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Inflation Falls, Inventory Drops, and Why is Multifamily Such a Mess?

On The Market Podcast Presented by Fundrise
36 min read
Inflation Falls, Inventory Drops, and Why is Multifamily Such a Mess?

Single-family vs. multifamily investing. We can go on this debate for days. Small-time investors favor single-family rentals due to their low barrier to entry and ease of management. Big players and passive investors far prefer multifamily thanks to its scale and ability to bring in some serious cash flow. But, it seems that many multifamily investors have lost their way. For the past two years, buying almost any multifamily property was considered a good investment, but now things are starting to shift.

Today we bring you two separate deals, one from Henry Washington and the other from Kathy Fettke. One is a single-family flip, and the other is a “passive” multifamily buy-and-hold. You’ll hear why one of these deals got ditched while the other should fetch a handsome return. This top-level analysis can help you debate future deals, as some properties look far better on paper than in real life.

We’ll also touch on the latest inflation news and an update on housing market inventory. One story shows some hope of the economy recovering, while the other could spell troubling times for investors coming up ahead. In the “News vs. Noise” section, you’ll hear exactly why a housing market crash may be delayed a bit longer and how more money could be pumped back into the economy, stimulating sales and boosting buyer activity.

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Read the Transcript Here

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer. Today, I am joined by Henry Washington and Kathy Fettke. Kathy, how are you?

Kathy:
I’m wonderful, thanks. Good to see you guys.

Dave:
Thank you. Can you tell everyone where you’re joining us from?

Kathy:
I am in Salt Lake today and then heading to Portugal the next day to look at property there.

Dave:
Seriously?

Kathy:
Yeah.

Dave:
Where in Portugal are you going?

Kathy:
I will be going to the Lisbon area because there’s some really exciting tax benefits there and also you can get a EU passport, if you invest.

Dave:
The golden visa, right?

Kathy:
Yeah.

Dave:
I know all about it. It’s very, very well known in the American expat community, people living in Europe.

Kathy:
Oh, I’m sure.

Dave:
Nice. Well, have a great trip. Henry, what’s new with you?

Henry:
Hey, what’s up, bud? Good to be here.

Dave:
Thank you for joining us.

Henry:
You don’t want to know what cool part of the world I’m in?

Dave:
I recognize that background, but tell us all about northwest Arkansas.

Henry:
Well, most people think it’s kind of gray like this background, but no, northwest Arkansas is amazing. I love it here. It’s a fantastic market. I just give you a hard time because I’m not in some super exotic location like you guys.

Dave:
Nice. Well, I’m joining you from Chicago sitting in the weirdest chair that I feel like it makes me look like I’m a four year old. I don’t know why. The proportions, if you’re watching this on YouTube.

Kathy:
You are the little one at the table right now.

Dave:
Yeah. My feet are dangling.

Henry:
I was going to say, “Are your feet swinging?”

Dave:
If you’re watching this on YouTube, I look like an absolute child. Or not watching on YouTube, you can see it. But anyway, let’s get into it. Today, we have a really great show. We’re going to talk… First, we’re going to do a news or noise segment because there has been some really interesting news that we’re going to talk about.
And then Kathy and Henry are going to share deals that they are working on or have been working on over the last couple of weeks because, as we all know, the market’s changing really rapidly and it’s super helpful to just hear from professionals like these two about what they’re doing and what they’re seeing in the market. And then at the end, we will answer some user questions that we pulled down from the Bigger Pockets forums. You guys ready?

Kathy:
Yeah.

Henry:
Let’s do it.

Kathy:
All right. Let’s go into our news or noise section. The first thing that I want to talk about is the inflation report. If you did not hear, inflation came out the other day and the consumer price index dropped on a year over year basis from 9.1% down to 8.5%. And a lot of people are hailing this as potentially the peak of inflation. Other people believe this is just a whole really not significant. So, Kathy, what’s your read? Is this news or noise?
I think it’s news. A lot of people are saying that inflation may have peaked in June. And if so, that would be wonderful. It’s still high. It’s still record high, but it’s trending in the right place. A lot of that was with energy prices. And what I’m hearing is that in the fall, we’re going to get some really positive reports because we’re looking at year over year. And inflation started to tick up towards the end of last year, so it’s going to look a lot better in the fall and that could mean no more Fed rate hikes. And it also could mean the stock market could take off because it pays attention to these things. So just what some people are saying, you know I love to bring you some good, calm news.

Dave:
What about you, Henry? What do you think?

Henry:
It’s news. It’s absolutely news. I mean, we were at record… 9.1 is what it was before and now we’ve come down. I mean, when you come down from a record high, even though you’ve come down to what would’ve been a record high before that, it’s still good news, right? This is going to help. This is going to help people in the long run. It’s giving people some hope. And even if it does go back up, I mean, we’ve got ground to make up before it even hits where it used to be. So people should be excited. This is good news.

