\n
Dave:
Hey, what\u2019s going on everyone? It\u2019s Dave. Welcome to On The Market, and joined here by the full force of the On The Market podcast. We have Kathy Fettke. Kathy, how are you?<\/p>\n
Kathy:
Wonderful. Glad to be here with you guys.<\/p>\n
Dave:
Henry, what\u2019s up, man?<\/p>\n
Henry:
What\u2019s up, buddy? How are you?<\/p>\n
Dave:
Doing well. Jamil, what\u2019s up?<\/p>\n
Jamil:
How you doing, handsome? I\u2019m great. Good to see you.<\/p>\n
Dave:
Aw, thanks, man.<\/p>\n
Kathy:
Sounds like a dating show.<\/p>\n
Dave:
Oh, yeah. James, flatter me. What\u2019s going on with you?<\/p>\n
James:
That kind of caught me off guard.<\/p>\n
Dave:
Me too. I\u2019m blushing now.<\/p>\n
James:
I\u2019m kind of blushing for you.<\/p>\n
Dave:
Oh yeah, I know. Jamil, you\u2019re really charming our pants off here.<\/p>\n
Jamil:
You know, I try.<\/p>\n
Dave:
Well, today we have a great show. We did a version of the show, I think it was back in May, where we asked you all to bring us deals that you are currently working on, and we\u2019re going to do a version of that. So I mean, we\u2019ve all been talking about how there\u2019s a lot of opportunity in the market right now, and we figured it was a good time to bring this concept back so you can share the types of deals that you\u2019re seeing in the market, that you\u2019re actually working on in the market. And I\u2019m pretty excited to hear from all of you guys.
Is everyone ready to go?<\/p>\n
James:
Yes.<\/p>\n
Jamil:
Let\u2019s do it. I love talking deals.<\/p>\n
Dave:
All right. Well, Kathy\u2019s the only one who didn\u2019t respond to that, so let\u2019s start with Kathy. What deals are you looking at right now?<\/p>\n
Kathy:
Well, we have a single family rental fund, as I\u2019ve mentioned, and we are rapidly acquiring properties. So one of them is in Gainesville, Texas, purchase price a whopping $80,000, and the rehab about 50,000, so we\u2019re looking at an ARV of 160. This property will rent for about $1,325 right now, but the area is growing so rapidly with all the chip manufacturing that we expect to see rents go up. Plus we\u2019re doing a A-class renovation because a lot of the jobs out there are six figure jobs, so they\u2019re wanting a nice place to live. So believe it or not, $135,000 property will actually be A-class in this area.
So it\u2019s kind of like a BRRRR strategy, but within a fund. So we\u2019ll be raising the money, raising the capital in the syndication, acquiring these properties with cash, renovating with cash. And then I do expect, at least the bank that we\u2019re talking to is expecting rates to come down by the middle of next year, at which point we\u2019ll refi this part of the fund and go do it again. But I don\u2019t know next year if the deals will be as good as we\u2019re getting right now. So the bank may be\u2026 it may make sense to just buy some points down and do a refi sooner to be able to take advantage of the market, but that\u2019s just one of what will be a few hundred of the same.<\/p>\n
Dave:
Wow, that\u2019s incredible. I mean, that sounds like a really good deal. Just eyeballing it meets the 1% rule roughly there and that 1% rule is assuming usually that you\u2019re putting 80% leverage on it, but you\u2019re holding this in cash, so that must be throwing off a lot of cash.<\/p>\n
Kathy:
Yeah, well, initially, yeah. Initially we\u2019re purchasing with cash. The rates just kind of don\u2019t make sense for a fund at this point. But my partner in Texas has a really good banking relationship with a local bank that\u2019s excited to lend to this fund and is quoting in the fives. So we\u2019ll see.<\/p>\n
Dave:
That\u2019s great.<\/p>\n
Kathy:
Yeah.<\/p>\n
James:
What kind of term is that on the five?<\/p>\n
Kathy:
I don\u2019t know for sure, I would need to find out, but I\u2019m going to say a five year. But I\u2019ll have the details. We don\u2019t know what the market lev-lending environment will be in six months, which is when we would be doing the refi. So I don\u2019t know the specific terms, but this is at least what that local bank is saying that they would do.<\/p>\n
Dave:
And how do you find this deal, Kathy?<\/p>\n
Kathy:
Through my partner. As you know, I\u2019m, I guess, a lazy investor, is that what you\u2019d call it? We have people all-<\/p>\n
Dave:
That\u2019s called smart investment.<\/p>\n
Kathy:
We have teams all across the country, that\u2019s been our business at RealWealth for almost 20 years. So we have partners in different markets who do the work, they find the property. It\u2019s usually a property management company. So they have the teams in place, they have the repair teams, the acquisition process. I think on this particular one it was a wholesale deal and she is just getting bombarded with wholesalers calling, negotiating, and if you got the cash, you\u2019re in business.<\/p>\n
Dave:
You mentioned a little bit about chip manufacturing, is that the main draw to the area?<\/p>\n
Kathy:
There\u2019s so much technology moving into that, the Texas Instruments and every single day\u2026<\/p>\n
Dave:
The calculator people?<\/p>\n
Kathy:
Yeah. If you go to growdevelopments.com where there\u2019s a video of this fund and what we\u2019re doing, you\u2019ll see every single day, there\u2019s\u2026 I don\u2019t know if it\u2019s every single day, but almost where a company is moving, usually from California to Texas, because it\u2019s just a better place to do business at this time. So many\u2026 Caterpillar is moving there. So there\u2019s just all kinds of different companies. But in this specific area, there\u2019s really\u2026 They\u2019re just kind of calling it the Silicon Valley of the\u2026 I don\u2019t know, it was kind of a funny term, but of Texas.<\/p>\n
Dave:
Well, they call everything silicon something.<\/p>\n
Jamil:
I know, I\u2019m so tired of Silicon Valley.<\/p>\n
Dave:
Silicon Mountains, they call Amsterdam Silicon Canals. It\u2019s so stupid.<\/p>\n
Kathy:
I know, and Park City is the Silicon Slopes. But there\u2019s a lot of tech companies moving there just because the cost of labor is so much cheaper and then your employees can live better. Imagine that, living in a\u2026 well, renting $1,325 in rent for somebody who would be paying three or four times that in the actual Silicon Valley.<\/p>\n
Dave:
And why specifically single families?<\/p>\n
Kathy:
Such a good question. It\u2019s an asset class I\u2019m just really comfortable in, and there\u2019s so many deals right now. It is being hit hard with the higher interest rates. So we are able to get great deals and a lot of times that\u2019s where people want to live, they want to live in a single family home. But we\u2019re not walking away from duplexes or fourplexes. We\u2019re just kind of keeping it in the one to four unit.
