. Either one\u2019s scary.<\/p>\n
Yeah, it wasn\u2019t really hard when there was 3%, 30 year fixed rate mortgages to decide what loan product to go after as an investor. But as they say, the people who are going to get creative and find these solutions, like the ones you guys are pointing out here, are the ones who are going to get the best opportunities in this market. And from all the people we talked to on the show, it does seem like there are opportunities if you are willing to do that extra leg work and think through some solutions that you weren\u2019t thinking through a year ago, just like the two of you.<\/p>\n
100%. One thing about real estate having been in it for so long, is it\u2019s always changing. When I first started, new homes were the thing. It was the same kind of thing. I could get amazing cash flow on a new home, so why would I buy an old one? And then all of a sudden everything fell apart and you could get existing homes for almost nothing. So of course we pivoted and did that and we\u2019re buying foreclosures from banks and REOs. And then those all got bought out, I was like, \u201cWhat do we do now? There\u2019s no inventory. I guess we got to build again.\u201d So it\u2019s always changing. And if you\u2019ve been in the game long enough, you\u2019ll be changing too or else you won\u2019t be playing the game.<\/p>\n
True. So true.<\/p>\n
Well Chris, thank you so much for joining us. If anyone who\u2019s listening wants to connect with you, what\u2019s the best place they can do that?<\/p>\n
Oh, we\u2019d love them to come check us out at southernimpressionhomes.com. There\u2019s a lot about our product and inventory on the website. There\u2019s ways to interact with our team right there. Happy to connect that way. So just fill out one of the forms and somebody will be in contact almost immediately.<\/p>\n
All right, Chris Funk, thank you so much for joining us here On The Market.<\/p>\n
Appreciate you having me.<\/p>\n
That was awesome. Kathy, you have the coolest friends. Thank you for bringing Chris. How do I get cool friends like you?<\/p>\n
Oh, well we search the country for them, I guess.<\/p>\n
Honestly, I\u2019m actually curious, how do you meet so many people? Is it just networking and going to conferences? How do develop such a great network of other real estate investors and people who have helped you in your journey?<\/p>\n
I do speak at a lot of conferences. I have had the Real Wealth show for, oh my gosh, 20 years so I\u2019ve interviewed a lot of people. But our company is also based on finding really good builders and property managers and teams nationwide to help our members at Real Wealth buy stuff. So that\u2019s my job, I got to find cool people.<\/p>\n
Well, you\u2019re good at it.<\/p>\n
Thank you.<\/p>\n
What did you learn from Chris today? I know you talked to him all the time, but was there anything in particular you got out of this conversation?<\/p>\n
Just a reminder of how difficult it\u2019s been. Obviously, we have three or four subdivisions. We finally sold off a couple of them, so that\u2019s good.<\/p>\n
Nice.<\/p>\n
But I\u2019m not hands on obviously the way he is. And to hear all the challenges\u2026 And on my side I hear the investor complaints. So my job is to get everyone communicating. And so I figured there were some BiggerPockets people who also are frustrated with their builder. A lot of the comments we get from our buyers is, \u201cOh, they\u2019re just trying to rip us off. They\u2019re just trying to raise the prices because they can and they\u2019re keeping all these profits.\u201d And so I\u2019ll put together the webinars and say, \u201cOpen your books. What\u2019s going on? What are you paying for things? What\u2019s your profit?\u201d Generally, profit margins on new homes are really small anyway. They\u2019re 5 to 10%. Generally, you make all your profit at the very, very, very end. And in our subdivisions, we still have to create\u2026 30% of our subdivisions need to be affordable for the teachers and the firefighters and the police. There\u2019s no negotiating on those. We\u2019re locked-in in Park City, we\u2019re locked-in on $400,000 properties that cost us 800,000 to build. But it\u2019s an agreement, we have to do it.
