Mindy: Hello, hello, hello and welcome to the BiggerPockets Money podcast where I sit down with James Daynerd, Jamil Damji and Kathy Fettke, three of the panelists from the on the market podcast, which is a sister podcast to this show. And we talk about this flip-flapping real estate market we find ourselves in. I am here to make financial independence less scary, less just for somebody else. To introduce you to every money story because I truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. Whether you want to retire early and travel the world, start your own business, go on to make big-time investments in assets like real estate or even just get a handle on what is going on in this market right now. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams. All right, today I am joined by James Daynerd, Jamil Damji and Kathy Fettke. James, welcome to the BiggerPockets Money podcast. Please introduce yourself and tell us why you are so great.
Guest: Hey Mindy. Um, so I’m a full-time investor. I’ve been an investor on the Pacific Northwest for the past uh 19 years now. I started when I was a senior in college. I’m a heavy value-add investor where we do a lot of heavy lifting on properties of the increasing day one margins. So whether it’s fix-and-flip properties, development sites, building homes, or large and small multi-family where we’re stabilizing them and increasing the value. I’m also a broker up in the Pacific Northwest where we do about 150 million a year with investors of just helping investors through the process, sourcing on and off market deals, and then handling the disposition as well. But just full-time deal junkie, Pacific Northwest. That is that is uh that’s where I hang.
Mindy: Full-time deal junkie. I love that. Jamil, welcome to the BiggerPockets Money podcast. Let’s let everybody know why you’re so great.
Guest 1: Thank you, Mindy. I appreciate being here and uh I uh I am Jamil Damji. I am a national wholesaler. So what I do is I wholesale properties all across the country. I have I founded the largest franchise for wholesale in the in the United States called Keygley. Not not only that, I also fix and flip property and I’m on a television show on A&E where I flip properties with my best friend and big sister. And like James, uh do a lot of value add, a lot of heavy construction type projects. And so this is very interesting to me. Nice to meet you.
Mindy: Well, it’s nice to meet you too. Thank you for joining us today. And Kathy, last but not least, she is alphabetically last. Kathy Fettke, welcome to the BiggerPockets Money podcast.
Guest 2: Thank you.
Mindy: Please let our listeners know why you are so fantastic.
Guest 2: Oh, thank you. Uh, I have, I’m the co-founder of RealWealth. We’ve been helping investors in high-priced markets find properties in cash flow markets. So that means, you know, understanding what it takes to own a rental property out of state. We do a ton of education at RealWealth and uh I have a broker-to-broker relationship with agents across the country who really know investment property and know what the rents are and and many of them own property management companies. Uh so that you’re not kind of stuck with an agent that just wants the commission and is going to take you to the wrong neighborhood. Um we also provide the resources that come along with that, like, you know, the insurance companies and, um, you know, the lenders that can can do loans in those states. So, uh, we’ve been doing that for, oh my gosh, almost 20 years now. And uh, and then I also started syndicating in 2010 in the in the downturn when we were buying land for like 10 cents on the dollar. So that’s been a uh an interesting ride as well for the past 12 years.
Mindy: So, well, I’m so excited that the three of you are here today. I, I’d like to say, I assembled this amazing mastermind team of of panelists to come in and talk about the real estate market, but I actually had some help. They are the panelists that regularly appear on our sister podcast called On the Market, where they talk about the state of the market in general. And that’s what we’re going to do today. We’re going to talk about the state of the market in general. If you haven’t been paying attention, the Fed raised interest rates, what, three times in a row, and they didn’t just give them a little bump. I believe all three times was 0.75 basis points, which is a huge amount. They haven’t done that, uh, well, they used to say they haven’t done that since, what was it, like 2010 or something? And now it’s like every month they’re doing this. So it’s uh it’s been a lot.
Guest 1: I think I read it was ’94 since it was that large of a raise.
Mindy: That yes, they haven’t had this much of a raise since 1994, you are correct. And now they’ve done it three times in a row. Why does the Fed keep raising these rates? Because inflation. They’re trying to fight inflation. Let’s talk about inflation.
Guest 2: Well, it’s interesting. Last year that same Fed said it was transitory, you know, and a lot of us were looking at each other like, are you sure about that? Because we’re seeing something different out here. We’re seeing bidding wars and lines out the door and 90 people wanting one house uh paying way too much for it. So it, it’s, it’s kind of shocking that the, the Federal Reserve, which is really the banking system, it’s not a government entity and people get confused about that. They, but they are tasked with controlling inflation. So they really got it wrong. Uh they have admitted that, but, you know, to me the bigger picture is the amount, you know, again well, you said what is inflation? It’s simply prices going up and like you said uh before the show, supply and demand usually controls that, but we’re in a very different world today. The economy is not the economy of our parents. Um, economics is not what people learned in school. It’s extremely manipulated by the Fed, by the banking system. Again, not a federal, not a government agency, the banking system is what it is and, um, they have been able to create an enormous amount of money, which was not okay when I was young. You know, they would print a little bit of money and it made headline headline news. Um, but to to just give an example of how much, I’ve talked about this on the market on our on the market podcast. Um, in my parents’ time, it was like two trillion dollars circulating or less. And if they printed even a few billion dollars, it was a big no-no. Um, today we’ve they’ve created seven trillion dollars in the last two years. Like how could that not create inflation when there’s that much more money circulating?