There\u2019s just a lot of people who prefer to live in a and rent a single family home. And of course as a fund manager, we can sell off homes that really just aren\u2019t performing the way we want them to. You can sell them off individually. So the loans to a fund are unique in that way that you can sell off assets that just really aren\u2019t performing, whereas that obviously more difficult to do in an apartment. But I know James is going to talk about an apartment. I\u2019m kind of jealous about it.<\/p>\n
Dave:
I know, it does look pretty good.<\/p>\n
Kathy:
It looks really good.<\/p>\n
Dave:
We\u2019ll have to hear about that. Well, any other questions for Kathy? Kathy, it sounds like a great deal. Congratulations on this and the larger fund. Love the strategy. I know a little bit about North Texas. I know you\u2019ve been bullish on that for a long time, so I\u2019m sure it will work out well for you.<\/p>\n
Kathy:
20 years, 20 years in\u2026 Texas is my happy place.<\/p>\n
James:
I love this deal. It\u2019s totally bulletproof right now. You\u2019re buying it for 50% off, the rent covers no matter what. If the property goes down by another 30% it doesn\u2019t matter because your rent\u2019s going to cover and if you decide you don\u2019t want to keep it, you can sell it and rack a return. That\u2019s your bullet-proof safe deal in a recession market right now.<\/p>\n
Kathy:
I mean, you just nailed it. I\u2019m older than you guys. I don\u2019t know if you noticed, but we\u2019re conservative and a lot of our members at RealWealth are conservative. We underwrote this fund extremely conservatively. We barely accounted for any appreciation at all. We expect it will be there, but I just didn\u2019t want to underwrite it or promise that. But I\u2019m going for conservative right now and I know a lot of other people are looking for that. And that\u2019s why I like it too.<\/p>\n
Jamil:
I think Dolf de Roos said, \u201cThe deal of a lifetime comes around every week,\u201d but I feel like this is one of those deals of a lifetime, Kathy, it\u2019s a great deal, I would absolutely do it myself so good find.<\/p>\n
Kathy:
It means a lot coming from you guys.<\/p>\n
Henry:
Oh yeah, that\u2019s a buy all day. Multiple exits, that\u2019s what you need right now.<\/p>\n
Kathy:
Yes.<\/p>\n
Dave:
All right, Henry, let\u2019s move on to you. What are you working on there in Northwest Arkansas?<\/p>\n
Henry:
Yeah, my deal\u2019s actually not too dissimilar from Kathy\u2019s deal. This one is a single family home. It\u2019s in Fayetteville, Arkansas, so it\u2019s in an area of Northwest Arkansas that people love. It\u2019s a little further out than maybe most of the homes around the area. But I\u2019ve actually done, this will be the third deal I\u2019ve done in this little street. And so I\u2019m very familiar with the area, I\u2019m very familiar with how well or not well it does and so that gave a level of comfortability.
But we\u2019re buying a single family home; purchase price is 70,000. It is a two bed, one bath. And again, I talked about this on a previous episode and I just kind of mentioned it with Kathy. I\u2019m looking for multiple exit strategies right now. If I can buy it and underwrite it where there are multiple exits, I\u2019m typically going to buy that deal because I know I can pivot one of two to three ways and still make a profit. So purchase is 70,000, ARV is 180,000. And what we\u2019re doing with this property is we\u2019re going to go\u2026 we\u2019re taking a three-pronged approach.
The first approach we\u2019re taking is the wholetail approach, so this means we would just clear the property out of all the stuff that the seller leaves behind, make sure it\u2019s got floor coverings and make sure that the HVAC, all the appliances are working, plumbing works, electrical works, and we stick that thing on the market. The plan would be to stick this on the market at about $125,000. And when you look at the median home price around here, being up close to 300,000 or just under 300,000, more like 200, 250,000, finding a house that\u2019s livable where everything works and you can pay 125,000, that\u2019s still hard to find, even-<\/p>\n
Jamil:
And you\u2019re putting it into a condition where it\u2019s financeable?<\/p>\n
Henry:
Financeable, 100%. Financeable, buying it for 70, make sure it can pass conventional loan standards and then put that on the market for $125,000. That\u2019s a steal. And then if for some reason that doesn\u2019t work, option two would be to go ahead and do that renovation and do that flip. So to do the wholetail, we\u2019ll probably spend between 2 and $5,000 just depending on what needs to be done. If we were going to flip it, we would probably spend somewhere close between 25 and $30,000, and then we would sell it for the 180. And then if neither one of those work out, we can always just put a tenant in it.
