\n
Dave:
What\u2019s up everyone? Welcome to On the Market, we are here for a very special show, we\u2019re doing a flipper roundup. If you\u2019ve been listening to a bunch of our shows, we\u2019ve been doing a couple of these panel shows with one or two of the OG regular panel, but bringing in some experts based on the specific strategy that we\u2019re talking about. And we\u2019re going to be doing that for flipping today, which is going to be a really awesome show. We just had a great conversation with Leka and Dominique and of course for our flipping, we had to bring in James. James, what\u2019s going on man?<\/p>\n
James:
Oh, just enjoying the sunny weather today. I\u2019m excited, I was just in flipping in Seattle where I was getting rained and just, it was freezing cold, wet and now I\u2019m in sunny California.<\/p>\n
Dave:
That sounds lovely, that\u2019s actually what I\u2019m doing, I was in Amsterdam. Amsterdam and Seattle have the same weather, but Jane and I decided to just get out of town and now we\u2019re in Portugal and it\u2019s so sunny and beautiful, it\u2019s lovely.<\/p>\n
James:
I\u2019d rather be in Portugal, that sounds amazing.<\/p>\n
Dave:
I forgot to ask Kathy, I wanted to figure out what she\u2019s doing there with the Golden Visa thing, but we\u2019re working and so and then just eating a lot, but it\u2019s been great. But before we get into the flipping show, which is awesome, you are friends with Leka, so you know her, but we have Dominique Gunderson who first time I\u2019m meeting her, incredibly talented young flipper, great conversation, but I corralled you into joining us beforehand because we just saw some data drop two hours ago, three hours ago, about October inflation numbers. And I felt like they were pretty encouraging.<\/p>\n
James:
That was great, when I woke up this morning and I saw that hit my phone, I was like, \u201cOh, thank you.\u201d Because it\u2019s not just the data numbers, it was the prediction, finally. They\u2019ve been predicting wrong for six months and they keep over pushing and pushing. It\u2019s the first time I think that what? Inflation came out at what? A 0.4 increase and they were anticipating 0.6, is that correct?<\/p>\n
Dave:
Yep. Exactly.<\/p>\n
James:
And they were a hundred percent wrong last month, they predicted 0.3 and it came in at 0.6, so it\u2019s a step in the right direction of what\u2019s going on.<\/p>\n
Dave:
Totally. Yeah, and last month, so September data that we got in October was a pretty big step back. It felt like, here we go, things were not getting better, but if you look historically, the July numbers were pretty good, the August numbers were pretty good, those September numbers were scary and now we\u2019re back down to pretty good numbers. And so what happened, just to recap for people is inflation last month was at 8.2% year over year, now it\u2019s down to 7.7%, which is the lowest it\u2019s been since January, so that\u2019s really good.
And then the core inflation rate, which is really what the Fed cares about, it strips out energy and food costs because they\u2019re volatile. And that went down from 6.6 to 6.3%, so we\u2019re not out of the woods by any measure, but after last month, having that scary bump up, it\u2019s good to see that overall the trajectory seems to be that inflation is heading down.<\/p>\n
James:
Yeah. It definitely makes you feel be\u2026 I mean last month I was like, \u201cMan, is this ever going to work?\u201d I\u2019m like, \u201cAre we really stuck with this for 10 years?\u201d And so just watching that trend for this month is great, great news. Definitely made my morning better.<\/p>\n
Dave:
Oh totally. Yeah. And just so people know, the way it works, what we\u2019re talking about, 7.7%, 6.6%, that\u2019s a year over year data, so we\u2019re comparing October 2022 to October 2021. And the interesting thing is inflation was bad in 2021, but it really started getting bad around this time last year. And so in all likelihood, even if inflation in an absolute basis keeps going up, the year over year number which is what the Fed cares about, what we should care about, is probably going to keep going down. If you look at it just mathematically, not even policy changes, nothing, just mathematically it is very likely that it\u2019s going to keep going down slowly, but I think this is a sign that we will probably start to see more normal numbers. We\u2019ll probably start to see the Fed instead of raising it to 75, maybe they\u2019ll cut it down to 50 basis points in December. And hopefully this is-<\/p>\n
James:
Don\u2019t jinx us.<\/p>\n
Dave:
It\u2019s not a victory, but it\u2019s hopefully maybe a turning point in the battle against inflation, still a long way to go, but hopefully this shows that we\u2019re heading in the right direction.<\/p>\n
James:
Yeah. And at least you can\u2026 we just want to get to stabilized. If it\u2019s high, that\u2019s okay, we want to get things stabilized out and moving in the right direction. This is not an overnight fix, but it\u2019s showing that we\u2019re taking the right steps and that things are getting better.<\/p>\n
Dave:
Absolutely. All right well, we\u2019ll you all posted as we hear more, but now we have to wait another month, but I was pretty jazzed about this, I\u2019m such a nerd, but I was very excited about it. All right, well, let\u2019s bring in the rest of our panel for this conversation about flipping in 2023, but first we\u2019re going to take a quick break.