Mindy: What I find very interesting is that it’s usually supply and demand. When supply goes up, rates fall, or prices fall. When supply goes down, prices increase. And it doesn’t really matter what you’re doing if there’s no supply, prices are going to go up unless nobody wants it, you know, like typewriters. You can make those a thousand dollars a pop, nobody’s buying those. You make them a dollar a pop, nobody’s buying those. But right now, we don’t have supply. We have supply chain issues that stem from this little thing called COVID. And raising interest rates in my opinion, I’m not an economist, but raising interest rates when we already don’t have supply doesn’t seem like the right move here, because yes, you are dampening demand for housing in some markets, not in all markets, but in some markets. Um, I’m in the Denver market and our demand with the June rate increase, our demand was like, oh, no more. We don’t want any houses at all. And that was very difficult as I got my first listing in a very long time and now it’s still on the market. which is is kind of shocking to me that that it’s still on the market three months later. Um, but in other markets, it doesn’t matter. It doesn’t matter how high the rates are going to go, people are still buying. And we still have record low inventory. So how does increasing interest rates help with inflation? I don’t I I see all I see is this hurting the people who have to move, who have to buy, who have to, you know, and and it’s not just houses, it’s cars and, you know, other things as well. But this just seems like the wrong direction that we’re going in.
Guest: What we’ve seen is we’ve seen inflation come down a little bit off peak of June. I think it was at 9.1 and now we’re down to 8.3. But a lot of these rates they’ve been adjusted because it’s it’s not just a supply and demand thing. That is part of the problem. But we are seeing the supply start to increase. Even, you know, the other day, you know, we do a lot of construction and we’ve heard that there’s actually warehousing with over supply of flooring and different types of material because they bought up, bought up, bought up and now they’re kind of stuck with inventory. We’re actually seeing that also like in the used car market. I’ve been seeing that too. Lots are starting to fill up. But part of the reason they’re also increasing the rates is they’re trying to slow the money down in our economy. It is going way too fast or it’s been going way too fast and it’s been consuming everything, which was a lot of the reason there was also the supply. In addition to, it’s not just a supply and demand thing, but it’s a labor issue, is a lot of like the inflationary costs that I’m seeing is a labor issue, not just a material cost. And and that is just because on employment is basically at zero, it is causing labor costs to skyrocket and they’re trying to get that back down, which is unfortunately means slow the money down. Slowing the money down leads to a recession and then you have to kind of transitionally push through. But I I know personally, as as a investor does a lot of construction, lot managed a lot of employees, the labor market is a mess and it does need to be fixed because it is really hard to get your job sites done and until they they make these corrections, it’s also going to push that down, which there’s going to be a lot of relief for investors on that side. You’re going to be able to get guys to show up to your work. Uh you’re going to be able to actually pay them at affordable rate and and but it has to be slowed down and that’s half the reason they’re also increasing rates. It’s not just a supply and demand thing.
Guest 1: I agree, James. I think we’ve got such a complicated situation right now that we’re dealing with and the variables that are creating the inflation crisis, I think it’s not just a simple, you know, the simple math of, okay, let’s raise rates and everything will fix itself. And I think that that is just indicative of the very surface level problem solving we have right now from the Fed. I I I I truly don’t believe that they’re looking at the problem uh deep enough. And you know, again, I’m not an economist, and so I I don’t have uh better solutions uh to say, but I I there was an interesting article that I read Steve Forbes said, we need to be looking at this situation from the level of the currency. We need to be shoring up and strengthening our currencies, not just raising rates to weaken the economy. In fact, all that we’re doing right now is we’re beating up the people that are the working class people, folks that are really need help in markets like this, when things get tough, the we find a way to continue to be beat up people who are uh in in most need of of of the help. And so I I I again, I think that the way that we’re approaching this right now is totally backwards, but it’s uh it’s interesting.
Guest 2: Yeah, I see it as a silent tax. If if politicians and their constituents want more things and and want, um, you know, again, student loan debt canceled. Not that, you know, I look at Europe and they have free university, right? So, and and healthcare, but um here in the in the US if you if politicians want something, it is much easier to just print more money for that thing versus taxing people. Because at this point, you’d have to tax people 150% of their income in order to to pay uh for all the debt. Uh so it’s a silent tax and it does hurt the people that you know, that are already struggling because when prices go up, you know, you’re paying more at the at the pump. Well, I have an electric car, it doesn’t affect me. Um, or if, if, you know, people I know who they still bought their RVs and they’re still driving around paying all this money for gas, they’re not as affected obviously or else they wouldn’t be doing that. But it’s the people trying to just get to work that were already struggling. Um so it is, it’s an, it’s an interesting time and hopefully more and more people will awaken to, you know, some of the manipulation of the market.