Dave:
I totally agree. I think that the trend has to reverse sometime. Hopefully this is it. And I think what you said, Henry, about hope is really important because so much, even if it peaked, it’s not like inflation’s going away. It’s still going to be with us for a little bit of time. But the uncertainty about is it just going to keep going up forever, is it going to keep getting worse, I think is really hampering the economy because no one can make decisions when you’re in this really uncertain period.
And I, personally, believe even if it’s peaked, it’s going to come down relatively slowly and over the next couple months. It’s not going to start dropping really rapidly in my mind. But at least you know that it’s starting to head in the right direction. And I think that’s really encouraging. So this is one of the things I’ve been happiest to see in a while.

Henry:
It’s good for people. It’s good for the economy. It might stimulate some more spending. I think people have been hoarding their money a little bit and money’s meant to be circulated, not hoarded. And so I think it’s good all the way around.

Dave:
All right. Well Henry, what do you think about this? Some data came out from Redfin that showed that new listings, which had been going up for most of the year, just the amount of people who are listing their houses has been going up and we’ve seen inventory tick up. It’s actually heading in the other direction now. New listings actually dropped by 12%. And so now we’re seeing fewer people, even in this period of relatively low inventory, that said, it’s been going up, but on a historical context still super low. This seems maybe the trend is sort of reversing. What do you make of new listings down 12%, Henry?

Henry:
Yeah, man, I’ve been saying this for a couple of months now as interest rates have been rising. My general thoughts were that the market, as interest rates are rising, there will be less buyers because there’s fear. And there’s people who just say, “Hey, I can’t afford it at that interest rate.” Because it’s kind of like sticker shock, right? But we, as a country, haven’t fixed the lack of supply problem that we have in most markets.
And so I think as interest rates went up and values were starting and people were afraid values were starting to come down, you were seeing more and more listings enter the market. But we still have way more demand than supply. And so I think that values were going to kind of get flat a little bit, maybe come down in some markets, and then values are going to start rising again. And so I think we’re starting to see some of that. People were listing their homes because I think there was some FOMO. There was some, “Oh, I missed the peak. I need to hurry up and sell because I want to get top dollar.” And I think it’s a couple of things. People are realizing that there was probably less buyers and so they weren’t getting… People felt like, “If I didn’t get seven offers in the first 15 days, then my house is trash.”

Dave:
Why even sell your house? [inaudible 00:07:15] It’s not even worth it. Just a piece of garbage at this point.

Henry:
And so I think you saw some FOMO of people trying to list and hurry up and grab that top dollar. And I think some of that FOMO is starting to wear off. I think people aren’t seeing prices come down and they’re starting to realize they haven’t quite missed the boat. So, yeah, I think you’re seeing less listings.

Dave:
Yeah. Kathy, how about you? Is this news?

Kathy:
Well, this is horrible news to all those people who are waiting for the market to crash and for the foreclosures to hit. All of you are going to just have to wait a little bit longer. This is a problem for buyers. This is a horrible problem because homeowners, people who own property, they know they’ve got a valuable asset, right? And they’re not just going to walk away from it and they’re not going to put it on the market and wait two days to sell it.
They want it to sell right away with a house full of people on the open house. So, and what else are they going to find out there that would even make sense with the payment they have and the price that they paid? They’re going to be paying… Basically, their mortgage payment would probably double if they went somewhere else. So it’s just of it’s compounding the problem of low inventory and it’s really concerning for home buyers. It does mean, again, that probably more people will be forced to rent for a while.

Dave:
Yeah. I think, like you said, the people who are waiting for the market to crash, this is working against them. And I guess I’ll ask you. I only had two news or noise questions, but now because this is very interesting, I’m curious. There’s been this concept of a soft landing in the economy for a long time now. Do you think between inflation hopefully peaking and this data that’s coming about the housing market, I can’t speak for the rest of the market, but do you think housing might be heading towards that soft market where we are seeing some price declines in some markets, but are you feeling more and more confident that there won’t be a significant decline?

Kathy:
I think it just depends on the market. I’m going to be answering a lot of things with, “It depends” because the places that generally go up 40% in a year or every year for a few years, they’re probably going to feel it because they already got their price gains. But other areas like beautiful Arkansas, they’re not going to probably feel it. Right? These tertiary markets, the secondary markets, areas where there’s lack of supply are going to have a soft landing probably no matter what. But multifamily, and I’ll be talking about that later, there’s some major hits coming. And so it all depends on the asset class and the area. Always.

Dave:
Well, that’s a good plug because just before I got on this recording with you both, I recorded a bonus episode for On the Market where we talked about different markets, which markets are the highest risk of declining, which ones are at the least risk based on some of the different metrics Kathy was just saying. So if you are curious about your own market, you should definitely check out that show. It sort of teaches you a little bit on how to do this analysis for yourself. So check that out.
All right. Well, with that, let’s get into the deals you guys had. I’m very curious to hear about that. But first we’re going to take a quick break to hear from our sponsor. Welcome back, everyone, to On the Market. We have Kathy and Henry here to tell us about the deals that they are working on. Kathy, let’s start with you. You’ve been, sounds like, working on some multifamily deals. Can you tell us a little bit about it?