All right, for our flipper roundup, we have a great, mostly new panel with us today. First we have Leka Devatha, how are you Leka? What\u2019s going on?<\/p>\n
Leka:
I\u2019m doing great. I just saw inflation numbers come in and I\u2019m a little bit optimistic at the core index numbers going down just a smidget, but there\u2019s so much in the news, it\u2019s some exciting stuff, some not so exciting stuff, so I\u2019m just peachy, thanks for asking.<\/p>\n
Dave:
When you talk about inflation, you\u2019re speaking my love language, so I appreciate that, but can you tell us a little bit about your flipping credentials and what your experience with it is?<\/p>\n
Leka:
Boy, I started flipping back in 2014, so almost a decade ago, all in the Greater Seattle market. I have mainly done full gut remodels, so everything that is structural engineering, just massive reconstruction of homes. I don\u2019t touch the cosmetic stuff, it\u2019s just not fun for me. And true story is that I\u2019ve bought 90% of my inventory from your other co-host James Dainard.<\/p>\n
Dave:
Oh.<\/p>\n
Leka:
I absolutely have enjoyed, loved working with him and his team. It\u2019s just been such a great partnership, I\u2019ve learned a lot from them and they\u2019ve just given me this landscape to go do some crazy projects and have always had my back. So having that amazing team by my side and then having an amazing contractor team, I\u2019ve been able to do about 75 massive remodels in this area.<\/p>\n
James:
I can vouch for that, she\u2019s done some major\u2026 I\u2019ve sold her some total turd boxes and she puts them back together. Oh yeah, I mean there\u2019s definitely been a few [inaudible 00:07:24] in there.<\/p>\n
Dave:
I was going to ask what happened in the other 10% of the business? You\u2019re just letting that get away.<\/p>\n
Leka:
It was before I knew him.<\/p>\n
Dave:
Oh, okay.<\/p>\n
James:
Yes, they always say 10% of the deals you buy are bad, well-<\/p>\n
Leka:
That\u2019s just a [inaudible 00:07:39]. He\u2019s so right though, he\u2019s so right.<\/p>\n
Dave:
Yeah, the list of all your failed flips have come from a different provider.<\/p>\n
Leka:
And I\u2019m like, \u201cJames, what do I do?\u201d He\u2019s like, \u201cDon\u2019t [inaudible 00:07:53] them anymore.\u201d<\/p>\n
Dave:
Nice. Well, we also have Dominique Gunderson joining us. Dominique, can you tell the On The Market listeners a little bit about yourself?<\/p>\n
Dominique:
Yeah, absolutely. Thanks so much for having me, super excited to have this conversation that\u2019s super relevant today with flipping and what\u2019s going on with the market in that space. I got my start in real estate right after I graduated high school at 17, that was back in 2015. I worked just kind of doing some real estate agent mentoring type stuff for the first little bit and then I jumped into investing. When I was 19, I started wholesaling in Los Angeles where I grew up. Did that for a little bit, about a year and a half. I wholesaled 40 deals and got super comfortable with the process and how to close escrow and do deals. And so that was when I branched out and started my own company out of state in New Orleans, which is where I flip today, and started that in 2019 and have been flipping there ever since. Just kind of started slowly and learning and then have been just hustling and scaling over the last couple of years. And now I\u2019m doing usually about seven or eight flips at a time.<\/p>\n
Dave:
Wow, that\u2019s incredible. Definitely doesn\u2019t sound like you\u2019re scaling slowly, to me that\u2019s very, very impressive. Just out of curiosity, why New Orleans?<\/p>\n
Dominique:
New Orleans is where my dad lives, so it was a super accessible out of state market for me. And when I decided to start my own company and go out of state, I was still living in Los Angeles at the time, so I was definitely looking for a more accessible, cheaper, lower barrier to entry type of market. And I think one of the biggest things you can do right when picking an out-of-state market is picking a place where you have someone trusted on the ground that can really, even if they\u2019re not in real estate, just show you the basics of streets, neighborhoods, zip codes, what\u2019s going on, having local connections, stuff like that, so that was my major driver for picking that market.<\/p>\n
Dave:
Awesome, that\u2019s great. I love that city, it\u2019s just a very fun, delicious place to go. Well, James, everyone knows you but can you remind everyone listening what your flipping credentials are?<\/p>\n
James:
Yeah. We definitely like to flip stuff up the Pacific Northwest, so we\u2019ve been active investors since 2005. Been flipping homes throughout from 2005 all the way up until today. Right now I think with our company, we\u2019ve completed about 3000 flip transactions with our clients and ourselves, and then we personally have\u2026 we\u2019re coming up on definitely the thousand mark. I\u2019ve lost count, to be honest, how many houses we\u2019ve tore apart at that point, but we\u2019re active guys in Seattle. I think right now we have about 25 to 30 million in active projects with flips and development going on, all short term investments. So we\u2019re active people, always buying different types of stuff and figuring out how to slap them back together.<\/p>\n
Dave:
Well, thank you all for being here, I appreciate this is going to be a lot of fun show. I admitted to you all before we started recording that I\u2019ve never flipped a house so if anyone listening to this is thinking like, \u201cOh Dave\u2019s doing such a good job pretending and dumbing this down.\u201d It\u2019s no, I\u2019m actually just that dumb about flipping houses, so I\u2019m going to ask a lot of silly questions here for you guys, hopefully, everyone else learns something here. But James, can you just tell us a little bit and start sort of set the scene here for where we are with flipping right now. What are the market conditions that are driving the flipping industry right now? And how do they compare to some of your previous experience in the industry?<\/p>\n
James:
Yeah, so right now what we\u2019re seeing is we just came off the biggest bull run in appreciation that we\u2019ve ever seen. The last 24 months have been absolutely absurd with the amount of appreciation, I think we\u2019ve seen what? We\u2019re up 35% from 2019 or 2020 roughly in appreciation, so we\u2019ve seen this rapid increase and what that\u2019s done is because it became so profitable. Flipping has always been a very high risk business, you\u2019re buying something on a short term yield, you\u2019re buying something that also needs a lot of repairs, there\u2019s a lot of unknown factors in it and you\u2019re buying at a discount and you have to put the right plan together. But over the last two years what we\u2019ve seen is this rapid amount of appreciation to where a lot of investors have gotten into the market with flipping because what became very high risk and very hard became somewhat easy over the last 24 months.
