Why Volatile Housing Markets Are Looking Attractive to Investors

Dave:
Hey everyone, welcome to On the Market. Today, we have one of our correspondence or show-and-tell shows where our esteemed panel will be sharing what they’re watching most closely in the market with you. Today we have James Dainard with us. James, how are you?

James:
Doing good. Just left a brutal meeting with the planning and or clearing and grading in the City of Bellevue. So I’m feeling refreshed after they beat me up for an hour.

Dave:
Sounds enthralling. Henry Washington’s also here to join us. Did you just get beat up by a town hall committee?

Henry:
I didn’t, but man, it’s funny, rarely do those meetings seem to go well. So maybe that’s something we should talk about at some point, how to navigate dealing with your local city officials.

Dave:
Oh, that would be fun. Kathy Fettke, our last panelists today. How are you?

Kathy:
I am doing so well. We are hosting a retreat for our company. All our RealWealth employees are here, the investment counselors, the property teams, and we’re visioning, we’re planning for the future and we’re, believe it or not, really excited, which will tie into my article later.

Dave:
Kathy, when do we get invited?

Henry:
I was just going to say, I didn’t get a Malibu invite.

Dave:
Yeah. We’re on the team. We could be in the RealWealth team.

Kathy:
You guys, it’s an open door policy with you anytime. Just come on by, but James needs to just sail on down and work outside or park more.

Dave:
Oh, yeah. Drop anchor.

Kathy:
Drop anchor.

Henry:
James can take his boat, I’m taking spirit air.

Dave:
Sounds horrible.

Kathy:
The worst.

Dave:
All right, well let’s get to today’s topics. Each of you brought a news story that we’re going to discuss, but first I just wanted to get your impact. Your, what’s the word? Impact?

Henry:
Input?

Dave:
What am I talking about? Input. There we… Thank you Henry. Henry, you host the rest of the show, it’s late for me. Anyway, I wanted your input on this inflation report that came out last week. It was pretty brutal. James is shaking his head and disgust. What did you think?

James:
I think that we might be in this for the long haul. The fact that it just keeps going up. And for a while it’s like they were blaming it on certain things and now they just can’t. Like energy was a big… There’s a lot of scapegoats that have been going on the last three to four months and they kind of pulled all that out and it’s still going up and unfortunately, it doesn’t look good for us. This could be a 12 to 24 month issue and unfortunately for us, what the fed is saying is, they’re going to put us into a recession if this doesn’t improve. And so it looks like we could be going down a little bit.

Kathy:
I’m going to give a positive other side opinion, opposite opinion.

Henry:
That’s good.

Kathy:
I’m going to let you know everything’s going to be all right now. Remember I do have an album that my daughter recorded of me singing in the car when I drive her to school and I’m happy to share that. But the other perspective is that it’s kind of flat, I mean, the positive news in this, and remember, headlines are meant to scare you and make you mad, that’s their job, so that you will watch and we are motivated by fear and that’s what’s going to get you to watch the news. So remember that. But it’s pretty flat from month to month, which is a good sign. In fact, it was slightly improving. And that tells me that in a couple of months when we’re finally comparing year over year to higher inflation, which really started at the end of last year, it’s going to be a different story. So I’m actually seeing it as positive as it hasn’t really gone up so much month to month. It’s holding steady and might really turn around in the next couple of months. So holding the vision there guys.

Henry:
Isn’t a surprise that in a volatile market things are functioning volatily.

Dave:
What do you mean?

Henry:
Is that a word?

Kathy:
What?

Henry:
Is that a word? It’s volatile right now. The inflation was high and then it dropped for a month and everybody was like, “Yeah.” And then now it’s gone back up. Essentially it’s flat. Am I the only am one that operates like, it’s a thing now, I’m operating as if it’s a thing and I’m going to operate as if it’s a thing until it’s not a thing. So we know it exists. And so as a general consumer, I think the only thing you can really do is look to hedge. And you can hedge with your real estate investments typically, and look to bring in additional sources of income, so that you can afford the higher cost of goods. I’m happy that it’s not increasing as rapidly as maybe some thought, but for me, it’s just, it’s here, operate like it’s here, use it as an opportunity to learn how to build some additional income and continue to hedge.

Dave:
Well, I guess the thing that worried me about this was that yeah, the top line CPI went down from 8.3% to 8.2%, but the core CPI, which excludes energy prices and food because they’re too volatile, went up month to month 0.6% and it’s going up. And that’s the number the fed cares about. So when we’re talking about fed policy, they’re looking at this and thinking that it’s going up. And there’s a whole lot of reasons for this, we can talk about this, but rent and housing is a big part of that. And it’s not likely, the rent and housing shelter part of the CPI is not likely to come down for at least another six months.
So I think that’s pretty concerning. And just in general, the reason at least, I look at it is, because we’ll talk about this, but most people are forecasting housing prices to go down. And in my opinion, the only time they’re going to… I don’t think it’s going to be a crash, but they’ll probably start to go down a little bit. And the only time we’ll start to see growth again is once the fed at least pauses and then hopefully reverses course and starts lowering rates. So to me, that report just made it look like it’s months out at least before the fed even stops for a second to see if this is even working or not, which they probably should.