Kathy:
Yeah. I represent the passive investor, I guess you could say, because it’s hard to find deals in California. So many Californians just have to go elsewhere. And a lot of times that means more passive. And, of course, there’s people in California and everywhere that are in the tech industry and in the and entertainment industry and in sports. And they just don’t have time to do anything but invest and they’ve got the money to do it. So I’m kind of coming from that perspective.
And I’m seeing over the years, and I know you guys have too, people just throwing money at syndications and at apartments that really turned out great for a lot of people. They, wow, hit it out of the park, but it’s really getting hit hard now. And so I get a lot of deals that come to me. And unfortunately, when you’re a passive investor in these deals, sometimes people don’t take the time to do the underwriting, but it needs to be done. You’ve really got to look at each deal. Even if you’re passive, it’s super important. Get yourself an underwriter. You can find them anywhere, just to take a look.
But a couple that have come to me recently are in the Houston area and they’re in the seventies vintage. So that’s getting old. I hate to say it, but because anyway. The seventies vintage is old for a building. And when the business plan is a five year plan, it’s going to be even older. Right? So, and Houston happens to be an area that can have ups and downs. It can be a little more volatile than, again, a place like Arkansas because it’s dependent on oil a lot of times.
And there’s pockets with high crime. And let me tell you, if you buy an apartment in a high crime area thinking you are going to turn it quickly, I can give you some great stories of my own experience where that didn’t happen. So this was a $52 million apartment. The underwriting, in my opinion, was extremely aggressive. They hadn’t repriced, so we’re still talking about pricing from a few months ago when so many apartments are down by the millions. 10, 15, 20 million. It’s got to be repriced by now. That concerns me.

Dave:
Can you just explain that just for our audience? I think a lot of people are not super familiar with multifamily. Can you just explain, one, what you mean by aggressive underwriting? And then, I agree with you on the repricing thing, but could you talk to us a little bit more?

Kathy:
Aggressive underwriting would be making assumptions that things are going to go a certain direction in a really positive way and you’re not going to make a mistake. There’s going to be no surprises, no issues, no change.

Dave:
All rosy. Yeah.

Kathy:
Yeah.

Dave:
Everything’s going to go perfect.

Kathy:
So you’ve got to stress test everything. And so with the repricing, of course, with rates going up, that’s going to influence the NOI, which is going to influence the price and that’s going to bring it down. So the higher interest rates generally means prices are coming down. I mean, that’s one way to look at it. So if you got into contract, go back and say, “Hey, I got to reprice this. Interest rates are up.”
And there’s a good chance the seller will do that because they don’t want to put it back on the market and get an even lower offer. So just do it. Save yourself a few million. Okay. So in this, the aggressive underwriting we saw was expenses were growing at just 2%. Now in a newer building, maybe not on a seventies building. No, no. We had a gas pipe burst in our old building that I’ll never buy again. And it went from a hundred percent occupied to zero in about an hour.

Dave:
Wow.

Kathy:
So listen. Yeah. So I’m telling from experience. There is truth. There’s truth to wisdom with age, right. Okay. So, and then the expense ratio needs to be around 43 to 50% on an older building. Theirs was under 40%. So, again, just not anticipating that old stuff breaks, right? And then refi rate. Listen, we have no idea what rates are going to be. So if you’re going to make assumptions, put a bunch in there. And in this case, when we put in a different number than what they had put in in their underwriting, it ended up being a 0% return. So it matters. These numbers matter. And then the exit cap. Way too low. This is the price you’re going to sell the property for based on the cap rates of the area. Way, way, way too low for this vintage and this area where, again, vacancy they had at 2% and the area was 8%.
So I think they have a lot of ideas that they’re going to fix this up and make it great and it’s going to rent. But when you’re in an area that has 8% vacancy, you are swimming upstream. And also there was high crime in the area. And, sure, people made this mistake in Chicago where you are right now, Dave, thinking there’s a new Obama library and a bunch of people bought properties around there because, oh my gosh, all this money coming in here. But it was a very rough neighborhood. And they ended up… It got delayed by years and it takes a long time to turn a neighborhood around. And so, if something big is coming into town, that’s wonderful. But just know it could take five or 10 years for that area to really transition the way you’re thinking. And in this pro forma, they were thinking it would happen in year two. So that’s not happening.

Dave:
Was this an experienced operator?

Kathy:
No.

Dave:
Okay.

Kathy:
No, I think this is… That’s the thing is you might look at it and go, “Oh, my gosh, they’ve done so many good deals. I’m going to just jump in without looking at the underwriting.” But it’s been a bull market, right? It’s been insane returns. You could have underwritten like this two years ago and still made millions of dollars. Right?

Dave:
Right. But from luck, right?

Kathy:
From luck.

Dave:
Yeah. It’s not because the operator was right.

Kathy:
Yeah.

Dave:
It’s just everything went up [inaudible 00:16:48].

Henry:
Everybody wins in a bull market.

Dave:
Yeah, exactly.