So we\u2019d spend about 20 grand, 15 to 20 grand, put a tenant in it and rent that sucker out for between 1,200 and $1,300 a month. So I\u2019m fairly confident that the wholetail strategy will work. I am not a hundred percent confident that we\u2019ll sell it at 180 given the interest rates keep rising and that buyer\u2019s pool kind of shrinks, that first-time home buyers pool is shrinking and shrinking when that happens. We\u2019d sell it, but we may not sell it for that 180 that we\u2019re thinking, but obviously we underwrote it so that we have a lot of room if we need to come down.
And then very, very confident in being able to rent it out and get that 1,200 to $1,300 a month. So that\u2019s why I like this deal because there\u2019s multiple exit strategies, but there\u2019s a bonus with this deal that made me really love it.<\/p>\n
Dave:
And there\u2019s more.<\/p>\n
Henry:
But wait, there\u2019s more. So this house, when I bought it, when I was looking at the property, it\u2019s a house, it\u2019s on almost about an acre, just under an acre and part of it is just kind of a lot that was next door. And so I said, \u201cHey, is this a part of your property too, right?\u201d And she was like, \u201cYeah, I think it\u2019s a separate parcel.\u201d So when I did look into it, it\u2019s two parcels and it\u2019s already split into two parcels, so we closed on both. I will sell the house without the parcel that it came with because I can get the same ARV with or without that parcel attached to it. And then I own that parcel now free and clear.
And so I can sell that parcel to somebody who wants to either just have the land, to somebody who wants to build something on it because it is a very build-able lot. You have to clear some trees, but it\u2019s super build-able and there\u2019s obviously utilities. And so the plan is we do the strategy we talked about with the house and then sell the lot probably on terms to someone where we take a 2, 3, 4, $5,000 down payment and then have them make payments to us as the bank for owning that lot. So I get to cashflow the lot and\/or sell it and make an additional profit, plus the strategies we talked about with the house.<\/p>\n
Jamil:
Henry, how do you make that decision when you come to the fork in the road on whether or not to renovate it for retail or renovate it for rent?<\/p>\n
Henry:
Yeah, we just go with the easiest first. I want a quick turnaround if I can, so we\u2019re going to stick it on the market as a wholetail first. We\u2019ll leave it on the market for two to three weeks, see what happens. If we don\u2019t get what we want, then we\u2019ll talk about what\u2019s the best strategy given the current environment. Things are changing so fast that things could be different in a month when we look at making a pivot. But the first strategy we\u2019re going to do is to try that wholetail strategy because it doesn\u2019t take much money to renovate it, we don\u2019t have to do anything, we just get it on the market. If that doesn\u2019t look like it\u2019s working, then we\u2019ll either pivot to a rental or a flip.<\/p>\n
Dave:
Well, Henry, things are changing so fast that since we started recording this episode, the Fed raised 75 basis points since we\u2026 That\u2019s not a joke, that actually just happened.<\/p>\n
Henry:
100% true, yes.<\/p>\n
Jamil:
Geez.<\/p>\n
Kathy:
Well, it was expected, I guess.<\/p>\n
Dave:
It was, it was.<\/p>\n
James:
Love this deal. Great, great buy. If you can go through any different channel\u2026 I mean, these are no brainer deals. Everyone is freaked out by the market right now. This is the definition of a deal where you can get in and out, rack a return, make money, it\u2019s safe in all different aspects. This is the recession deal. I think it\u2019s awesome. I mean, anytime you can go in and wholetail it, that\u2019s a win because you\u2019re buying\u2026 A lot of over the last couple years people have been buying on the performa, whereas if you can wholetail it, you bought on the now. You\u2019re buying so deep that you\u2019re buying below the as-is condition and that\u2019s a safe deal to get into, right? If it\u2019s only worth 125 as is and you\u2019re buying it at that 70 grand, that\u2019s a win. And so buy that way it\u2019s safe through any kind of metrics. I think this is a fantastic deal.<\/p>\n
Kathy:
And talk to my lender and just keep them all in your own commercial fund. Don\u2019t sell.<\/p>\n
Henry:
Okay, give me some money, we\u2019ll do it.<\/p>\n
James:
Hey, I\u2019m in.<\/p>\n
Dave:
And for anyone who\u2019s listening to this who\u2019s trying to get their first deal as well, I just want to point out that the two deals so far, Kathy\u2019s was for 80 grand? And Henry\u2019s was for 70 grand. So just pointing out that although houses have gotten very expensive, is more expensive to finance, even if you don\u2019t have a lot of cash saved up, it is still possible to get into the market and do deals like Kathy and Henry are doing.<\/p>\n
James:
But I do want to say this would not be a great property for a new investor because it\u2019s a pretty deep rehab as well.<\/p>\n
Dave:
But still, even still rented, you said what, the ARV is like 160?<\/p>\n
Kathy:
Mm-hmm. Yeah.<\/p>\n
Dave:
So still achievable for people who might not have a ton of cash.<\/p>\n
Kathy:
It\u2019s just hard to do a renovation on a property that\u2019s not where you live. You need a really good team that you trust and you need to be able to oversee it. So obviously in Henry\u2019s case, he\u2019s going to make sure that it\u2019s being done well and he knows the business. What do you think, Henry? Do you think somebody new to the business could do your deal?<\/p>\n
Henry:
My deal? Absolutely. It doesn\u2019t need much work at all. I mean, it\u2019s-<\/p>\n
Kathy:
Oh okay.<\/p>\n
Henry:
We just need to cover up some of the floorings or replace some of the carpet and then that thing would be\u2026 I mean, somebody was living in it right now and it was in decent shape, so. I wish we could show pictures of these things so people could get an idea of what these look like.<\/p>\n
Dave:
We probably could in the show notes, if someone wants to\u2026 if you send them over. And on YouTube we could do that.<\/p>\n