James:
And the concerning thing is they were predicting it to go up 0.3 and it doubled what their prediction was. And that’s the scary part, is their predictions in forecasting have been a hundred percent wrong for the last 12 months. And so every time they think this is going to have this impact, they’re a hundred percent wrong. And that’s what freaked everyone out, is they weren’t just wrong by a little bit. They were wrong by a hundred percent.

Kathy:
Yeah.

James:
Even though it’s only 0.6, their forecast was way off.

Kathy:
Well, remember it was just a year ago they said inflation was transitory, so they have been completely off. I’m not going to trust very much of what comes out of their mouths, but they are saying that they’re going to keep raising well into next year, we’ll see. But again, we talked about this before, a lot has already been priced in when it comes to mortgage rates and the stock market. They react immediately when they hear those kinds of things. So I’m still going to hold that vision that we’re going to be seeing better numbers over the coming months and that might shift things.

Dave:
Totally. I saw a tweet about this today that I thought was a good description of pricing things in, that the stock market and mortgage rates, they’re not a mirror, they don’t reflect what’s going on, they’re a crystal ball. It’s people trying to forecast what’s going on in the future. And so if you look at the stock market, they’re pricing this in, and if you look at mortgage rates, they’re pricing this in. Of course things can keep changing, but it’s not like they’re waiting around for it. All right. Well, you guys helped me talk through my anxiety about interest rates. So thank you for this counseling session.

James:
I don’t know if I helped.

Dave:
I don’t know. I recovered. I could barely talk like 20 minutes ago. So not all.

Kathy:
Well, there’s one thing to remember, it’s that there are a few things that perform really well in an inflationary environment and generally it’s real estate, gold, hard assets, obviously, energy right now, if you’re going to invest in anything unrelated to real estate, it might be energy.

Dave:
For sure. Well, we’ll talk about some of the implications of this and what else is going on in the market now in mid October. But first we are going to take a quick break. All right, James, you’re up first for show-and-tell. What do you got for us for this correspondent show? What news story or thing are you following most right now?

James:
So something that I’m following, right, as we’re underwriting properties and we’re trying to predict, we’re investors in all different categories. We do apartments, syndications, buy and hold, we do development and we do short term flips. And in the short term right now with the market, those short term high yield investments are by far the riskiest right now, if you’re looking at flipping homes, it is a risky venture. But as people kind of exit the market, there’s actually a ton of opportunities out there. And so I’ve been talking to a lot of people and they’re shocked that I’m buying so many flips right now.
And the reason we’re doing this, we’re really just trying to beef up our underwriting and making sure that the deal’s bulletproof all the way through. And this article kind of talks and gives some guidance about it. It’s actually from NPR and the title of it’s Home Prices See the Biggest Drop in Nine Years Thanks to Higher Mortgage Rates. Which you would think that article would make me not want to flip properties and buy that short-term investment. But what it does is it does a really good job at guiding where the market could go and how you predict it into your underwriting.
And so, one of the speakers on there was actually Mark Zandy from Moody’s and they put in kind of his analytics behind it, which was that they feel that the peak markets are going to come down about 10% over the next 12 months. What they are saying though too is, any of the markets that bubbled heavily, which is Phoenix, Idaho, even some Austin, even Seattle, that those markets are subject to more 20% drops during those times, which we have already seen that big, big drop. Because I’m seeing in a lot of our tech spaces that we’re actually about 30% down from the highest peak sale, not from median home price, but from the peak sale number. And so it is consistent, but what the concerning thing is he says that is based on us not being in a recession. And if we go into a recession, they’re actually predicting that each, it will be more of a 20% drop for the slower steadily markets and a 30% to 40% drop in these big peak market jumps or 20% to 30% drops in the ones that jumped really high in that second quarter.
And so what we’re using, this is for our underwriting, is we’re tracking those trends. So as we’re looking at our next potential deal, it’s been very helpful to know this information, because we’re looking at the markets that already deflated rapidly. And then what we’re doing is we’re building in these predictions, the 5% to 10% off of the market. And then that’s what we’re going for with the values of these properties. Because as flippers, there’s still great opportunities out there. We’re buying homes very, very cheap compared to what we have been paying in the last 24 months. And then our goal is to make it kind of more bulletproof is, as long as we know the worst case scenario is not making money on a deal, then we’re okay to buy that deal because there’s so much pad in the performa.

Dave:
Meaning, as long as you’re not losing money.