And so what we\u2019ve seen is the cost of capital has increased roughly 45 to 50%, and what that\u2019s done is it\u2019s slowing the market down. The fed kept their rate at zero for the last two years and we all got the reward out of it. As cost of money\u2019s cheaper, things go up in value, and so as the cost of money has gone up substantially or the fastest we\u2019ve ever seen over the last 90 days, we\u2019re starting to see things starting to decline back and normalize out with pricing. And so right now what that means is as the Fed increases rates and as the rates increase, it becomes an even riskier playing field to be playing in right now. And in the flipping community, we are seeing people get caught where they were buying a lot of property, they\u2019re rolling their profits in, they\u2019re going into bigger properties and it has now became a lot harder to control.
So why is it harder to control? Inflation is still going up or is still higher, so costs are hard to track right now, so people are typically going over budget. The market is cooling down and there\u2019s a lot of uncertainty in the market which is starting to confuse the consumer buyers and there\u2019s less people looking for deals, which means you\u2019re going to hang onto your flips longer at this point as well. And so what we\u2019re seeing is the market\u2019s starting to come down, things are taking longer to sell and we\u2019re in this correction mode to where we\u2019re trying to get to stabilization, but it does make flipping very risky right now because you have to kind of time and really predict the market well with the forecasting. And so I think you\u2019re seeing a lot of shock in the market because a lot of new flippers have not gone through downturns in the market. And since we\u2019ve been doing this since 2005, we\u2019ve seen ups, downs, we\u2019ve seen crashes, we\u2019ve seen things level out, and it\u2019s all about pivoting and changing up your plan.
But unless you go through those types of cycles, you don\u2019t really know what the next steps are, right? In the last 12 months we\u2019ve done a l\u2026 or the last four to five months, we\u2019ve done a lot of pivoting in what we\u2019re doing and how we\u2019re running our construction sites, how we\u2019re evaluating things, we learned that from flipping in 2008, because in 2008 when we went through the same type of market correction and pullback and well, not the same type but we are seeing a drastic pullback, that\u2019s where we had to kind of learn how to evaluate properties, look at things a little bit differently and change up all of our plans. And I don\u2019t think right now what we\u2019re going through is the same as 2008, but the impact in the short term is about the same because we\u2019ve seen about home pricing, at least in our market, come down about 20 to 25% from peak pricing in a very short amount of time which can cause damage, and that\u2019s where all the risk is coming from.<\/p>\n
Dave:
Dominique, are you seeing something similar in your market or your margins getting impacted or how has the recent shift in market dynamics impacted your business?<\/p>\n
Dominique:
Yeah, it\u2019s super similar to what James was saying specifically with investors and flippers. I am seeing so many properties that I either passed on six months ago because I didn\u2019t think the margins would work if the market shifted and went down or even deals that I bought and just decided to wholesale because I knew I couldn\u2019t make the margins work and other flippers picked those up and I can see where they ran their numbers and how they projected for spending X amount and selling for X amount that it would work, and putting it up for that price and it\u2019s just not working. And there\u2019s long days on market and tons of price reductions, especially in the flipping space. It\u2019s super common right now in the New Orleans market, just people who didn\u2019t expect us to be in the place we are right now, maybe even expected things to continue to go up and were shooting for slightly higher than that past sold comp or equal to that past sold comp.
And I mean the main reason why I would pass on those deals six months ago is because I was expecting to actually shoot for lower than that last sold comp. And that\u2019s kind of how I\u2019m running my numbers even still right now, and I have been for the past six months just kind of anticipating this. But so many people that aren\u2019t in that head space and aren\u2019t doing that yet, they\u2019re definitely paying for it right now. Whether it\u2019s when they actually sell losing money or even just paying holding costs for three extra months because they priced way too high and they\u2019re just sitting on the market.<\/p>\n
Dave:
And are you able to preserve your margins then and just because you\u2019re buying the right deals or in these type of times you sort of accept lower margins but keep moving forward because you have to do something?<\/p>\n
Dominique:
For me I\u2019ve kept to my margins pretty strong, just passed on a lot more deals, really narrowed in on my buy box and I\u2019m only buying in specific neighborhoods and zip codes that I know that have high demand. On the resale side, I\u2019m only buying in the entry level price point right now. So when my product comes out finished and renovated, I want it to be one of the cheapest, nicely renovated homes on the market. So for me in my market that\u2019s kind of in the 200K and under price point, on the resale. So I\u2019ve really just narrowed down my buy box, specific location, specific price, specific type of asset. And so I\u2019ve just passed on a lot more deals that I didn\u2019t think would work with overinflated projected margins.<\/p>\n
Dave:
That makes sense, and sounds like you\u2019re adapting well. I see Leka just getting excited about the idea of $200,000 flips over there.<\/p>\n
Leka:
That\u2019s the cost of my rehab.<\/p>\n
Dave:
Yeah. What is the price point of your average project Leka?<\/p>\n
Leka:
So the acquisition price is between, I want to say 500 to 700K, now it\u2019s 750 maybe sometimes. And then the cost of rehab is between 150 and 225, 250 just depending on how extensive it is, whether it\u2019s full permitted all new everything is more like 200, 250. And then with holding costs and all of your property taxes and buying and selling costs, it\u2019s about a million on an average to do a median price point flip in my market.<\/p>\n
Dave:
Wow. And what do you target selling those for?<\/p>\n
Leka:
Before we would list it for say 1.1, 1.2 and then get 2, 300K over ask. Obviously, that\u2019s not the goal now, my goal now is to deliver above market qualities for under market pricing.<\/p>\n
Dave:
Mm-hmm.<\/p>\n
Leka:
So then still charge a premium, but then the minute the buyer walks in, there has to be this wow factor like, \u201cOkay, yes I\u2019m paying 6%, 7% in interest, but this is the house that is worth that.\u201d And so I treat every flip as if it was my own primary residence. I\u2019m still able to keep my costs low because I\u2019ve worked with the same team for five years and then we kind of understand each other. I also bring on my contractors as my bridge financers, so they\u2019re also part of the deal, they get a portion of the profit when we do sell the flip.