Henry:
Yeah, I\u2019ll send pictures.<\/p>\n
Dave:
And we could [inaudible 00:16:51] them in the show notes.<\/p>\n
James:
Oh yeah.<\/p>\n
Dave:
All right. James, let\u2019s move on to you. You\u2019re switching it up, talking multi-family. What you got?<\/p>\n
James:
So my deal\u2019s a lot different than the first two that we talked about. Actually our assignment fee is the total of the two purchase together on this deal. But yeah, so this is actually a building that my business partner locked down. It\u2019s a syndication deal that we are closing on tomorrow. Actually the docs were just on my table. I was signing them right before the show. It\u2019s a great purchase. So it\u2019s 58 units in Everett, Washington, which is where Boeing is, great location. They just opened a new airport called Paine Field, which is actually more\u2026 it feels like a private airport, but it\u2019s the airport of Snohomish County.
So we\u2019re right next to the airport, it\u2019s 58 units, we paid 11.35 million for this building. We\u2019re going to put in two and a half million into the renovation, which is actually an all-cosmetic turn. It\u2019s very simple. We get in and out. That\u2019s one thing that we do like to do on our bigger projects or syndication deals, is stick to the cosmetics, not the heavy, heavy value add. It just gets a little too complex at that point. So the total project cost with rehab\u2019s going to be 14 million and after it\u2019s all renovated and stabilized, it\u2019s going to have a 16.9 million stabilized value at a 5.2 cap.
So at a cap rate, that\u2019s very reasonable. These buildings we\u2019re trading for the last two years around a three and a half to four cap. And so what we\u2019ve seen is\u2026 My partner, he does a lot more of the syndicating and the packaging of the deals and it\u2019s been hard for us to get in that 50 to 100 unit quantity because all the hedge funds have been buying this stuff up at ridiculous margins. And so since we\u2019ve seen the decompression in the market and the market get a little unstable, it has great opportunities in there.
So we syndicated the deal, we raised roughly about 3.5 million to take it down. And then what we were able to do, and this is key for any of these type of deals, is my partner was able to lock the financing on this. For me, I want to stay away from variable rate loans right now, especially in any kind of syndication deal or anything on a variable rate. And so we were able to lock the financing and to get 5.7 on a five-year term and then it can kick up to plus two over a 10 year. But we plan on actually refinancing this out or selling it at the five year because it yields a 19.7 IRR or it\u2019s going to be a 15.8 IRR to our investor clients. So it hits numbers we have not been able to get in a really long time for this kind of location.
It\u2019s a great purchase. It\u2019s kind of funny, as the market gets worse and people get more afraid, we\u2019re actually taking down bigger deals now because we want to go where the margins are. We don\u2019t really care about the money. If we need to raise the money, we\u2019ll raise the money. If we need to put the money up ourselves, we\u2019ll put the money up ourselves. But these bigger deals are actually coming to be more profitable again and they\u2019re giving really good yields. And so it\u2019s opened up a whole another investment window to where we\u2019re kind of getting out of the lower end and we\u2019re going to the high because that\u2019s where the gaps are right now. A lot of people are calling us with bigger buildings to move around, but we\u2019re stoked about the purchase. We\u2019d never be able to get this in two years and now we\u2019re closing tomorrow.<\/p>\n
Kathy:
That\u2019s incredible. What are the terms for the investor? How do you carve that out?<\/p>\n
James:
Okay, so they\u2019re getting a 6\u2026 So this thing stabilize, one thing I forgot, it stabilizes out as 6.19 cap too, which again, we have not been able to get over the last couple years. So then investors are on an 80\/20 split and then they get a 6% pref return and then we don\u2019t waterfall this deal. So they\u2019re going to keep the upside in the IRR at that point, so they get a lot of extra kicker on the deal.<\/p>\n
Kathy:
Wow. How do we get on your list?<\/p>\n
James:
You have to know us. We are not a not big raiser. For us, we\u2019ve been investing for a long time, we like to invest with people that are like-minded. They know us really well, they trust us. So luckily we\u2019re all on a podcast together, we\u2019re all friends so you\u2019re invited to that group. But we do keep it pretty tight. I think that\u2019s important for anybody raising money, needs to realize, is they better be like mind, they better be on your side. They better have the same understanding and the same goal in their investments or don\u2019t take the money; it turns into a absolute headache. Just because someone wants to give you money, don\u2019t always take it.<\/p>\n
Henry:
Great advice.<\/p>\n
Dave:
James, just curious, with your business, you do a lot of single families, you do a lot of flipping, how big or small can you scale your renovation and construction effort? This seems like a pretty big deal. Can you just keep doing this for as many deals as you can get or do you hit a point where you can\u2019t scale your operations much further?<\/p>\n
James:
That is a great question. So what we\u2019ve had to do, because we are in multiple different construction aspects, we build town homes and single family homes. We have our apartment renovations and then we have our fix-and-flip. Those are actually three different segments of construction teams for us. We keep them completely isolated so they don\u2019t share, they\u2019re not mixtures. So our fix-and-flip team, typically we can handle about 20 projects at a time and we don\u2019t go any more than that. But what I\u2019ve done recently is I\u2019ve actually gotten out of third party and brought in more labor on that side to where we\u2019re actually controlling the schedules, which has allowed us to do more projects and keep them moving more efficiently.