Henry:
I love the lessons in that because the lessons in what you’re saying really translate to all real estate. And so if you’re somebody who is wanting to do real estate on a much smaller scale, these lessons still apply because as we go out and look at property, you’re going to have sellers that give you assumptions on the rent you can get, assumptions on the after repair value of a property, assumptions on vacancy. You said it great. Right. They had vacancy penciled in at 2%. 2% doesn’t cover one month’s mortgage, if it’s empty on a single family, right? So you have to know, educate yourself enough to know what good conservative numbers for are in your market and run your analysis conservatively, no matter if the market’s hot or cold. And especially if you’re new, you want to be way more conservative on your analysis.
Because if you’re new, the chances of you making a mistake are much higher and you can’t trust these people who are looking to sell an asset. A lot of the times, they want to make their, especially if the person pitching you that asset is not involved with the day to day and really just makes a commission on the sale of it, right? So you have to understand where your information is coming from and you have to do your own due diligence. So many new investors get burned because they buy something based on an opinion of value of somebody who is going to make a commission on the sale. Right? You got to get your own opinion of value from somebody not involved in that deal.

Dave:
That’s great input. And I think it’s super important to remember for everyone who is underwriting deals right now, where we are historically. If you look at vacancy and you’re like, “Oh, vacancy’s 3%. hat will continue.” Vacancy is at the lowest it’s ever been. And so you sort of have to assume, if you want to be conservative, that there’s going to be some reversion back to normal levels in terms of vacancy, in terms of appreciation rates.
I’m looking in out-of-state buying and I talked to agents and they’re like, “Yeah, this market’s averaging 15% appreciation per year after the last five years.” I’m like, “Yeah, because it went up 40% last year and before the pandemic, it was terrible. And that still comes out to 10% per year.” You have to really challenge what people are thinking because we’re in a market in transition. And what was true now, over the last couple years, may not be true in the very near future.

Henry:
When people give you real estate data as a buying point, do you go, “I don’t know if you know who I am, but I’m the data [inaudible 00:19:30] and I do this for a living.”

Dave:
I nod. I nod and smile to people. But, no, then I go and find a real estate agent who actually provides real and good information that I can’t just look up on Redfin myself. So, Kathy, first of all, I don’t know if we’ve established this, but you did not buy this deal, I assume.

Kathy:
No. No. And it was really just investing in this syndication, so okay it’s $50,000 minimum investment. So it is something that a lot of people might go, “Oh, it’s just $50,000.” Not just, but you know, I’ll put 50,000, if you’re a professional ball player or whatever. Yeah. Just throw it in there without really looking at the numbers. So go online, find a good underwriter if you’re going to do syndications. And it’s going to cost some money, but it’s like getting an inspection on a house. You just need to do that.

Dave:
So worth it. So let me ask you. How much time did you put into this deal?

Kathy:
I have an underwriter, so 10 minutes.

Dave:
Okay. But how much time did your underwriter put into it and was this one of many or is this one that you were seriously considering for a while?

Kathy:
Oh, no, this is literally two deals from… It’s almost identical, these two deals that came from different operators who are pretty experienced. And, man, I hope I’m not selling anyone down the river. It’s just important to, before closing, to stress test everything. Because we are in changing times, and if you’re in a short term loan, which a lot of these apartments are in bridge debt, and this one didn’t have an interest rate cap, so that’s terrifying. I would buy. I think right now there’s incredible opportunity coming in the apartment space. So it’s a good time to learn it and know what to look for because there will be opportunity.

Dave:
Great. Yeah. Kaylin and I, our producer, were talking about doing a couple multifamily shows in the near future, so stay tuned for that, because it would be definitely be… Like you said, there’s going to be good opportunities and for people looking to invest passively or become a sponsor themselves of deals, it could be an interesting time to get into that. All right. Any last thoughts, Henry or Kathy, about Kathy’s deal in Houston?

Henry:
Good job.

Dave:
Yeah. I love that you brought a deal you didn’t do, honestly. I feel like so often people highlight they did this amazing deal, but when you’re looking at real estate, you say no to more than you say yes to.

Henry:
Sometimes saying no is a huge win.

Dave:
It’s a huge win.

Kathy:
Yeah. Yeah. I wish I had said no to a lot of things. Yeah, I know what it’s like to jump in and be positive and excited and optimism is a wonderful thing in life. Optimism isn’t as great as an investor. So I know that feeling of being so excited and just feeling like you know what you’re doing and then jumping into things and then going, “Uh-oh, this is hard.” I’m still dealing with decisions I made 10 years ago. And they stay with you for a long time. So just take some time before putting your money on the line to really make sure you understand.

Dave:
That’s great advice. And our monthly reminder that if anyone wants to buy land in North Dakota to reach out to Kathy. She’s-

Kathy:
I got it.

Dave:
…she’s not your back. Yeah. If you want that land in North Dakota, she’s your person.

Kathy:
With global warming, you’re all going to be coming and trying to camp out on my little cool spot. We’ll be so cool.

Henry:
You should market it like Yellowstone. It’d probably sell like hotcakes.

Kathy:
Yeah. I mean, give little parcels for global warming. You will be cool here on this little piece of North Dakota.

Dave:
Yeah. If you wait long enough, it will be super high demand.

Kathy:
Yeah. Maybe even ocean front.

Dave:
Oh, God, lets hope not. All right, Henry, what is going on in northwest Arkansas? What kind of deals are you doing right now?