James:
As long as we’re not losing money, it’s a win in a transitionary market. Because what you do is you don’t leave any money on the table and then you’re still going through the motions. And that’s like, if we’re looking at a 10% drop in the next five to six months based on what this article’s reading, he’s talking about a 10% drop over a 12 month period. So, that gives you that buffer. If we’re factoring in 10% and we’re at six months in, that’s 5%. So it gives us that extra 5% cushion, which is a big deal in the margins. The other thing it does is, it’s directing me towards where to buy and where the trends are. I want to go after the markets that already collapsed really quick, because those are the ones that they just came down fast and now they’re kind of hovering and those are going to be the ones that are actually going to drop a little bit less because they already had the major impact.
So I’m actually targeting the areas that have had the biggest drop because usually what happens is, it’s a domino effect and things start falling. The more expensive markets go first and then the softer markets fall last. And so those are ways that we’ve been able to look at these trends, look at what’s going on, and then look at the smart investments to make, because I do know I don’t want to sit on the sidelines right now because the buys we’re getting are just ripper deals, no brainers on the single family homes, fix and flip and then actually the small multi-family for four to eight units, we are seeing massive opportunity in those areas. And so by watching these trends, the predictability, and then also watching other… And we’re using that kind of same theory with the rental buying too. If we saw rents jump 35%, 40% in a certain market, we’re going to actually predict that those are going to come back a little bit too.
And so based on the forecast that we’re going into recession, we’re just kind of factoring those things in the deal. And you can really read it based on how high that second quarter appreciation was or rent growth. And if it’s high appreciated high rent growth, we’re building it back. And if it was steady, it’s actually a lot more predictable. Because even in the article it talks about the steady markets, they’re still anticipating growth of 4% to 5% in those areas. So it’s just really good information to build into your underwriting, build into how you’re looking at things for the next 12 to 24 months. And it really keeps you safe on that next purchase that you’re doing.

Kathy:
I was born and raised in California and I’m really used to these kind of volatile markets. You can make it a tremendous amount of money when things are going up. And then you’ve got to watch out when prices come down. I know in 2008 in California, if you bought in 2006, it took you 10 years to make your money back and because prices dropped so much, but when it takes off, oh man, that’s when you become a millionaire overnight. So if you can get into those growth markets when prices are down over time, it’s a great bet. It’s just buying at the peak. And so for markets like Seattle, San Francisco, obviously Boise, Phoenix, Nashville, Austin, if you are going to be going into those markets, you really need to understand, you need to not pay full price because you don’t have to right now.
So really understanding where those discounts are and being able to have this opportunity to get into those markets where it might make more sense than it did just a few months ago. But volatile versus these linear markets, which are the ones that we focus on at RealWealth because they’re just flat and boring most of the time, when you look at where prices aren’t changing and where rents are continuing to rise, it’s the Cincinnatis, the Clevelands, the Baltimore, these areas keep coming up because builders weren’t going there, they weren’t like, “Hey, I want to build a whole subdivision in Cincinnati. But you still have the-

Dave:
That’s literally never been said before.

Kathy:
I’m sure someone’s building there, but point being, there’s just not a whole lot of inventory and there’s still this massive group of people that maybe thought of, “Now I can buy a house.” No they can’t. There’s just not a lot of new supply in those markets.

Henry:
I’ve been preaching the unsexy markets for several episodes on this show and now them unsexy markets are starting to look a little too sexy, ain’t they guys?

Kathy:
That’s right.

Dave:
All right, well James, thank you for bringing that story. Super helpful and yeah, I think that the key is if housing prices are coming down, just understand what’s going on. And as James gave some really good advice on how to protect yourself. You don’t have to panic if you’re informed and prepared for it. So hopefully the show is helping you do that. Henry, what did you bring to school today?

Henry:
Let me check my backpack. You know me, I’m always going to look out for my landlords man. I’m a buy and hold investor, and so my article is from Redfin and it basically states that rents are growing but half as fast as they were six months ago. And so based on the recent data, it’s showing that rents are up 8.8 or 9% year over year in September across the country. And that’s cut in half from what it was. And to me, this is just another indicator that rents typically follow behind housing prices. And we started to see the slowdown in the housing market a few months back, but we still saw rents increasing. And so now it seems like things are starting to catch up from a rent perspective as far as rents going down. Some of the things it talks about, are increase in supply due to people not selling but deciding to become landlords because they got locked in at such low interest rates.
And so instead of selling that property, they’re looking to rent that property. That’s an increase in inventory as far as rentals are concerns. And then less migratory people. People have kind of either done that or they’ve had to go back to where they went because now companies are asking them to come back. So what it also talks about, which is very important is it talks about, yes, it’s cut in half, but there’s still several markets across the country who are seeing double digit rent increases still. And when you look at these markets, just like Kathy said, Oklahoma City, right? 24%, Louisville, Kentucky, 17 and a half percent, Nashville, Tennessee, 17% increase. Cincinnati, 16.5% increase. I think the most popular markets that are seeing an increase on this list that I can tell are New York City, Portland, Oregon and San Antonio both seeing all… New York is at 15% increase, San Antonio is at 12, Portland’s at 14.
So there are plenty of markets where rent is still increasing, but there are several of the more popular markets that rents are starting to then see a decline. And so what does all this tell you? For me, it’s paying attention to what’s happening in larger markets and understanding that if history repeats itself, rents will come down a little bit because housing prices are coming down a little bit. And so I need to be prepared for that as I’m looking to buy deals. And so it’s all about watching for the signs and then preparing for it in you’re underwriting. So if I’m underwriting a deal, I don’t want to have to buy a property that only cash flows with the highest perspective rent.
And an agent will tell you when you’re trying to buy a deal, “You can get $5,000 a month rent for this thing. Man, it’s going to cash flow like crazy.” Well, you might get three. So understand, understanding the trends and understanding that the larger markets might go first, the smaller markets are going to fall behind and knowing how much watching this number month over month will let you know how much to pay attention to it in your underwriting. So as you’re looking at deals, make sure that you’re conservative on your rent estimates so that in the event you get more great, but in the event you get less, you’ve planned for it. And if you’re underwriting it and it cash flows at a lower rent price, then you’re probably going to give yourself some padding and be a little safe on the buy.