And so because of all that I\u2019m able to keep my costs low and still offer all these crazy sizzle features and I design them to the tee so that it doesn\u2019t have to be expensive, but it\u2019s a little accent wall here, a little wallpaper there, some wainscoting, something cool and different like ceiling sconces next to the master bed. These are just cool features that not most flippers do, so when they walk into a project or a house, I want them to feel like, \u201cThis is my home, I need this home.\u201d<\/p>\n
Dave:
I like that term, sizzle features.<\/p>\n
Leka:
Sizzle features.<\/p>\n
Dave:
That\u2019s a good term. Is that an industry standard? Or is that just what you-<\/p>\n
Leka:
It is. It is. It is a total industry standard, when you flip your first home, Dave.<\/p>\n
Dave:
I\u2019m never flipping a home, it\u2019s too much work, I\u2019m too lazy.<\/p>\n
Leka:
It is too much work.<\/p>\n
James:
And what Leka just talked about is really important right now in the market as you\u2019re flipping, right? The rates are going up, I mean actually what Dom also talked about, there was two major things that they just discussed, which is really important for flippers. A, knowing your buy box right now, and sticking to what you\u2019re good at. When you have rates that are volatile, that means that the market\u2019s volatile, it\u2019s a higher risk. So if you know what you want to buy and you know how to execute that plan, that\u2019s where you can mitigate your risk in the flipping. And then knowing what you are flipping, like what Leka is talking about, where her average price point on her flips right now, or I mean I\u2019m her broker so I kind of know the nu\u2026 it\u2019s 1,000,050 to 115.<\/p>\n
Leka:
Yeah.<\/p>\n
James:
And that is a market that has kind of became expensive with the cost of money, right? It is a lot more to service that debt, so adding in those little extra flavors is how you get those deals clicked out. And just kind of that, the little sizzle features are very, very important right now to get that pri\u2026 you got to give people a reason to buy in that price point.<\/p>\n
Leka:
Right.<\/p>\n
James:
Whereas, Dom is flipping in the lower price points, which is a lower risk because you can stabilize it, you can keep it, you can do\u2026 she\u2019s buying what she knows, where she knows and also there\u2019s multiple exit strategies. Whereas, in Leka\u2019s market or our market, there\u2019s not a whole lot of exit strategies, it is your selling that property. [inaudible 00:22:22]. And that is the riskier factor, but there is the huge margins that come with that risk at that point.<\/p>\n
Dave:
Leka, you mentioned that you were able to control costs, which seems like a pretty big accomplishment over the last couple of years because material prices for pretty much everything have just skyrocketed. Is that starting to slow down? Are you starting to see better or more, at least more predictable pricing for materials?<\/p>\n
Leka:
Yes and no. I\u2019m just ordering cabinets for 15 units right now for a 12 unit apartment building and then two luxury flips and all the cabinets are basically back ordered till mid to late December. So then will I step in and pay a little extra to get them in first week of December? Yes, so there\u2019s that. There\u2019s still kind of a lack of inventory with regards to just basic stuff like garage doors, appliances, so if I have to pay a little extra to get those things then I will pay it just to get my project done and on the market as quickly as possible before the Fed raises interest rates, another 75 [inaudible 00:23:38], so yes and no. Lumber has definitely come down, but then I do flips, I don\u2019t do new construction so we don\u2019t use that much lumber for framing. So it\u2019s kind of a wash for me.<\/p>\n
Dave:
Dominique, what about you? I think it seems like the two issues\u2026 well, flipping over the last couple of years has had some tailwinds, which is the appreciation, but the two headwinds seemed like both material costs and labor was just super expensive and difficult to come by. Are you still facing some of those challenges? Or what are you seeing?<\/p>\n
Dominique:
I would say pretty similar to what Leka said, I have also been working with pretty much the same team of contractors since I started and they kind of manage all of my projects. So labor wise it hasn\u2019t changed that much, we have a really good set of both managing level and then subs that I haven\u2019t seen huge differences in their availability or their price points as far as labor goes, but materials I would say a little bit different than what Leka said just because we are in that basic entry level kind of more simple price point as far as the renovations go. So we use a lot of materials from Home Depot and Lowe\u2019s and Floor and Decor and some of those larger box stores, so inventory is typically easier to come by and there hasn\u2019t been crazy amounts of back order.
But at the same time I mean if you look at early 2020 pricing on materials compared to now, it\u2019s still so much higher. I\u2019d say anywhere from 30 to even up to 50% higher on certain objects. Just a toilet, I always used to pay $89 for toilets at Home Depot and now they\u2019re a $119 or bathtubs, same thing, it\u2019s like they were a $120, now they\u2019re $220. So you\u2019re definitely still seeing those higher prices, but again, I mean with inflation that\u2019s gone up over the last couple of years, it\u2019s kind of expected. We haven\u2019t really dropped back down to that 2019, 2020 level yet, so\u2026<\/p>\n
Dave:
That\u2019s an interesting point that sort of the lower end finishes are more readily available. You\u2019re using a regular toilet, I\u2019m sure James and Leka use those Japanese toilets that when you walk in they-<\/p>\n
Leka:
[inaudible 00:26:06] toilet.<\/p>\n
Dave:
Yeah, they say hello to you and they warm up and do all this stuff. Actually a friend of mine released an apartment with one of those recently and his landlord came in and got it from\u2026 he retroactively, he was like, \u201cI miss my toilet.\u201d [inaudible 00:26:25] just put in a regular toilet, and he is like, \u201cI can\u2019t use just a regular toilet anymore.\u201d<\/p>\n
Leka:
Oh my God. I mean heated seats, come on.<\/p>\n
Dave:
It sounds nice, I admit. So I\u2019m curious James, I\u2019m sure you talk to a lot of people who are aspiring flippers. What do you think the market is like or what advice do you give to people who are considering flipping or maybe starting to flip in this type of market? Would you recommend it?<\/p>\n
James:
Yeah, I mean I think if you make a decision in any kind of business, if your goal is to grow your capital right now, flipping is actually still a really good business. It\u2019s a very high risk business but I really don\u2019t think it\u2019s much different now than it\u2019s been historically, it\u2019s always been a high risk business. When we\u2019re looking at these flip deals, we\u2019re looking at making 30, 40 and 50% cash on cash returns in a six month basis, right? That is an extremely high return. That comes with an inherent amount of risk though, and if you have to move and you really need to perfect your business to get going. And so if you\u2019re a new investor, you can get into the market, and actually to be honest, there\u2019s a lot better buys right now.