Our town homes are all built in-house, so it\u2019s done\u2026 we don\u2019t hire out builders, we build them all ourselves, so we manage that process. We have superintendents, project managers and general labor staff. And then we also staff our syndication deals. And typically, depending on the size of the complexes, we do have one roughly about\u2026 it\u2019s roughly about 200 doors, down in south King County, that\u2019s actually staffed with its own construction team.
So we have numerous different project managers and then we bring on labor staff behind that, so we can handle quite a bit of projects at one time. Like right now we\u2019re turning about 200 apartment doors right now across different sites. But what\u2019s key to that is making sure that we\u2019re buying in similar locations. We don\u2019t want to stretch out. So if we\u2019re finding deals all in the same geographical location, our team can\u2019t\u2026 we are targeting those areas like projects that we already are working on. So we have another 35 unit up in Everett right next to this one so that team can pop right over.
And so that\u2019s kind of where myself and my partner are targeting, \u201cWhat is efficient?\u201d It\u2019s not about just being able to buy the right buy, what is efficiently work with inside your teams at that point? So we can scale up. I mean at the same time, as the market started coming backwards, we were like, \u201cWell, do we need to cut our staff back because we won\u2019t be buying as much,\u201d but it turns out we\u2019re getting amazing buys so now we\u2019re going to staff up on labor. But by not hiring it out and doing it ourselves in-house, my partner\u2019s been able to reduce our cost per unit by at least 20%. They\u2019re going faster, and then we can staff up and staff down to control the timetables a lot better.<\/p>\n
Dave:
Sounds very effective. That\u2019s awesome. Henry, is it the same for you? I know you do a lot of flipping and you do a lot of renovations. Are you scaling? What are you doing these days in terms of your renovation teams?<\/p>\n
Henry:
Yeah, so for me running a much smaller operation, the contracting aspect has been difficult. I\u2019ve been looking actually at bringing a couple of the guys that are currently\u2026 that we\u2019re currently contracting through on staff to see if that\u2019s going to increase our efficiency at all. We are finding more and more deals. Plus when I\u2019m keeping rentals I\u2019m typically buying undervalue as well, and so those need work too. So it\u2019s not just renovating the flips, but I have rentals that need renovations as well.
And so right now I\u2019ve got more work than my guys can handle. And so we are in the market looking to hire new people, but I\u2019m also trying to think creatively on how can I leverage the people that I have to have them working more efficiently. Dealing with contractors or, said differently, the contracting aspect of the business has always been a more difficult part of the business and it absolutely can limit your ability to scale. Right now I feel like we\u2019re in an okay place. I\u2019d like to have three crews at all times if I\u2019m going to outsource it and right now I have one.<\/p>\n
Dave:
Yeah, I mean, I would imagine, as James was saying, it might be easier to start hiring a little bit for these things too. As a lot of construction, at least large scale construction, multi-family is slowing down a little bit, at least in terms of new permits.<\/p>\n
Kathy:
And better pricing.<\/p>\n
James:
Yeah, better pricing, then look into how you can exchange out your expenses. So what we did on our fix-and-flip, and it\u2019s a new program for me, is I got rid of all my\u2026 over the last 90 days, we\u2019ve completely leveled out our construction teams and we rebuilt it in the last 90 to be more efficient for this new market. And what we did is we took our management staff, which is our project managers, which were heavy salaries, they\u2019re around 100 grand a year up in Washington, it\u2019s expensive. But they don\u2019t reduce your bottom line, they just make it efficient.
So what we actually did as the construction slowed down is I replaced my project managers with hands-on general contractors that I\u2019m paying a hundred grand a year. They\u2019re happy to get that money now because they\u2019re sick of running their own business and their workload\u2019s going down, and now they\u2019re project managering and doing labor for me. So I\u2019m sending subs out, they\u2019re coordinating the subs for me at the same time they\u2019re installing windows, flooring, millwork, doors and light framing.