Kathy:
Yeah, like you said, don’t get your rental quotes from your sales agent. Talk to the property manager please.

Henry:
A hundred percent occupancy all year long. Top, top, tippy, top rents, it’ll be great.

Dave:
Wait, is that not true?

Henry:
No one ever moves. They just want to pay tier rent always.

Kathy:
And it’s interesting what you said about rents coming, at least the growth, rent growth coming down, slowing down a bit. That’s more to my point that one of the huge numbers in our inflation data is rent. It’s the cost of housing. So to see that starting to slow down is good for future numbers.

Dave:
Totally agree.

Kathy:
Future inflation numbers are going to be good. See, the more we believe that. And Dave, you told us to stop shopping.

Dave:
I know.

Kathy:
I had this retreat, I had basket full of food and… Anyway, I haven’t been able to slow down the buying, but maybe hopefully you guys did for me.

Dave:
Well I think it’s also just the natural trend of what’s, it is just kind of happening. As the market’s slowing down and we’re kind of going into a recession things the velocity of money and everything’s just kind of… Well, the money’s starting to disappear out of the market and then people are not going to be able to pay those high rent growth anymore. It’s just not going to be affordable. I was looking that it was, what was it that 72% of consumers have less money in their savings account in the past 12 months than they did 12 months ago. 72%. And so I think what’s happening too is people are being a lot more cautious about making these decisions, even in the rental market, not just grabbing that next nice place they’re going, “Okay…”
Because we’ve even seen that in some of our rentals. The ones that aren’t tricked out that are a little bit more affordable are filling a lot quicker right now. Whereas, 12 months ago everyone was stacked full of money and they were ready to pay the highest possible rent because they wanted the nicest possible place. And so those are the consumers are also just, they’re kind of slowing down and I think that’s going to knock the rent growth down. But like Henry said, as long as you build that into the underwriting and you’re not going… Be cautious of those markets that are spiking right now, those are the ones I’d be careful in. And the ones that have just flattened out and started to chill out, those are actually the ones that you want to kind of target because A, people lose their appetite for them, so there’s more opportunity. And B, it’s already starting to slow down, so you can run your metrics a lot better.

Henry:
Absolutely. And another thing that you can think about as far as being a landlord, you want to put yourself in the best position possible. You want to be able to be flexible with what you can charge, so that you can be more diligent in your tenant selection if you have to get a certain amount of rent for a deal to make sense. And that is a higher number, you’re going to limit the amount of people that can actually afford there. And you might not be renting to potentially the best tenant. But if I can take less and open up my pool of people looking to rent, then you can have better tenant selection, better tenant screening. You can hopefully get a long term tenant.
I would gladly take a long term tenant that’s going to stay for two or three years at maybe a hundred or 200 bucks less than what the top tier rent is if they’re going to stay for a long period of time. And so it’s going to help you have better candidates and help you be in a position to where you can help people and be of benefit to the people in the communities. Because there are plenty of people who are going to be looking for housing with interest rates being so high. And the more flexible you can be with what you can offer gives you the more opportunity to make sure that you’re going to get the long term return that you’re looking for.

Dave:
That’s a great point Henry. Totally. And I love that you brought this story because it is something that’s going to be evolving. We’re actually going to be doing a show about rent and potential rent declines in the next couple weeks. So make sure to pay attention to that. And in preparation for that show, I’ve been preparing a data drop that is rent prices for the top markets over the last couple of months. And there are actually four markets that have seen year over year rent decline already. Only four out of several hundred. I’m going to see if any of you can guess. If you can guess it, I’ll give you a prize, I’ll buy you dinner next time I see you and you’ll get a free autograph copy of Real Estate By The Number.