I mean where we learned how to flip homes was in 2008 when the market\u2026 we would predict, we would run values on a property and let\u2019s say it was worth 500 grand, by the time we went to sell that we were factoring that we were going to sell that at 430, we were knocking 10 to 20% in a very short amount of time to get the values down. So if you\u2019re a new investor, you can definitely get in the market, there\u2019s actually way better walk-in margins right now that can actually help you. You\u2019re walking into a lot better deal, which is going to kind of mitigate the risk down, but you want to take the right steps like what Dominique\u2019s talking about is buying the right type of deal.
If you want to get into a flip, buy a low risk deal. What is a low risk deal? Well, that is a cheap price point where there\u2019s multiple exit strategies. For some reason if you buy that property, you renovate it and it looks awesome, but the market is not moving right, you can still refinance it, stabilize it, wait for the market to calm down and then sell it later or maybe just keep it as a bur down the road. And that\u2019s the first thing I\u2019d be looking at is lower risk deals which require lower capital.
The second thing is you want to make sure that you understand the construction cost, because what we are in is we are in the inflationary period where costs are still well above where they were two years ago, but they are coming backwards. But you have to kind of know that right now to kind of really watch and see what you can get your pricing down because the public knowledge isn\u2019t that the pricing is coming down, it\u2019s guys and girls that are actively in the market working with people and kind of reading the trends there. I\u2019ve seen at least a 10 to 15% drop in construction pricing in the last 45 days, but we\u2019re also getting that price adjustment off construction because we\u2019re changing our plans up, we\u2019re not just accepting the answer that\u2019s given to us. If I\u2019m getting high flooring costs, we have to floor 5,000 square feet at an apartment building we\u2019re renovating right now.
My people in my office are calling all the different flooring companies to find out what they have on overstock and clearance because they did buy up too much product. And so it\u2019s up to the investor to execute that plan and really create the value. If I go get the quote from my flooring company, it\u2019s still going to be 30% higher than it was two years ago, but now what we\u2019re doing is we\u2019re chasing down the product and we\u2019re going to have to find that good deal, and that\u2019s always how flipping has been. When we were flipping in 2015, it was, how do we get our faucets cheaper? How do we get our handles cheaper? And going and actually finding the solution rather than just getting it. And so if you\u2019re a newer investor, buy the right deals, buy something low risk, low that you can sell it, you can keep it, that will make it to where you\u2019re not going to get clipped.
If you\u2019re buying an expensive property and you go to refinance it and you\u2019re losing a thousand to 2000 a month because the loan balance is too high, that\u2019s a hard property to keep. In addition to the lower price points, you\u2019re less susceptible to big hits, right? If I\u2019m flipping a house that\u2019s a million dollars and the values come down 10%, that\u2019s a hundred thousand dollars I have to deal with inside my [inaudible 00:30:50]. If I\u2019m flipping a house that\u2019s $200,000 and it comes down 10%, that\u2019s 20 grand. I can absorb that, that\u2019s not going to bankrupt me at that point. And so just you can get in the market, you just want to buy the right type of deals. In 2008 there was nobody really buying flips and we were not experienced flippers but we were buying constantly. And so we were brand new people flipping the most amount of houses, but we had to figure it out. We had to have a good lender, good construction team and a very padded up [inaudible 00:31:18] to where we just knew the deal would work every which way.
Every deal has a stress test, you can put the value on it, and then what we\u2019re doing right now in riskier markets is if we see the value is today is a million bucks, we\u2019re going to knock 5% of the value off that. If we think our construction costs are going to be a hundred grand, we\u2019re going to add 10% to that deal. If we think we\u2019re going to keep it for five months, we\u2019re going to put seven months of debt cost on there, and that\u2019s how you stress test your deal. And if you can pad that all the way through and the deal still makes money, then that\u2019s something that I\u2019m going to consider.<\/p>\n
Dave:
Yeah, I mean that makes a lot of sense James, and it\u2019s excellent advice. It sounds like you have been a very experienced flipper for many years and it sounds so logical when you say these things, but Leka, I\u2019m curious, do you think these, are they achievable for new investors? It all makes so much sense, but do you think, does it take time to learn the skills that James is talking about?<\/p>\n
Leka:
I was doing this analysis just a couple of days ago and what I saw was my hard money costs, so if I were to buy a deal, the same deal that I bought earlier this year, if I were to buy that same deal today, just my hard money costs are 25% more. And with prices for flipped homes coming down with the target, right? The market target that is ever changing and with\u2026 yes, there\u2019s a lot more labor now than there was a year ago because there\u2019s a lot fewer people actually flipping and investing in real estate and actually reconstructing. So there\u2019s a lot more general contractors available, there\u2019s a lot more labor, but if you don\u2019t know what you\u2019re doing, it is very stressful, it is very high risk. So yes, you can still flip, you can still buy homes and I\u2019m also seeing homes\u2026 before, earlier this year, I would see about four deals come to my inbox every day, most of which I would pass on. Today I\u2019m seeing 15 to 20 deals coming my way.