And so what it does is it reduces down my cost, replaces my management cost with labor and management and reduces my overall expense there and things are going substantially faster. I don\u2019t know why I didn\u2019t do this a year ago. We\u2019re just basically right now recruiting generals to be our project managers and then having more of them, but we can run our sites more efficiently.<\/p>\n
Dave:
That\u2019s awesome. I mean it sounds like you\u2019ve found some very good people. I\u2019ve never met a contractor that efficient but good for you.<\/p>\n
James:
But if they\u2019re on payroll, you can actually tell them what to do every day. It\u2019s amazing.<\/p>\n
Dave:
All right. Jamil, let\u2019s get to you. What are you up to?<\/p>\n
Jamil:
Well, I just feel like the lazy one here on the panel because my deal\u2019s easy. It\u2019s easy. So I live in a beautiful neighborhood in Phoenix, Arizona. The neighborhood\u2019s called Arcadia. It\u2019s on the border of Scottsdale and Phoenix. Just lots of activity, lots of people, lot of short term rental activity, great hotels. So I like to be in the short term rental game where there\u2019s luxury five star hotels nearby because that tells you that\u2019s where there\u2019s demand for people to want to stay in that type of property.
Well, we are going to be hosting the next Super Bowl here in Phoenix, Arizona. And it just so happens that the first time I ever got into the short term rental game was the last time we had the Super Bowl here in Phoenix. So I\u2019m familiar with what happens to a town when you get Super Bowl activity. We\u2019ve got the Barrett-Jackson Auction that comes every year. We have Waste Management which happens every year and now the Super Bowl. So I feel that for the next, at least 12 months, we\u2019ve got strong demand in the short term rental space.
So I am purchasing a very beautiful home that\u2019s been sitting on the market on my block actually. It\u2019s about five houses to the east of where I live. And it\u2019s a gorgeous 3,800 square foot house that was remodeled in 2010. Now, 2010, if you guys remember it was slate central, so it has really terrible slate floors, gray and purple walls. I understand why the house didn\u2019t sell, the sellers needed to do just a little bit in order for the house to hit that price point. It just so happens that the house was just recently appraised at $1.7 million, which is in line with the comps for the neighborhood.
But these sellers are really motivated, they\u2019re both attorneys and they just want out. They want to downsize, they may be leaving the state, and so they were ready to make a deal. I basically just called off the sign and I shot them the number that I wanted to pay and that was a million dollars and I was very firm with my number and they took it. So now looking at that, at a million dollar purchase with a 1.7 million current appraisal, I believe I\u2019m walking into some equity. Even if we do slide down even further, I\u2019m going to be in a tremendous position when the market rebounds.
But in addition to that, if I leverage and put 20% down, I\u2019m looking at around a $4,800 a month mortgage payment at 6%. My estimate right now after running some numbers is I should be able to net about $500 a night at 20 nights per month, so I should be getting about $10,000 a month in gross rents for a short term rental. Now, because we had been in the space before, my wife was running our short term rental business in the past. Our daughter, who is almost 17 years old, really doesn\u2019t want anything to do with us anymore. So my wife has taken a little bit of a\u2026 She\u2019s like, \u201cWhat do I do?\u201d
And so this would be a great opportunity for her to get back into the short term rental game. So our goal is for her to manage it, [inaudible 00:30:22] going to reduce our expenses on it. I\u2019m expecting to be running it around 25% expenses. So my goal is to cashflow roughly $2,000 a month on this property. And if I\u2019m putting down $200,000 as a down payment, I\u2019m getting $2,000 a month in cashflow and when the market rebounds, I have a few hundred thousand dollars in equity, I think it\u2019s a pretty decent deal.<\/p>\n
Kathy:
Sounds like it. Sounds pretty decent.<\/p>\n
Dave:
Did I just hear Jamil say he was going to hold onto something and he used the word leverage in the same sentence?<\/p>\n
Jamil:
Yeah, both things I\u2019m typically allergic to, but.<\/p>\n
Henry:
I was wondering if anybody else was as blown away as I was.<\/p>\n
Jamil:
I\u2019m really tempted to buy it out in cash, but my accountants have said, \u201cJamil, stop it. This is irrational. You need depreciation, we need to spread your money out further so that you can get,\u201d because I wrote another ridiculous cheque to the IRS this year, so I\u2019ve got to do better. And so this is going to be a part of that process.<\/p>\n
Dave:
Well, all joking aside, I mean, you have been on the show, said many times that you\u2019re adverse to holding debt. You\u2019re primarily a trader, you\u2019re flipping stuff, you\u2019re not holding onto things. But in this market I think most people would assume you\u2019d keep doing that, not wanting to hold onto something. Obviously the tax implications are big for you, but what is it that changed your mind and makes you feel confident doing it in this market? Is it just such a good deal?<\/p>\n
Jamil:
It\u2019s such a good deal and I really believe in the neighborhood. First and foremost, Phoenix, Arizona, the average lot size for our properties is like 7,000 square feet. It just so happens that these two streets where I live, my street and then the one street north of me, we all have half acre lots. And it\u2019s really rare in our neighborhood to get huge lots like this, so there\u2019s a lot of demand for properties on these large spaces. Secondly, I get family coming into town all the time. I thought this would be a great spot for them to stay at when they do come to town. They don\u2019t have to stay in my house, they can stay down the road.
But $700,000 walking in equity. And this wasn\u2019t a friend of theirs who appraised it. It was one of the foremost appraisers in town that gave them an appraisal and so at $1.7 million current appraisal, I think what happened for these guys is they just didn\u2019t\u2026 they had the house so customized to their liking that if they had just done maybe 30 or $40,000 in updates to the house, they would\u2019ve gotten their number or they would\u2019ve gotten close to it. They probably would\u2019ve sold this for a million five.