Henry:
Well, much smaller scale than Ms. Fettke over there, that’s for sure. I’m your friendly neighborhood hometown investor. So, yeah, so I thought this would be a good one to talk about because it is a deal that I purchased. And I purchased it with a slightly different strategy in mind because the market was a little different. But so the idea was I bought this single family home.
And it was a junker on the inside. Really, really, really bad. But when the market was popping at its peak, we were able to just clean properties out. Right? And then list them on the open market and investors were coming in and buying stuff up because you couldn’t lose. Right? You could buy anything. And even if you weren’t cash flowing month over month, you sit on it for a few months and it’s worth… The value’s going up.
And so that strategy was working well for us. And, luckily, I was smart enough to not budget my numbers when I was buying it. So to give some context, this is a small house. I paid 65 for it. Right. ARV? ARV On a full rehab is 2.25. But it needs a full rehab. Right? It needs all the things. And so we were looking at buying it, cleaning it out and then selling it, but for like 140, to somebody who wanted to come in and fix it up themselves and do the work because they still get a property under market value.
But what happened was the market has been changing and less people are buying those less desirable properties because they’re a little more uncertain about values and rents and things like that. And so I was smart enough to know, so when people ask with the uncertain markets, are you changing your strategy? And I’m not changing my strategy. I am being more strict on my numbers. And so this person who I bought the house from negotiated with me. It was actually, she’s literally a used car salesman. That’s what she does for a living so.

Dave:
Was that intimidating?

Henry:
It was. It was. She was good.

Dave:
Those people know what they’re doing.

Henry:
She was really good at it. And she wanted about 25 grand more than I was willing to pay her. And I came up maybe five grand to 65 and I wasn’t going to budge even though I wasn’t close to her number. And the only reason I wasn’t going to budge is because I was just more uncertain. And so I am not changing my strategy. I’m just sticking to my numbers more because I’m not sure what the exit strategy is going to be and I want to be able to have more than one exit strategy. And luckily, in this case, that’s what happened. So I did buy it for well, she said no, she came back to me later and took my offer of 65. And then it took us a while to get to close. It took me a while to get to the project. And now the market has changed.
And so I can’t do that same strategy reasonably. And so now I have to go ahead and do the renovation. But I planned for that on the front side and I have the money to do the renovation. And so we’re going to put about 60 to 70,000 in this thing and end up selling it for 225, maybe 230, because homes that are done are still selling great. Right? The market is still great for those properties right now. But the homes that are less than done and are not doing so well, there’s not as many people wanting to snap those up like they were before because they just felt like “I can buy anything and not lose”. And so all of that to say, you have to be strict on your numbers. It goes hand in hand with what Kathy was saying is you have to be strict on your numbers, you have to do your due diligence and you have to buy with more than one exit strategy in mind, especially when you’re talking about single to small multifamily real estate, because the market is uncertain.
It doesn’t mean you shouldn’t take action. It just means you need to give yourself an appropriate amount of cushion to be able to pivot and change directions. And if I would’ve paid what she wanted to pay, I would be in a position where I probably couldn’t do the full renovation, which would limit what I’d make on the backside. And so you’ve got to stick to your numbers. You have to become an expert in whatever market you’re looking at investing in so that you can know what your number is and stick to it and not get emotionally tied to these deals.
And that’s really, really easy for somebody, for instance, for me. I would love to do a large multi-family deal and I could see really easily how I would get overly optimistic about the numbers and about the potential for the future and about having that asset to build wealth for my family in the future. And you got to untie your personal feelings from these deals and untie yourself from the what could be on the back end.
Because what you have to focus on is what’s right in front of me right now and I want to make sure that I buy something at a price point where I know that I’m going to be able to have multiple exits in the event the market pivots. Because I’ve said it many times, if what I’ve learned in the past two years is that anything can happen and we can’t predict it. So you have to make sure that you are an expert in your market and you stick to your numbers.

Kathy:
Would you hold that? Would it make sense to keep and rent that?

Henry:
Yes, it would make sense to keep it and rent it. My personal strategy is I am selling singles and holding multis just because I like small multis and I am such a relentlessly consistent marketer, I’ve always got good leads on small multis coming. And they just make more sense from a numbers perspective for me to hold those. And so I generate capital by selling the singles and then I keep all the multis to generate the wealth.

Kathy:
Love that.

Henry:
Now that doesn’t… Somebody else, if you’re just getting started and you find a deal like this and it’s a single, you should totally hold it. Right?

Dave:
Yeah.

Henry:
What I tell my students is if you are consistently marketing and you know that you’re going to continue to get leads that are in your buy box, that are more fit for you, then you let those go, you monetize them some other way and you buy the ones in your buy box. I think, just like you said, people should do their due diligence. I think people should stick to their buy box.

Kathy:
Yeah. The only reason I asked it is because if you did hold it for a year, obviously, you get better taxes and then maybe interest rates will be lower. And I’m just always curious why people sell when there’s some pretty good lenders right now, portfolio lenders. We’re starting a fund doing exactly what you just said, exactly what you’re doing, in the Dallas area on one to four units and holding because of the great demand for rentals, but also because we want to hold until interest rates come down a little bit and better tax benefits. So I’m always just curious, but you explained it. You take the profits and then you’re putting it into something with higher cash flow.

Henry:
Yep. 100%.