Henry:
Oh, I’m in. Sold.

Dave:
I’ll give you each one guess. All right. If you get any of the four, I’ll do it. Kathy, go.

Kathy:
San Francisco.

Dave:
No.

Kathy:
No. Oh, I want dinner.

Dave:
We’ll still get dinner.

James:
Oh, I know this. I know this and it wasn’t the cities I thought it would be.

Dave:
You should know this. Oh I wont-

James:
Yeah. Oh, my gosh [inaudible 00:25:03]

Dave:
Henry, you got guess?

Henry:
Milwaukee?

Dave:
No. But you were kind of close because I don’t know geography. I thought Milwaukee is a safe place.

Henry:
Than Minneapolis is what you’re looking at.

Dave:
Yes. Okay. But that was your second guess. James, you can’t guess that one anymore.

James:
Is it Cleveland?

Dave:
No.

James:
Why?

Dave:
Number one, James, you should know this. Spokane, Washington.

Henry:
That’s-

Dave:
Rent has already gone down 6%.

Kathy:
Wow.

Dave:
And the number two, the four are, I’ll give you a hint in a future episode, we’ll have the data drop with all this data. But Spokane was negative 6% in September, Reno is negative 3%. St. Paul, Minneapolis, which we should probably do a show on those two cities, because they did enact some new policy. 2% down and Minneapolis, 1% down. So those are the ones. Anyway, after that there’s the low ones all end with AZ. So lot in Arizona are really slowing down. But I’ll share that soon

Henry:
Since I got to it on my second guess. Can you send me half a book?

Dave:
Yeah. Which half do you want? The top, bottom? Instead of the first or half, I’m going to rip it in half. And you can-

Henry:
I want the half Jay Scott wrote.

Dave:
That’s such a good call. It’s way better. Oh man. Wow. That was good Henry. For that I’ll autograph your book. And I’ll glue Jay’s two halves together to make you one whole book. All right, well with that, let’s get to Kathy’s story. What did you bring for us today, Kathy?

Kathy:
Well mine is from USA Today. So this is not a hard hitting story, but the-

Dave:
Swipes it. USA Today.

Henry:
Shots fired.

Dave:
Zing

Kathy:
As home sales stall, seller’s fix it, punch list budget is 50% higher, the data shows. So basically the article talks about, in the fourth paragraph it says, “Buyers were once willing to waive contingencies including home inspections. Today, nope. There were 60,000 purchases that fell through in June. That’s 14%.” Of course, June is a while back, so these are dated numbers at USA Today. Anyway, but that was 14% of the homes under contract, the highest on record. So to summarize this, I talked about it in our last show, that there’s the seller’s market and the buyer’s market. And when I’m in front of a room and I ask people, “What’s a seller’s market?” They say, “It’s a great time to buy.” And I say, “No. A seller’s market means the seller has the power.”

Dave:
Yeah, it’s kind of in the name.

Kathy:
It’s in the name. But honestly, love you all and this is wrong so many times. So many people buy in a seller’s market and sell in a buyer’s market, that’s buy high, sell low type thinking. So just know that right now things are shifting from the seller’s market, where it was good for this seller, yet I know you all were buying. And then in now it’s shifting to a buyer’s market, which means you have the power as a buyer, this is your turn, this is good news. So depending on who you are and what you’re trying to do in real estate, these markets matter. As a home builder, we’ve got subdivisions all across the country. It was a great time to be a seller the last few years, not so much today. I’m sure James could agree with me, hard to be a seller, you have to work harder.
You can’t just put a sign in front of your house and have 90 people come and try to buy it. It’s now 50 days on market is the average. So it’s taking longer, at least again, according to this article, it’s taking longer, you have to do better as a seller, you got to put more money in, it’s costing more. The cost of materials is higher. Buyers are going to demand more. So if you’re a buyer, this is your turn. If you’re a seller, you got to work harder and you got to know what you’re doing. Just like James was saying earlier, you’ve really got to know your numbers really well right now.

James:
I love this article because I’m a firm believer punching out your house. If you are in a transitionary market or a soft market, the last thing you want to do is work for 30 to 45 days to get that buyer on your property and for them to walk over a punch list items. And right now we have a lot of listings in the market, we have about 75 listings. We are pending above 50% of those, which is actually really good right now with what’s going on. But we’re doing that because as a broker we are working our tails off. We are calling every person that’s going through, we’re calling every broker to find out how many showings they’re getting that are competitive with us, because actually, what we’re doing with that is we want to get ahead, if we have another listing in the area and it’s not selling or it’s stale, we actually want to get in front of them on the price drop so we can ink before they will.
And so we’re having to work really, really hard and as you go to sell these things, they have to be punched out. We went over this for 30 minutes this morning. I have a flip that’s going live on Thursday. We punched it out five times, we’ve done a pre-inspection report on it. We are hitting everything on the pre-inspection report. And I know for a lot of flippers they do have the mindset of going, you want to leave a couple things on the table for people so they can have it and you can give it to them on the inspection. I think that is a terrible idea right now. You just want to give them the best finished product and every buyer because there’s a limited amount of buyers, at least in our market right now. We went from having 30 showings a week, which was getting us those no inspection offers to three.
If you do not want unfinished items to spook off your first three buyers, that is probably going to be one of your buyers on these houses. And so taking the time, spending that little extra money will help you sell that property dramatically faster and for more. And so it’s spending that extra 50% on the punch list, I believe it and they should be doing it. Because the amount of money you’ll get back, because as we go into a buyer’s market, buyers will beat you up on everything. They’re going to beat you up on time, they’re going to beat you up on items,