But they didn\u2019t want to spend any money, they didn\u2019t want to do the work. And so I\u2019m looking at it as though I can put in a little bit of cash, update the house so it\u2019s beautiful for a short term rental. And I know as soon as the market comes back, I can put that thing right back on the market and probably make a few hundred thousand. So I\u2019m playing an educated timing bet, like I\u2019m timing the market right now. I know we always say, \u201cDon\u2019t time the market,\u201d but I feel like I\u2019m timing it well, I\u2019m buying this deep and my goal\u2026 I\u2019m not going to hold this forever, but I probably will hold it until the market rebounds and then I\u2019ll sell it for a big payday. And in the meantime, I\u2019m going to make great cash flow and my wife\u2019s going to have a good time managing the short term rental.<\/p>\n
Kathy:
I just looked up some of the tax benefits you can get from this, so be sure to talk to your CPA about the Qualified Improvement Property, the QIP. It says in 2017 The Tax Cuts and Jobs Act created a class of property called the QIP. So big bonus depreciation there and then cost seg strategies, that some of them will disappear or be lessened next year. So great year to be doing that and to try to be claiming some tax benefits. We\u2019re doing the same thing with one of the Park City properties that we bought and I\u2019ve been furnishing\u2026 I\u2019m going this weekend to finish furnishing it and all of that is like accelerated depreciation. Talk to your CPA because it\u2019s different for everybody, but this is a really good year to take advantage of those cost seg strategies and QIP.<\/p>\n
Henry:
I think I\u2019m taking this a little personal. The last episode I recorded with Jamil, he said, \u201cHey, come stay at my house,\u201d and then this episode I\u2019m here like, \u201cUgh, I got to buy a house down the street because I got to stick people like Henry in it when they come visit.\u201d I\u2019m taking it a little personal.<\/p>\n
Jamil:
I didn\u2019t know you were going to pick up on that.<\/p>\n
Dave:
Yeah, Jamil, how much did you say it\u2019s going for a night?<\/p>\n
Jamil:
I\u2019m expecting 500 a night.<\/p>\n
Dave:
All right, Henry, you\u2019re getting charged 500 a night to stay at Jamil\u2019s house.<\/p>\n
Jamil:
It\u2019s resort-like though, guys. Half an acre, there\u2019s a beautiful pool, they got a jacuzzi. The entire second floor is only the primary bedroom.<\/p>\n
Dave:
Wow.<\/p>\n
Jamil:
It\u2019s got mountain views. It\u2019s delicious.<\/p>\n
Dave:
Who needs a bedroom that big?<\/p>\n
Henry:
If you don\u2019t want me to stay at your house, you don\u2019t have to pitch me on this one, it\u2019s fine, I\u2019ll get a hotel, Jamil.<\/p>\n
Jamil:
I really do want you to stay at my house because I\u2019m expecting you to tan by my pool.<\/p>\n
Henry:
I\u2019m absolutely getting a hotel.<\/p>\n
Dave:
Oh man, that\u2019s the second time today, Jamil. It\u2019s become clear how bad it is to be a seller of unique properties today. Like those weird houses that need a little bit of love, man, they\u2019re sitting on the market for a long time and sounds like you\u2019re getting what, 30 or 40% off because of it.<\/p>\n
Jamil:
And I\u2019m just obnoxious on those calls too. Listen, there is tact in how you find alignment with a listing agent. So first and foremost, just for everybody listening, very quickly the strategy I used, I used the listing agent as my agent. So I had them do dual representation, which aligned the listing agent to my side and gave me some extra leverage, because now she\u2019s getting a 6% commission and I\u2019m playing on the fact that I know that she probably hasn\u2019t closed a lot of deals recently, and so a 6% commission right now is going to be huge for her. So she\u2019s really going to bat to help me get this deal done.
Secondly, I actually disclosed that I was the guy\u2026 I actually live on their block and because they know me, they know who I am, they\u2019ve seen the production vans and the things in front of my house when the TV show is being filmed, they know that I had the financial capacity to close. And so for them, they\u2019re looking at it like this guy, he can close, he\u2019s legitimate, he\u2019s real. I really played my hand firm and I wasn\u2019t attached to it. So when I gave them my number, they tried to negotiate with me multiple times to try to edge that price up and each time I just swatted back and said, \u201cNope, firm. Nope, firm. Nope.\u201d And finally it got done.<\/p>\n
Kathy:
Well done.<\/p>\n
Dave:
All right, well, thank you all for sharing these. This has been super fun.<\/p>\n
Kathy:
Well, I just have to share that I found out what it is, it\u2019s not the Silicon Slopes, it\u2019s not the Silicon Beach, it\u2019s the Silicon Prairie. Okay. So maybe where I\u2019m investing isn\u2019t super sexy, but the numbers work.<\/p>\n
Dave:
Prairie.<\/p>\n
Henry:
Silicon Prairie, I don\u2019t even know what that means.<\/p>\n
Dave:
Nothing, Henry, it means nothing.<\/p>\n
Jamil:
It means absolutely nothing.<\/p>\n
Kathy:
And it means it\u2019s out in the middle of nowhere. It\u2019s the boonies. But that\u2019s where these tech companies are moving, to the boonies, to the prairie.<\/p>\n
Jamil:
Sounds nice.<\/p>\n
Henry:
For those Silicon Prairie dogs.<\/p>\n
Dave:
All right, well, we\u2019re going to take a quick break and after that we\u2019re going to answer a question from someone on the BiggerPockets forums. All right, we have a question from the BiggerPockets forums and a reminder as always, if you have questions for the panel, want us to answer them, you could do that by going to the BiggerPockets forums and posting a question.