So now what I\u2019m doing is I\u2019m like, \u201cOkay, this house is just a flip, but this house can be a rooming house or a midterm rental or a short term rental, this house I can add an ADU three years down the line if I wanted to just hold it as a rental property and not fix it up right now, so when the interest rates come down, I\u2019ll fix it up, I\u2019ll subdivide lots, I\u2019ll change zoning variances.\u201d I am looking at it through a different lens, which is very hard for a new investor to do. So what I am encouraging all the newer investors to do is go partner with more experienced flippers. Flippers like James, who has been through many market cycles, right?
I started flipping in 2014 and while I started was pretty slow, but then as I\u2026 2015, 2016, 2017, it was peachy, right? It was amazing. And then 2018 we saw [inaudible 00:34:24], and then 2019, 20, 21, boy, I have made more money than I could have dreamed of, right? And so I have seen that cycle that has set me up really well for right now that even if I have to offload properties at a discount or at a loss, just getting the money that I put into it is enough of a liquidity factor for me to go out and buy some killer deals in 2023.
For a newer investor, if they were to partner with someone like James or myself or Dom and then just shadow us and see, okay, how are we pivoting? How are we being flexible? How are we constructing? How are we designing these projects to sell for a profit, not a loss. I think that is much better use of their time and money than going out and buying their own project and maybe taking a huge loss hit.<\/p>\n
Dave:
Yeah, that\u2019s great advice, taking the time to learn right now, especially if you learn in these adverse conditions when market conditions improve, you\u2019re just going to be set up for success for the long term. But something that always struck me about flipping, especially in challenging markets is if you do it enough, the probability is that you\u2019re going to make a lot of money over the long run, right? But on any one deal you could lose money, right? I don\u2019t know if any of you want to share, but you do lose money on some deals, right?<\/p>\n
Leka:
Ah, never.<\/p>\n
Dave:
[inaudible 00:35:55].<\/p>\n
Leka:
If someone that has done as many deals as us says they have never lost money, run in the other direction because that is a lie, that is a [inaudible 00:36:05] lie. Yes, a hundred percent. You do as many deals as you do and for no rhyme or reason you can lose massive amounts of money on a deal. It could just be that you got hit with a crazy inspector in the city that makes you do 37 inspections on your project, basically [inaudible 00:36:24] away all your profit. It could be that Amazon announced a head tax and everyone stopped buying real estate and then you just had to sell your property for a loss in a very hot market in a very hot neighborhood. It could be that you overspent on finishes, it could be that you just bought the wrong house at the wrong time, it could be so many factors. But yes, I have lost, the most money I have lost on a deal is $65,000. My own flip, it was flip number 37, so it\u2019s not like I had just started flipping homes, I had quite a bit of experience, so yeah.<\/p>\n
Dave:
Well, thank you for sharing that, but I think that\u2019s what worries me personally about flipping or getting started in adverse conditions is if you\u2019re putting a lot of your own capital into it and it\u2019s all of your money, right? It would be scary, and if that bad luck happened to you on your first deal, if you don\u2019t have the ability to absorb the loss, that\u2019s a little bit scary, I\u2019m just telling you why I don\u2019t flip houses now.<\/p>\n
James:
And that\u2019s a bad business plan, you should never put any of your money in any one asset class. You need to break it up, and that\u2019s where people get caught. I mean it is a real thing when things come down quickly, we lost 380 grand on a house.<\/p>\n
Dave:
Yeah. Whoa, jeez.<\/p>\n
James:
That\u2019s a big number.<\/p>\n
Dave:
Yeah. Wow.<\/p>\n
James:
And luckily we could pay for it, but because we were rolling all our profits for two years. Like I said, bull run, we were making a lot of money for two years. So good news is we made a lot more than we lost, but it can happen very quick. And in 2008 I got wiped out, I went from\u2026 I thought I was rich, I was 23, I had saved up 450, 500 grand wholesaling, saving every penny I could, re-investing. And in six months I had 20 grand left.<\/p>\n
Dave:
Ooh.<\/p>\n
James:
And it was very, very rapid and it can hurt. High risk, high reward, and so yes, do not put all your money into one thing. Take your time, spread it out, start with one. We all started with one and then we start learning the systems and then go in and if you don\u2019t have all the money to\u2026 or if you\u2019re putting every dollar into that project, then look at investing with someone else because then you can give portions, you can spread it out, you can get in different markets.<\/p>\n
Dave:
Totally. Yeah, you wouldn\u2019t buy just one stock or if you\u2019re a tech investor, you wouldn\u2019t just put it all in one startup in hope, you would spread that around a little bit.<\/p>\n
Leka:
Yeah.<\/p>\n
Dave:
Even within real estate. Dominique it sounds like you have sort of gone into a couple of different strategies yourself, you\u2019re wholesaling, you\u2019re flipping, is your plan to continue to be primarily a flipper?<\/p>\n
Dominique:
That\u2019s a good question, I would say in the immediate future, because I have good systems in place and we\u2019re buying deals and it\u2019s still working. I want to keep the flipping going at sort of the volume or maybe a little bit more than we\u2019re already doing. But I\u2019m definitely starting to shift a little bit, I flipped for the last couple of years mainly just to kind of get experience, get started, save capital, really learn and kind of master the different neighborhoods in the market that I\u2019m investing in. But now I\u2019m definitely starting to shift and starting to make offers and prospect more into small multi-family deals, apartment buildings, things that I can still renovate and flip but not necessarily have to sell right away, maybe keep it for five to seven years and then sell. Maybe sell right away if that makes sense, but just kind of scaling up doing bigger deals under one roof.