Kathy:
Because they can.

James:
Because they can and they should, they should get the right product, because there are a limited buyer pool buying it. And if you leave that item up, they might turn a $500 item into a $2,000 item or even worse, walk from your sale. So punching out your house is, I’m a firm, firm believer that you need to take the time, slow it down, do not roll them out too early, price it well and make a buyer feels really good about you, your product but also as you as a seller. If you take that little extra time, they feel better about the whole transaction. That’s how you get a deal pending in this market right now.

Kathy:
Yeah, this is the time where you still have to go back to staging. And at our Park City Project, I would say our last, we just changed sales teams, because I think they got lazy, I hope they’re not listening, but it was just so easy and now you have to work hard. And this new team is putting up the balloons and the signs and spending the money on the ads. They’re going to spend $200,000 just on marketing for this project, because they know that’s what it’s going to take. And to go international.
So again, you’ve got to work harder if you’re trying to sell real wealth is generally acted as a buyer’s agent helping people buy. So it’s like “Ah yes. It’s like our market again.” For that side of the business. Up until now, we were the ones without the power. It was like the seller saying, “No, this is the price. Too bad if you don’t like it.” It was almost impossible to even find anything. Now, we have more inventory, we’re getting better deals. For me, this is our time for that side of the business. For this side of the business that’s selling, that’s where a lot of our effort’s going to have to go. But we’re finding creative ways to do it.

Henry:
I think that I don’t want people to miss how good of a tip that was that James gave on punching out your house and getting it as ready as possible when you’re looking to sell it. If you are flipping in this market, that is a phenomenal tip. And he had mentioned that a $500 item can turn into a $2,000 item, both because of opportunity cost, because of time. You’re going to end up having to fix that thing anyway.

Kathy:
Yes.

Henry:
But now, it might prolong you closing the deal, which takes money out of your pocket for holding costs. It may have that by our walk, so you’ve got another 20, 30 days on market, right? Because you’re getting less people walking your property now. And all of that increases your costs of holding that property when you could’ve just paid $200, $300 to go ahead and fix that punch list item off the top and get that household quicker. The little things matter a whole lot more now. And I think if you got into the game of flipping houses when the market was amazing for doing so, you may not have had to hone that skill, you may not have had to think about the little things. So, that tip that James just gave you is huge. If you’re new in this game, the little things matter a whole lot more now. And you need to pay attention to those small details.

Kathy:
And even though sales are down 20% from last year, there’s still 4.8 million, we’re on track to for 4.8 million in sales. It’s down from 5.9 million last year. But that was a really a record year. 4.8 million is kind of sort of average and normal. So people are still buying and selling. It hasn’t come to a stop and people really need to realize that. 4.8 million homes, that’s a lot of homes trading hands today.

Henry:
We got spoiled. Kathy. I’m spoiled. I listed a house last night, late last night. It’s now, what time is it here? 12:00 01:00. It was one when we started. So it’s about what, 01:30 now and I don’t have a showing yet.

Kathy:
Oh.

Dave:
Oh my God. Did you drop the price?

James:
Drop price?

Henry:
Exactly.

Dave:
You got to drop it.

Henry:
I got to.

James:
Drop price.

Henry:
It’s been… Gosh-

Dave:
I’ll make you an offer right now. Henry. 20% under list price.

Henry:
Just six [inaudible 00:35:34].

Dave:
Or whatever it is. I don’t even know what it is.

Henry:
I would’ve had 10 showings by now, but I put it on the market last night and not even half a day has gone by and I don’t have a showing yet. So woe is me, the market’s crashing.

Dave:
Send your thoughts and prayers to Henry

Henry:
Ts and Ps.