So anyway, bottom line is I want investors to really understand that it\u2019s not always the greedy builder that\u2019s trying to rip you off. It\u2019s just the way things are. It\u2019s just inflation. Not just inflation, but it\u2019s a severely unhealthy version of inflation that it also includes complete lack of supplies. It\u2019s one thing to have things be expensive, it\u2019s another thing to not be able to find what you need at all.<\/p>\n
Yeah, it\u2019s crazy. That chart he was talking about, the Producer Price Index for home building is a crazy thing to look at if you\u2019re at home and you just want to understand what Kathy and Chris are talking about. The new home industry actually has really good data, generally speaking, that just like an average person can look up if you just want to understand broad macroeconomic trends. So if you want to understand what Kathy\u2019s talking about, go check that out for yourself. I think this whole industry is just really fascinating. The whole build-to-rent model just makes a lot of sense. And I know that there\u2019s a lot of cries out there or headlines in the media that make it say like, \u201cOh this is the beginning of a renter nation.\u201d The data honestly doesn\u2019t really bear that out at all.<\/p>\n
Yeah, doesn\u2019t support that. I know.<\/p>\n
Yeah. Yeah.<\/p>\n
I\u2019ve been on CNBC. I\u2019ve been-<\/p>\n
Home ownership rate is the same. It\u2019s the same.<\/p>\n
They\u2019ve been saying that for 10 years and I would go on these big stations on, again, CNBC and Fox and ABC and say, \u201cNo, no, no, no, it\u2019s not that different.\u201d It\u2019s always in the 60%. Like 62% home ownership. The highest was, I think, we got to 69. There are still a lot of homeowners out there.<\/p>\n
Totally.<\/p>\n
Right.<\/p>\n
And to me, if I were a renter\u2026 I actually am a renter. I rent in Amsterdam. But if I were a renter in the United States, a build-to-rent like subdivision and getting single family home sounds like a good option. So to me it sounds like if this is a profitable endeavor for builders and investors and it\u2019s allowing people to live in a product that they really like, it just seems like a really interesting trend that is likely going to continue for the next couple of years and something that investors should be considering. Because I always assumed it was just at the subdivision level, not that people were doing build-for-rent in terms of infill. But I guess to Chris\u2019s point, you have to have the systems to manage those efficiently to actually generate the cash flow.<\/p>\n
Yeah, ours has always been infill or we would negotiate with builders for our clients that will take 10% of your inventory. But most subdivisions don\u2019t want more than 10% of the homes to be rentals because it can change the vibe be if they\u2019re individuals, because some people might self manage, some might hire a horrible property manager and it can bring down the value of the other homes around it if it\u2019s not well cared for. So I would say that the number one thing that investors should keep in mind, because there\u2019s going to be a lot of builders looking their wounds right now, it is a good time to be able to probably get a good deal on new homes. But do keep in mind, ask, \u201cHow many other renters do we have? Who are you selling to?\u201d
And most importantly, I\u2019ve met a lot of people who\u2019ve come to me and they want us to promote them and sell their stuff to investors. I won\u2019t say any names, but there\u2019s one guy who\u2019s got 800 homes in his subdivision that he\u2019s selling one off to investors who are not like Chris. Now, Chris is going to manage those subdivisions, but this other guy, he\u2019s just building them, doesn\u2019t have property management and he\u2019s selling 800 rentals to different buyers. That is not going to end well. So always ask, in my opinion. Think about it, one person faces a hardship, they need to fire sell their property or they need to just get anyone in there, they bring in the local drug dealer and it just could really spread like wildfire very quickly.<\/p>\n
Oh yeah, yeah. Sorry. I was glad you asked that question because I\u2019ve always stayed away from investing in subdivisions because it just seems like there could just be a quick race to the bottom. If there\u2019s an increase in vacancy in the market and all of a sudden your neighbor needs cash more than you do and they drop their rents 200 and then the neighbor next door drop, there\u2019s no way to differentiate. Your product is exactly the same. And so the only way you compete is on price. And if someone else is willing to go lower than you, you just get screwed. So I was really glad you asked that question. That honestly just sounds like a nightmare, just selling those individual units one at a time to individual landlords. That is not a situation I would want to get myself into.<\/p>\n
Be very careful out there. Yeah, because there\u2019s always going to be greed and there\u2019s going to be desperate sellers, desperate builders that will just sell to anyone. So that would be my first question. How many investors do you have in here? And then you might have trouble getting financing if it\u2019s all investor. I mean, that was my other question to this guy. How on earth or are these people going to get loans when the lender finds out that\u2019s basically an apartment?<\/p>\n
Mm-hmm. Yeah, it\u2019s a condo basically.<\/p>\n
Mm-hmm.<\/p>\n
Yeah, that\u2019s a good thing to look out for. But I do agree with you that right now is probably a better opportunity than most times to look at new construction. I\u2019ve never bought it, but I\u2019ve been looking at it because the premium now is about 8% nationwide. And in some markets it\u2019s lower. It is extremely close in terms of the price of existing homes and new homes. Depending on where you are, that could allow you to get a brand new product at a similar price to what you would pay for an existing home. So like Chris said, the prices just aren\u2019t that different and you get a better product. So I would recommend people look at it. It\u2019s traditionally not the best way for investors to make money, but right now it could be.<\/p>\n
Oh, I think so. I mean, I think I\u2019ve mentioned we are launching another single family rental fund in the Texas area. We\u2019re really focused on buying new homes that builders, like Chris said, they are going out of business and we can help them, save them, but also buy these either half finished homes or lots that they couldn\u2019t complete. And that\u2019ll be part of our rental fund.<\/p>\n
Great. And I just watched your YouTube video about it.<\/p>\n
Oh, cool.<\/p>\n
Yeah, it was very good. So if anyone else wants to, check that out, Kathy\u2019s Real Wealth Network. Well, Kathy, thank you so much for joining as always. And thank you for bringing Chris who was an awesome guest. I appreciate you recommending him.<\/p>\n
Thank you. I learned a lot too.<\/p>\n
All right. Well, thank you all for listening and we\u2019ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kalin Bennett. Produced by Kalin Bennett, editing by Joel Ascarza and OnyxMedia, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n