Dave:
It’s great advice. I think having multiple exit strategies is always good advice and I think that’s true whether it’s across strategies like flipping, wholesaling, or holding onto something. And I think even within rental properties, having multiple strategies is a good idea. When I buy a single family, I want to be able to sell it to an investor who’s going to knock it down and develop it and it has good zoning. Or it has great curb appeal and a homebuyer might buy it.
These are sort of things you want to think about and not pigeonhole yourself so there’s only one type of person who might buy this property or only one profitable use of this particular property. That sounds like it’s going to be a great deal, but just to help our audience understand the market, Henry, are you able to tell us a little bit about renovation costs and labor right now? Are you seeing anything change or is it stabilizing at all?

Henry:
Yeah. Labor’s been pretty flat here over the past year. I have not paying more for labor now than I was about a year ago. But supplies are definitely rising. So the things I’ve seen the highest price lift on in renovations are windows. I mean, I’m paying two to three times what it would cost me for windows than over-

Dave:
Just don’t put them in. Just do the whole place cinder block.

Henry:
Open air. Totally fine. [inaudible 00:32:25].

Dave:
Cinder block. No windows.

Henry:
Just paint a pretty picture of the outside. Windows, garage doors, especially nonstandard windows and garage doors. You’re seeing long lead times to getting them and the price of them is just much more expensive than the standard, and even the standard prices have gone up. So those are kicking my butt right now.
And then HVAC. We’ve seen a substantial increase in what it’s costing me to install HVAC in properties. It used to run me between four and four and a half. So 4500 bucks to do a new HVAC system in a house that’s running me 6,500 to seven grand now, putting in HVACs in properties. And so those bigger ticket items are those doors and windows, especially special order doors and windows are costing quite a bit more. And so I’ve had to adjust. So I have a spreadsheet that just auto calculates based on what I’m going to do to the property. I’ve had to go back and readjust all my numbers in those because I was estimating them so much lower than what it’s costing me.

Dave:
So, Henry, last question and then we’ll let you off the hook is you are, as you said, a relentless marketer. What’s your feel for the market right now? Are you seeing better deals, more deals? What’s happening?

Henry:
Yes. Both.

Dave:
Oh, cool.

Henry:
Yeah, I’m seeing better deals and I’m seeing more deals. And so I’m starting to get an increase. What’s happening is… So marketing for deals is typically you have to reach out to a subset of people and try to get those people to get on the phone with you. Whether you’re sending them mail, cold calling, text messaging, whatever it is, the idea is let people know you’re interested in buying and then try to get on the phone with them and work out a deal.
And that’s one level. The other level of marketing is put your fishing rod out there in as many places where people who are looking to sell will find you and that where people were looking to sell, to sell at a discount, that river had kind of not dried up, but wasn’t producing the fruit that it typically produced when the market was going crazy.
And now there are more people who are out there looking for people like me to come and buy their property and help them out of a tough situation. And so I’m getting way more lead flow coming to me. I just bought a deal from somebody who found my website and I’m not even marketing my website. It’s way down on the Google listings. And somebody was like, “Hey, as many people as possible, can you come? I need help out of this situation.” And so we are finding that more people are looking to sell now who are in a tougher spot because tougher economic times means people need to get ahold of some money. There’s more tough situations. And there’s also people who may have had a problem property who didn’t try to sell it over the past year are, again, in that FOMO phase. “Well, let me hurry up and get rid of this thing while somebody will still want to buy it and I don’t have to do anything to it.”
And so, yeah, I’m getting a lot more lead flow from people looking for me, plus my lead flow from the mail and the other strategies is still very consistent. I haven’t seen a dip in deals. And as far as profitability, profitability’s still good because, although I may not be able to sell and get 13 offers over asking in the first 10 minutes when a property’s on the market, I just listed two properties and I had one of them gone in less than 18 hours. It was under contract for five grand over asking and the other one, we listed it and within 72 hours, we had four offers and we accepted one for 10 grand over asking. So there’s still buyers out there. It takes a little bit longer. I didn’t get nine offers and four of them sight unseen, waving all contingencies, and things like that. But I did get… It only takes one offer to sell a house, right. One good offer to sell a house. And we’re seeing that. So, no, it’s been great.

Dave:
All right. Well, glad to hear it. It sounds like the summary sort of from both of you is that there’s more opportunity. There’s a lot more going on, but there’s a little bit of failure to realign expectations for some sellers or deal sponsors right now. So that means, for our audience, you should be active and looking, but extra diligent about what deals that you’re doing and making sure, as always in any market, you should be really diligent before you make an investment. But it sounds like some people have not really adjusted to the new times and, as a listener to the show, hopefully you’re staying on top of everything that’s going on and you are adjusting to the new times and can make good decisions.

Kathy:
You nailed it. I just think we’re in a… It’s an incredible opportunity because there’s so much fear out there. People are so scared there’s going to be a housing crash. And yet we have such really good mortgage rates again. It’s an amazing time, so don’t be discouraged. Don’t be discouraged. Jump in and learn, first and foremost. You won’t be afraid when you learn. The more you learn, the more confidence you’ll have.

Henry:
Wealth is being transferred from the fearful to the fearless right now. And you’ve got to get yourself in the game. [inaudible 00:38:07]

Dave:
That’s a good quote. I like that.