But definitely still kind of what James and Leka were saying, there\u2019s still a way to flip and make money. People are doing it, the people that know what they\u2019re doing are still buying deals, are realizing that this is actually the time better than the last couple of years to buy a lot, there\u2019s way more opportunity right now, there\u2019s way less people buying, prices are coming down. So I\u2019m going to keep it up, I mean I\u2019m going to keep buying flips and flipping houses in my buy box that I know that works. And also just kind of backtracking a little bit, something I wanted to add just for newer investors that are trying to get into flipping and analyzing the risk if they can pull it off in this market, I would say one of the best things to do to start is to become the absolute expert on your market, specifically the zip codes or neighborhoods that you want to buy in.
You should know every house that\u2019s on the market pending, that\u2019s recently sold, how long it took, how far over or under ask price people are getting? That\u2019s easy, you can go on Redfin, Zillow and do that research and figure those numbers out, but I think that\u2019s one of the best things you can do if you\u2019re getting started because that\u2019s where you\u2019re going to get hit, if you don\u2019t know those numbers on the resale. If you\u2019re still in April of this year running your numbers, you\u2019re going to lose money. You have to know, you have to be up to date on what\u2019s going on right now and judging by that what\u2019s going to continue to happen in the next three to six months.<\/p>\n
Leka:
I have to piggyback on that, that is such great advice. That\u2019s all I did the first six months I started wanting to invest in real estate, that\u2019s all I did. And that kind of laid this foundation that I still have today. When I buy a house in a market, you can ask me about any other house that\u2019s for sale, that went pending, or that\u2019s sold and I\u2019ll tell you about it. My broker called me yesterday and she\u2019s like, \u201cThis house sold for 1,000,060.\u201d And I was like, \u201cI know why.\u201d I walked it, it was a piece of [inaudible 00:42:11] flip, it was bad finishes, it didn\u2019t have a garage, it was a choppy floor plan, I know exactly why that house sold for a certain price and that\u2019s why my house is worth a lot more. And this is something I honestly learned from James when I first started because I would ask him about any house because I would do seven, eight flips and he would do 50 flips.
So I would ask him about any house in any market and he\u2019s like, \u201cOh yeah, and the house next door, and the house opposite, and the house on this other street.\u201d He just knew what houses, and why they sold. And then what happens is your brokers can\u2019t BS you, your wholesalers can\u2019t BS you, your contractor can\u2019t BS you because all the numbers are right there in front of you. And then the people that you are selling brokers, right? The people that are bringing in buyers, when they bring in a buyer, you always want to\u2026 in whatever market, if you are the seller, you want to be selling from a position of strength, not a position of failure or loss because that\u2019s when you make\u2026 you just give up all your money, you just give up all your equity and your profits. So I always go in like, \u201cI have my numbers, I know why this house is worth as much as it is.\u201d<\/p>\n
Dave:
That\u2019s awesome advice. Yeah, I think just there\u2019s no real shortcut to understanding your market, you have to just spend time in it. I mean when I first got started I would just\u2026 you\u2019d just be driving around and see an open house, you\u2019d just pull off the road and just go in it, even if you had absolutely no intention to buy it at all, just to learn about the houses. And I feel like that\u2019s been gone the last few years, there was no open houses, people were just\u2026 things were going so quickly. So this is a really good time with things sitting on the market longer for you to go and just see more properties and just get that practice, get more repetition that Leka is talking about, so you can really understand it. And then eventually you can become the Will Hunting of house flipping like James where he is got all of the pictures of houses and the red string that connects them all his office. [inaudible 00:44:15]. Yeah. Yeah, exactly.<\/p>\n
James:
I\u2019m the janitor in the back, yeah [inaudible 00:44:23].<\/p>\n
Dave:
No, no, you\u2019re the genius who comes in on the chalkboard and solves all the problems at night.<\/p>\n
James:
[inaudible 00:44:30].<\/p>\n
Dave:
Well, yeah. Well, Leka, I wanted to ask you, what are you sort of looking forward to in the next year? Do you see any market dynamics changing or do you think we\u2019re sort in for more of the same over the next couple of months at least?<\/p>\n
Leka:
The truth is that I don\u2019t know. I mean don\u2019t know, what I do is I try to be flexible and versatile with what I buy. I\u2019m also doing multi-family syndications, I am leasing out my office building that I just renovated, so I want to diversify as much as possible. So you know how people say, \u201cIf you\u2019re flipping homes, just stick to that.\u201d \u201cIf you are buying multifamily, just do syndications.\u201d I think that\u2019s bad advice, I think as long as there\u2019s a common thread, my common thread is that I only play in one market, in the Tri-County Greater Seattle market. And because I do that, it doesn\u2019t matter if I\u2019m buying self storage or apartment building or office building or single family flip or a multi-family [inaudible 00:45:35], I know my market, I have my systems in place, I have my contractors in place, I have property managers, I have mentors, and so I have my network and your network can solve massive problems.