Dave:
Yeah, I mean think generally speaking, there’s a reason. It’s called the buyer’s market and the seller’s market. And if you’re an investor, there’s a benefit to either one. When you’re buying, there’s one, there’s benefits to that, when you’re seller, there’s one and you just need to adjust and act accordingly. So thank you all for all these tips. There’s super helpful to navigating this market. As we’ve sort of all said, there is risk in this market, there is risk in this kind of environment, but there is also opportunities. So really this is the time to really know your numbers, understand your market really well, and look for those great opportunities that are coming around like everyone here was talking about. So we do have a question from the forums that we will get to, but first we’re going to take a quick break.
All right, for the last part of today’s show, we are going to go to the BiggerPockets forums and discuss a question from Kaohe Bruher. I hope I pronounce that right, my apologies if I didn’t. The question is, “When should you sell off a BRRRR property?” My question is, “When should you sell off a BRRRR property? My subject property is in Hawaii, there’s a saying, everything has a price, any feedback? Much appreciated.” So we’re not getting a lot of details on the specific property here. So let’s make this a philosophical question. Henry, what do you think?

Henry:
When should you sell off a BRRRR property? Not, never. look, I’m not a big proponent of the BRRRR. I’m more of a HELOC guy. So if it’s me, and like I said, there’s not a lot of information here, so I’m going to go off myself, I’m a buy and hold investor typically. So if I bought a property that I bought undervalue, added value to it and then got the rents where I wanted them to be, I would typically just look to do a line of credit instead of a refinance on that. And then that gives me access to that capital for me to use it when I need it. It’s a whole lot cheaper for me to do that too, because when you refi, your interest is going to be front loaded on that new loan and you take out a new loan at a higher amount.
And so I’m assuming they haven’t done the refinance already. If they’ve done the refinance already, the best time to sell it would’ve been when the market was at its height, the next best time to sell it is now. Right? We’re still seeing fairly decent prices on homes and they’re starting to come down and we don’t know exactly when they’re going to peak again because we haven’t seen the fed level off on interest rate hikes yet. But if you are selling it because you need money and you haven’t done the refinance yet, I would look at a HELOC instead. It’s cheaper money, you don’t change your mortgage so you keep your cash flow, you get access to the money and you only pay interest on it if you have to use it.

Kathy:
Yeah, I mean it’s hard to know without seeing the numbers. But if you have already taken all your money out of that deal, you did a refi, you got all your money back and you’re kind of at zero basis and you’re locked into a low rate and it’s cash flowing, I can’t see a very good reason to sell it. Because if you sell it, well first of all, if you just sell it, you’re going to pay capital gain tax. If you don’t want to do that, then you’re going to have to 1031 exchange. What are you going to buy and how is it going to cash flow with the rates?
I mean, obviously there are markets where you could still get cash flow and as we were talking about, you can find some really good buys right now. So if your Hawaii property, after taking out all your cash is really not cash flowing that well, and you have a tremendous amount of equity in it and you’re able to sell it because that market, it’s Hawaii, maybe somebody really is looking for their place in Hawaii and you could take a bunch of cash, and you found something else that’s better, that you could 1031 into that it still works with the high rates then I don’t see a problem with that.
I mean we help people do exchanges all the time because they have too much debt equity sitting in the property. And sometimes the equity line is just not big enough. In a place like Hawaii, if you made hundreds of thousands of dollars, your equity line might not go that high. So again, it just depends if you can find that replacement property and that replacement property performs better than what you have.

Dave:
I’m glad you brought that up Kathy, because my answer was going to be a mathematical one, which is try and figure out the return on equity. And Kathy was just talking about that. A really popular metric is cash on cash return and return on equity is sort of a similar idea, but instead of just the money that you put down to invest in the property at the time of purchase, you use the total amount of equity that you have in the property. So that’s the money you’ve put in as well as the money that you have earned by the market appreciation or any forced appreciation.
And that will tell you how efficiently your property is generating cash flow for you. And to Kathy’s point, you can do that calculation for the property that you own. And this is true of not just a BRRRR, this is for regular investments too. But you can do this analysis and say like, “Okay, I’m getting, let’s just say a 10% return on equity in this property, but everything in the market that I could buy is only 7% return. So what I own now is a better cash flow for me.” Or if you do the analysis in everything that you could go buy, to Kathy’s point is better than what you’re doing, sell it now and then reallocate that capital to something that’s going to earn you cash flow more efficiently.

Henry:
Okay Dave, I guess I’ll take your half of the book too.

Dave:
I actually did write that chapter, I wrote that chapter and there is actually, I did do a YouTube video on that on BiggerPockets that could help you calculate that if you want to do that.

James:
And I am a huge return on equity guide. That is how I built my whole portfolio out. Every year I audit every property I own, what is my return on equity. And because I think it’s one of the, in my opinion, and I know it’s different than a lot of people else is, I will sell anything. If I get the right price and I can move it into a better investment engine, I will sell it. I will not sell my wife, I will not sell my kids and I will not sell my dog. But everything else is for sale.

Dave:
What about your kidney?

James:
And so even right now-

Dave:
Your kidney?

James:
But will I still have one remaining?

Dave:
Yeah, you can live with one.

James:
How much is it number?

Dave:
[inaudible 00:42:25] But we’ll see.

Kathy:
Everything has a price.