Kathy:
That’s a quote. I think that’s a quote.

Dave:
Did you just make that up?

Henry:
I know it’s a big transformation of wealth. Yes. I made up the fearless part.

Dave:
I like that.

Henry:
But I know that wealth gets transferred from fearful people to the people who are ready to take action.

Dave:
Ooh, I like that. That’s going on a t-shirt. All right. Well, with that, thank you both for sharing those deals. This is super helpful for me, too, and for everyone else out there listening. All right, let’s move onto our user questions from the Bigger Pockets forums, but first we’re going to take a quick break.
All right. For our user-submitted questions this week, we have two. The first one comes from Gemma Jacque. Hopefully I’m pronouncing that correctly. And the question is, “Hi there. I’m wondering if someone can help me. I sold a property recently and put the profits into a 1031 exchange. My goal was to buy three more cash-flowing properties, but then last week I was let go from my job of 20 years. So the interest rates have gone up so much, the properties don’t cash flow anymore. I was going to take out the money and take the tax hit. I’m in California, so it’s so much money. I only have a few more days to decide, but I was thinking about investing into a DST instead. Any thoughts on this? Would this be crazy in the current environment? Any advice appreciated.” So, first of all, Gemma, sorry to hear that you lost your job.
That’s very unfortunate. Hopefully, you can find something that satisfies you and is a better position for you in the future. Secondly, for anyone listening, if you haven’t heard of a DST, this stands for a Delaware Statutory Trust, and it is basically a way that you can invest passively, essentially, in a syndication with 1031 money. So Gemma’s basically asking and saying that she was going to buy more cash flow. Now, because of her employment situation, she’s having a hard time getting a loan. Wondering if she should do a DST instead. Kathy, I know you have some experience with DSTs. I asked you before the show. So what are your thoughts on this?

Kathy:
And maybe her only option at this point is she can’t get financing because with a 1031, you have to get the same amount of debt of what you sold. And if she had debt on that, she’s going to have to get debt again. That’s going to be really hard without a job. So that may be her only choice, a DST, Delaware Statutory Trust, is one of the only ways, besides a TIC, to go into kind of a group thing. And that is totally passive. I think DSTs are great. They really serve a purpose. It’s important to understand that the returns are pretty low on those. I mean, two, 3%. It’s not going to be a Henry deal like he just explained, but it’s a place to put your money while you’re figure figuring things out.
DSTs, I’ve looked at doing them, I mean, sponsoring them. And the only way that the sponsor makes money is fees. That’s the rules. So the fees can be pretty high on those. That’s why the returns are pretty low. But again, DSTs are a great option. I always tell people, “Pick a DST as a backup in your 1031 so that if everything falls through, you have that.” So it’s kind of the fallback for most. But if there isn’t financing, then if she doesn’t have, what am I trying to say? If there wasn’t debt on the property she sold, then there’s lots more options. The final option would be opportunity zone to maybe choose that because you don’t have to take the full amount of the sale. You can just take a part of it and there’s some good opportunity zones out there.

Dave:
That’s great advice. And I actually, I did two DST investments earlier this year as the first time ever. I sold a property really at a good time and was looking very actively to find rental properties and just it wasn’t working. And as you probably know, I live in Europe, so it’s not easy for me to go look at properties all the time. I do primarily passive investing in the first place these days. And so I did it. And to your point, Kathy, the cash on cash returns are about high threes, low fours. So it’s not great compared to even what I was making on the property I sold, but when you consider how much money you’re savings in taxes, it’s extremely good.
And when I underwrote these deals, DSTs are meant to be tax shelters, basically. And they’re underwritten very conservatively. At least that’s what I saw is that, compared to what you were talking, Kathy, where they have these crazy rosy assumptions, the DSTs I looked at were sort of the opposite. They were very conservative. They’re not promising you a lot. But there’ll be some upside, but I liked it because I got to get into two markets I was really interested in investing in and didn’t have a team built out in. And so I’m a big advocate for it. I think it’s great, as long as you aren’t really needing a great cash on cash return.
All right, Henry, I’m going to throw you the next question here, which comes to us from Fay Gao. The question is which state city area should we put money in now? Just a simple question. So that’s.

Henry:
Oh, man. That’s funny.

Dave:
No, no. There’s more context. I’m just joking. Okay. “So I’m currently an investor in Chicago, still a newbie, owning two multi-unit properties. I’m holding… I’m looking to purchase my third long term buy and hold property, but I’m leaning towards looking for somewhere outside Chicago. Where do you suggest that I look and how do you manage out of state properties? There’s so many unknowns to me.”
So that is a huge question. We could do multiple shows about just that question, but I’m curious for you, let’s just sort of pare this down and ask the question. This investor has two properties in Chicago that sound like they’re doing pretty well, but is thinking about going out of state. How would you approach that sort of question?