So this one comes from Ryan Williams who asks max market rent or stable rent? \u201cHello. I have a lease ending on my rental property here in Denver and I\u2019m debating whether I should re-list my rental at a max market rate, 200 or $300 more per month than my current tenant\u2019s rent. Or if I should put it close to what I had rented out before, a little below the market rate and hope to fill the vacancy as quickly as possible?\u201d Henry, going to you with this one, I think you usually have a great perspective on this kind of thing.<\/p>\n
Henry:
So the question is, do I go for the top dollar rent or do I stay a little above the average and fill the vacancy quickly?<\/p>\n
Dave:
Yeah.<\/p>\n
Henry:
Yeah. I\u2019m all for the latter in this strategy. Vacancies just cost too much money and the longer it sets, the more it\u2019s going to cost you. And what we\u2019re finding right now and what we\u2019re seeing is when we put properties out there at top dollar, they sit a little longer and then we end up coming down off of those prices anyway having to lower rents. Because we do a strategy where we\u2019ll post it and if we don\u2019t get what we want within a certain time period, we drop about 50 bucks off until we hit that sweet spot. But if you feel like you know where your sweet spot is or you feel like you know where somebody\u2019s going to rent it at, I think that\u2019s where you should try to get it.
But don\u2019t just rent to the first person; you want to rent to the first person who meets all of your qualifications because it doesn\u2019t matter what your rent rate is, if you don\u2019t get a quality tenant, it\u2019s going to cost you more money in the long term. So your tenant selection process needs to be rock solid. But I\u2019m all for coming in a little under that top dollar rent price and getting somebody in at a price where they want to stay.
Because if you get them in a top dollar and rents come down a little bit right now because rents are trailing, are starting to do what prices are doing in some parts of the country, if you get them in a top dollar now and in 12 months they can get a place similar or better than yours for 50, 100, 200 bucks less. Yeah, it costs them a little bit of money to move, but you don\u2019t want to be dealing with that turnover because then that costs you more in the long run anyway.<\/p>\n
Dave:
Totally agree. I actually just did this in Denver two weeks ago. I had put it at max rent and wasn\u2019t getting the quality applicant that I was looking for and just like Henry, I just lowered it like 150 bucks, and within a week found a great tenant. No vacancy, worked out really well. Kathy, did you want to jump in?<\/p>\n
Kathy:
Yeah, I was going to say it really just depends on the area, and I usually talk to my property manager to see what kind of demand that they have and what they think because if they\u2019re seeing tremendous demand, then it might go quickly at the market rate or a bit above market. That\u2019s what we\u2019re seeing still in parts of Tampa and Florida, where there\u2019s still so much demand. But I generally, as a rule, do like to stay a little bit below the market rent because that does make your tenants so happy that they\u2019re appreciative and want to stay generally a little bit longer.<\/p>\n
Dave:
And it just protects you, especially going into a potential recession or job loss, you don\u2019t want your tenants to be stretched. It\u2019s just not a good situation for anyone.<\/p>\n
James:
And it always comes down to what Kathy said, it\u2019s just market conditions. What is the supply and demand? Even though it\u2019s just a rental, every asset class is this way. We just listed a flip the other day and we went on the higher side of the market because it\u2019s in a neighborhood where there\u2019s no inventory. Yes, there\u2019s a lot of inventory all around us, but if you want to be in this one specific neighborhood, you are buying our house, that\u2019s it. And it\u2019s a high demand neighborhood. And same with rentals. The first thing is look at where your supply and demand is, what\u2019s your absorption rate, and then how do you\u2026 don\u2019t overprice it to where you\u2019re losing a month of income, but also don\u2019t under-price it because you don\u2019t want to give money up if you don\u2019t need to give money up. And if there is no demand or there\u2019s a high demand, you can get that high rent.
Also, dig into the data a lot. A lot of times that high rent comparable may have a unique feature that yours might not have. Is it more walkable? Does it have a better yard? You do want to dig into those things and make sure you\u2019re comparing apples to apples because there is always that outlay or comp for selling, for renting, for whatever it is. And so really dig deep into that comparable and see what the deficiencies are. If your product\u2019s more deficient, then go with the lower rent comp. If you have the same walkable features or upside, then go for that higher number. People will pay for quality of living and we\u2019ve seen that the last two years. And so just dig into the data. The data will guide you on how you should price up your asset for rent, sale or whatever it is.<\/p>\n
Dave:
All right. Good advice from everyone. Well, thank you all for bringing your deals. I really appreciate it and this was a lot of fun hanging out with you all today. I\u2019d love to hear how all these work out. So definitely track the performance of each of these deals and maybe we\u2019ll revisit this in a couple of months and see how you\u2019re all performing.<\/p>\n
Kathy:
Sounds good.<\/p>\n
Henry:
Love it.<\/p>\n
Jamil:
Happy to share.<\/p>\n
Dave:
Well, on the show you all are performing great. You all did an excellent job. Thank you for being here and for everyone listening, we appreciate you. If you appreciate this show, make sure to share it with a friend, we would really appreciate that. Thanks for listening again, and we\u2019ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, researched by [inaudible 00:43:59] and a big 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
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Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
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