Dave:
I live in Amsterdam. I’ll go ask a guy.

James:
Okay. Hey everything is for sale. I mean even my boat’s up for sale right now. Because it’s like why wouldn’t I try to sell it? It’s a juiced up asset. And when riding the peaks valleys is where you make your biggest amount of wealth. We acquired a ton of properties BRRRR in 2007, 8, 9. And they didn’t have much equity then, but they had great equity and after three years we were able to look at that return and then trade those out for numerous different units. Because at the end of the day when I’m doing a BRRRR, I have something right now. I have a duplex for sale in Queen Anne Washington, which Queen Anne is a class A neighborhood, it’s completely renovated. I have 400 grand in equity on this thing and I have a rate of 3.95 on a 30 year fix that’s cash only, 1400 bucks a month with no money left in that deal.
And people were always like, “Well, why would you sell that? You have no money in, you’re making a great return. It’s in a great area?” Because if I have 400 grand sitting there, I will trade these two units for eight. And not only that, I’m going to buy a value add where I’m walking into equity immediately, creating more wealth on that and then I’m going to take that new gun powder and trade out again. And I’m a constant trader. And I know the one negative part about doing that is, your overall cash flow in the short term is not good, you’re always trading into more equity positions. But it’s short term pain for long term gain for me. I am chasing to get to a certain unit count that will pay me a certain amount of cash flow so I can chill out.
I need to get a lot of units to get to there. And by trading those out and returning the equity, that’s how I increase the portfolio, because equity is no good for me until I use it. And if it’s just sitting there, it’s going to go up and down. And so I’m always looking to, what is my return on equity? Can I beat it in the current market with the cash flow? And then what kind of equity position can I get out of that deal if I’m buying another value add?
And so I don’t do a trade for another turnkey, but if you go and you’re taking that BRRRR, you buy another value add, you BRRRR again, you might be able to get two more out of that. And so just keep building that equity and then use it, just don’t bank it. It’s the biggest mistake I see investors make out there. And just one thing about trading, use the right mechanism. You need to use the 1031 exchange, defer your taxes, use it that way. Because if you start eating the taxes, it all gets washed out. So do it in the right method too.

Dave:
Totally. I think that’s one of the more painful lessons I learned when I first started investing. I was building up all this equity and I was so proud of it. And I was like, “One day I’m going to sell this property and I’m going to make a lot of money.” And then a few years later I was like, “Man, I should have taken that money out and reinvested it a long time ago.” Because I mean, that’s sort of the key to building your wealth over the long term, is reinvesting your profits. And if you keep your equity in these homes, you’re not reinvesting it, even if it’s jacking up your cashflow a little bit, you’re getting more cash, the efficiency that which you’re earning that cash actually starts to go down and you’re using a lot more money to make slightly more cash and that’s just less efficient.

Kathy:
Yeah.

Henry:
So my takeaway is, buy Dave’s books, he’s good at numbers. And then go ahead and get on the pre-order list for James book, How to Flip Houses Like a Rockstar, Holding Rockstar. And then we’ll be all good, man.

Dave:
All right. Well, let’s see if anyone can get James’ Kidney off him too. See what offers you get.

James:
I’ll take a bit.

Henry:
Shoot me a number.

James:
Hey Henry, if I can get enough money on my kidney, can we go get a rental in Arkansas? I needed a good affordable market.

Henry:
You probably only need half a kidney for a rental here in Arkansas.

James:
Let’s get two rentals.

Henry:
I could probably get a guy in Arkansas to come pick it up from you too.

Dave:
I also, James, I’m just going to call bullshit right now on the idea that you’re going to chill out at some point, you’re addicted.

Henry:
Right.

Kathy:
Yeah.

Dave:
There’s no way you’re ever going to chill out.

James:
Yeah. Valid point.

Dave:
All right, well this was a lot of fun. Hopefully that answers the question for our forum poster. Kaohe Bruher. Thank you for posting. If you want us to answer your questions, you can do that on the BiggerPockets Forums. Let’s just before we get out of here, remind everyone where they can connect with you all. Kathy, where should people find you?

Kathy:
Realwealth.com and my fund, my Texas single family fund is growdevelopments.com. And of course, the RealWealth Show is my podcast.

Dave:
Awesome. Henry, what about you? He’s dancing.

Henry:
Hey. The best place to find me is Instagram @thehenrywashington on Instagram or check out my website henrywashington.com.

Dave:
All right. And James?

James:
Very similar to Henry, my Instagram is @jdainflips. We do a lot of free educational stuff on there. And then also we have our [email protected], not henrywashington.com, but jamesdainard.com.

Dave:
All right, great. And I am @thedatadeli on Instagram or you could obviously always find me on BiggerPockets as well. Thank you all so much for listening. Hopefully this show is really helpful to you. If it was, don’t forget to share with friends or give us a great review on either Spotify or Apple. We appreciate all of you and we will 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. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show, On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.