Henry:
I think there’s always a decent market close to where you’re currently living. And so if you can look one to three hours away from your Chicago market, I bet you could find a market that you would have a general understanding of because you’re pretty close where you can get good cash flow numbers. And would you get as good a cash flow numbers as if you went someplace out of state that’s got phenomenal cash flow numbers? Maybe not.
But you would also be closer to your property and you would be able to eat more easily, build a team, maybe manage it yourself, or build a personal face to face relationship with the team or the people that are going to be working there. Maybe you can get some personal references because it’s close enough where people might understand who’s operating in that area. And so there are a lot of benefits to you looking closer to home than just jumping directly to out of state.
Now, if I was going to look out of state, I would be looking for where is there market? So, if you’re a cash flow investor, you want to find a market where typically you’re going to get the cash on cash return that you’re seeking, while also it’s got population growth over the last, gosh, I’d look outside of five years. I’d look beyond five years, right?
So you want to see someplace where people are continually moving here and then where the economy isn’t tied to just one industry or tied to an industry that’s going overseas or obsolete. So I would stay away from certain manufacturing. I would make sure that, if it’s technology, that it’s not technology where we’re going to ship the jobs in that industry overseas because it’s cheaper. And so I would look for medical. Medical’s something that is a great industry.
If there’s great medical jobs in that area, that’s a positive. I would look for kind of medical, the FinTech, right? So FinTech, technology in medicine, universities. Now I do feel like universities aren’t as sought after. University degrees aren’t as sought after as they used to be, but definitely higher education still is a thing. And so there’s tons of jobs that require that level of higher education. So universities are great.
I would also look at government jobs. Those are things that typically aren’t going anywhere, right? And so if that area has population growth, government jobs, medical jobs, and technology jobs, as well as the entry price is lower than where you are in Chicago and you can get highest rents. Typically, if you’ve got those kinds of industry and you’ve got people moving there, your rents are going to be fairly decent.
So if you can get a lower entry price, but good rents, and people want to live there, those are all indicators to me of a market that I would like to invest in because typically in markets like that, you’re going to get cash flow and appreciation. So those are the kind of indicators that I would be looking for in a market that I was going to invest in out of state. So I won’t give you a specific market, but I’ll tell you those are the indicators that you should be looking for. Dave, didn’t you just put something together that might help somebody look for something like this? [inaudible 00:47:54]

Dave:
Yeah, it’s good. They could look, but I wanted to hear from you. That was good advice. That’s great advice. I think that’s really practical, especially about being able to build a relationship face to face. I think that’s so important for building a team. And, yeah, my first question when I read this was, why? You have properties in Chicago. They’re good. Just keep doing that. Just learn the market really well and just do one market really well.
Unless you have a reason to, unless you need cash and you’re not getting it or you want to diversify into an appreciating market, that’s great. But I don’t think you should just look out of state just because, oh, on average, Florida has a 9% cash on cash return, Illinois is seven. If you know your market better, you’re going to find better deals in Illinois than you ever will in Florida, just even if the average is higher.

Henry:
There’s such a smattering of cool cities in and around that Chicago area that are-

Kathy:
I was just going to say that.

Henry:
…that there’s tons of places you could invest where you could make an easy drive. I mean, you got Wisconsin, Indiana. You got all those cool markets that are just a drive away where you can get great, great numbers.

Dave:
Guys, I’m in Chicago right now and there’s also just great food here. You guys get great. You get great sandwiches, Chicago style hot dogs. It’s great. I mean, I’m having the time in my life right now.

Kathy:
Pizza.

Dave:
So good.

Kathy:
Everything that Henry just said could be found in Chicago in the Chicago area. All of that.

Dave:
That’s right. Yeah. That’s a good point.

Kathy:
Emerging suburbs of Chicago or within a few hours drive, yeah, absolutely.

Dave:
All right. Well, thank you both so much for being here today. We covered a lot of topics. This is a great synopsis of what’s going on in the market and some advice. So thank you both. Henry, have a great weekend, Kathy, enjoy your trip to Portugal. Well, we’d love to hear. Shoot some footage for us. Do some property tours. [inaudible 00:49:52]

Kathy:
Oh, I’m going to. Definitely.

Dave:
We want to see what’s going on over there.

Kathy:
I’m just mad that you’re leaving when I’m coming to Amsterdam. That’s just not fair.

Dave:
I know. Kathy is coming to Amsterdam two days after I’m in the U.S. I’m always in Amsterdam and one time I’m visiting the U.S., you come, but we’re going to make it official one day. I’m going to say it publicly so that it happens that we’re going to film an episode in Amsterdam one day.

Kathy:
Yes. We’re going to do that.

Dave:
All right. Thank you everyone. Again, if you want your questions featured On the Market or you want to interact with any of us, go to biggerpockets.com. We have the On the Markets forums there and we will answer your questions there. Thank you so much and we will see you again next time.
On the Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate [inaudible 00:50:45]. And a very special thanks to the entire Bigger Pockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Watch the Podcast Here

In This Episode We Cover

  • Deep dives into two live deals that Henry and Kathy have been presented with
  • The latest inflation numbers and some promising signs of real economic growth
  • Why home listings dropped by double-digit percentages and how this will affect the housing market
  • Real estate syndications and how past successes are putting today’s deals in jeopardy
  • Aggressive underwriting and why every passive investor MUST vet the deal before they invest
  • 1031 funds and using Delaware statutory trusts (DSTs) to limit your tax burden 
  • The tell-tale signs of a great rental market in 2022’s changing economy
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.