So going into next year, I\u2019m looking at a frat house next to Washington State University where it\u2019s already hitting 1% rule and it\u2019s only rented 50% and they want to sell it at one third of the dollar. So I\u2019m like, \u201cOkay, that\u2019s a really good buy in any market.\u201d So why would I not go research that? Or look at midterm rentals? We have such a shortage and a lack of midterm rentals, we have lots of short term rentals which might convert to midterm, so that could be an inventory problem, but right now there\u2019s such a lack of midterm rental opportunities that I\u2019m like, \u201cOkay, if I\u2019m renovating a 12 unit apartment building, why not put one unit on midterm rentals, see how it goes?\u201d So constantly even just playing with my portfolio that I own now and seeing how I can increase profits on my own portfolio, but also going forward, how can I buy more versatile properties?<\/p>\n
Dave:
That\u2019s such good advice, I love that advice because I feel like there\u2019s these people who say, \u201cOnly do one thing.\u201d Or \u201cJust specialize.\u201d But what you\u2019re describing is so interesting, you can become an expert either sort of horizontally, you pick a strategy and then you can use that across the country or you just vertically integrate in one market and you\u2019re just like, \u201cI know Seattle so well that any property I can make work because I have the network.\u201d I think that\u2019s very, very good advice and really helpful for people trying to figure out how to scale. There is definitely more than one way to do it.<\/p>\n
Leka:
Yeah.<\/p>\n
Dave:
What about you, Dominique? Is there anything you\u2019re expecting or you said you\u2019re going to go into some smaller multi-families, but are you seeing anything in the market that you think might impact your strategy or anything that you\u2019re looking forward to, think will be big opportunities in the next year?<\/p>\n
Dominique:
I personally still see a lot of opportunity in the single family space, in the kind of outskirt neighborhoods of New Orleans. I\u2019ve always seen opportunity there and I think that I\u2019m continuing to see it. The reason being is just because there\u2019s a lot of people in that market that are renters. And so you have a lot of people that are kind of in that space where they\u2019re trying to transition from rent to own, just getting qualified, first time home buyer maybe using an FHA or VA loan, so what are they likely to buy? And that\u2019s kind of looking at the population of the greater area. What I\u2019ve always tried to focus on is I see that there\u2019s a lot of demand in that lower end, first time home buyer, single family home type of space. I mean most likely these people aren\u2019t going to be buying a duplex or something like that.
They\u2019re looking for that entry level, what is nice? What can I take pride of ownership in? Type of property, and there\u2019s just a lot of inventory in the kind of outskirt neighborhoods of New Orleans. There\u2019s a lot of single family homes, there\u2019s a lot of tract home type streets and stuff, so that\u2019s what I think is still a lot of opportunity in that market. Kind of [inaudible 00:49:04] staying outside of the city, there\u2019s a bit less regulations, stuff like that. That\u2019s where I\u2019m going to probably continue to play, and yeah, like I said, some smaller multi-family stuff as well, but I think I\u2019ll still be heavier on the single family stuff for the next couple of years.<\/p>\n
Dave:
Nice. All right, great. What about you, James? Any last piece of advice for people who are interested in flipping heading into next year?<\/p>\n
James:
No, I think don\u2019t be afraid of flipping, I mean I know we\u2019re not. I mean the reason being is the margins are still big, the returns are still really high, if you can make 40, 50%, that\u2019s a good thing to be looking at. I mean that\u2019s how we grown our whole portfolio is flipping properties, taking the returns of 40, 50%, stacking them away, buying more, right? So we\u2019re always going to be buying, but right now it is risky, do not buy more than outside your SCIs. Do not put all your money into a deal, keep 50% off to the side to kind of work whatever\u2026 if you got to come up with some cash, you want to make sure the cash is there, but buying with multiple exit strategies is key. If you\u2019re looking at a deal, make sure that you know what you can do with that deal. Is there multiple channels? The more channels you have, the less risky that deal is.
And that\u2019s why I definitely don\u2019t agree with people saying, \u201cJust do one thing.\u201d The more things you know how to do, the less risky real estate is, so learn. I mean the fact that Leka or Dominique they\u2019re value add investors, they can take that skillset and go and get into every type of market, but if you\u2019re a new investor, learn the skillset, which is increasing the value on the plan, know how to execute that plan and then start expanding out. Don\u2019t go all in right now, take baby steps, work with other people and just be cautious, but just make sure the deal checks out, make sure that deal stress tests, add in the extra contingencies and then you can get going, but there is really good buys right now. I mean screaming buys and so if you sit too long on the sideline, you\u2019re going to miss these buy opportunities.<\/p>\n
Dave:
All right, great. Well, thank you all, we do have to start wrapping up. This is super helpful for complete noobs like me, and hopefully everyone listening got some value out of this. James, if people want to connect with you, where should they do that?<\/p>\n
James:
Best way to do that is probably on Instagram @jdainflips or you can go check out jamesdainard.com, we do a lot of value add construction talks, learning about ripping houses apart.<\/p>\n
Dave:
Oh yeah. Leka, what about you?<\/p>\n
Leka:
I\u2019m on Instagram, Leka_Devatha or on LinkedIn, just Leka Devatha, or you can check out my website, rehabithomes.com, and same, we just have a lot of value add stuff that we do and we\u2019re always talking about it.<\/p>\n
Dave:
Great. And Dominique, what about you?<\/p>\n
Dominique:
Instagram is great, I\u2019m @dom_flips_nola and yeah, same I\u2019m there for messages, answering questions, putting out content about our flips and stuff, so yeah.<\/p>\n
Dave:
All right, great. And I\u2019m Dave Meyer, you can find me on Instagram where I\u2019m @thedatadeli where I talk mostly about sandwiches. Dominique, I meant to say my favorite sandwiches in the whole world is in New Orleans. Have you ever been to Cochon Butcher?<\/p>\n
Dominique:
I don\u2019t know if I have, but I\u2019ve definitely heard of it. And I have heard of the amazing sandwiches, a lot of people have told me that, Downtown New Orleans.<\/p>\n
Dave:
[inaudible 00:52:22] I\u2019m sending you a gift card to Cochon Butcher, you have to go there, it\u2019s so good. All right. Well, I could talk about that all day, but we do have to go. Thank you all so much for joining us and thank everyone for listening, we hope you enjoyed the show. If you did, share it with a friend and give us a five star review on either Spotify or Apple, and we\u2019ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, 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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