Mindy: Do you think that rates are going to continue to go up? I mean, the Fed has indicated that they are not real concerned with keeping everybody happy. They want to keep inflation down and they are they’re going to do it. They’re they’re the boss. Um but where do you think rates are going to go in 2023?
Guest: Well, I think they they’ve said that they’re going to keep increasing the rates and you know, what what, you know, it what’s too bad is they’re being so reactionary now, and so they’ve had to go on this aggressive hike because they kind of ignored the issue for nine months. But what, you know, because at the beginning of the year, what he was saying was that the Fed rate was going to land around two and a half to three points by the end of the year or, you know, up into 2023 and that should fix the issue. And then it changed from two and a half to three to three to three and a half was their prediction. Now they’re saying four and a half percent from the Fed rate and you typically rates are three points higher. So it’s going to be a seven and a half, 8% loan for most uh investors, buyers, anybody getting any kind of bank financing, which is a huge increase that it was 12 months ago because we’re at two and a half percent and now it’s going to be at eight and there’s going to be shock waves by that.
Mindy: Do you think that’s going to affect pricing? We’re still really low with inventory with, I mean, you look back to 2008, 2009. We stopped building essentially in 2008. So 2008, 9, 10, 11, 12. I don’t know when they started building by you. I don’t remember seeing building like big subdivisions going back up until 14, maybe even into 15. That was a long stretch of time with no building. And that wasn’t just my neighborhood, that was everywhere. Builders went out of business, trades people left the market and didn’t come back, left the industry and didn’t come back. So now we’re short all this housing. I hear people say, oh, this is just going to be like 2008. And I don’t really feel that that’s going to be that this this market is the same, that has different causes, but do you think prices are going to fall like they did in 2008 or anywhere close to like they did in 2008?
Guest 2: It’s already happening.
Guest 1: We’re baking in around a 10% correction for pricing moving forward in most of the markets that we’re in, and we’re seeing a lot of opportunity for people to actually position themselves temporarily right now to to benefit from what’s happening in the market, right? So you’ve got cash heavy investors who are actually pulling the trigger but but really, really, really getting significant discounts on their purchases right now. But I don’t think that lasts. I think it’s a temporary situation where there’s going to be some, those who have to sell, will sell, right? And that’s the thing that we’re finding is that the individual who’s in the situation where they’re like, they’re they’re moving, they’re relocating or they there’s, you know, they’ve inherited a property or they have to, they a sale is a necessity. They will make the decision to sell. And are they going to absolutely get creamed because of this? Yes, they will. They are going to feel that. But I don’t think that we we can ignore the fact that you said Mindy, we are at record low inventory. And we have and because of what’s happening right now, builders are pausing building. Right? So we were already short. We were already short on supply on on inventory. And now you’ve got rates going to where they are. Builders pulling back even further. What does this create at the at the end of the wave? What what does this create for inventory and pricing. I think what you’re going to find is you’re going to have a temporary, a momentary opportunity where people, investors or whoever can get in and buy. This is why when, you know, I I was on a flight yesterday. And it’s it’s really interesting when you sit with people who who really aren’t even in housing, they don’t they’re not in real estate, they they don’t trade in it, but the sentiment, right? It was like when I when I told them that I was in real estate, they all immediately they were like consoling me. You know, it was like the way, so the sentiment that they have about what’s going on in the housing market, they were like, oh, I’m so sorry. And it, you know, you think, okay, if this is the sentiment out there, right, for the average person who’s not investing in real estate but just watching and reading the headlines, then I think what ends up happening is we will absolutely get a a a small depression because people they believe that the value of housing is going down. So they’re so sellers are more open to a steep discount. But I think what shakes out at the end of the wave is going to be an even bigger inventory crisis and this is going to create even more appreciation and a another correction going back up with with, you know, with pressure moving prices up. That’s what I’m predicting two years down the road.
Guest 2: I just said at the beginning of the year when I do my predictions that um you got to pay attention to the Fed. And the Fed because they, you know, we’re just puppets, they’re the puppeteers. They control things, we need to listen and follow. And really, uh experienced investors do that, especially stock market investors. Early this year, Jerome Powell said, we’re we’re going to raise rates seven times. I actually didn’t believe it. I was like, why would the Fed, you know, the Federal Reserve, I don’t when you say the Fed, it sounds again like a government entity. So it’s the banking system, the central bank, um decided, you know, we’re going to raise rates seven times and I thought, why would they want to crush our economy? Why would why would they do that? First of all, over stimulate it, and then decide, no, you know, we over stimulated, now we got to crush it. Um so I just thought, why why would you do that if you’re representing this country? But they have come out loud and clear just last week that no, we’re going to crush it and there’s going to be job losses and we’re going to bring asset values back to where they think they should be, which is affordable. So depending on who you are, it’s either good or bad. You know, news, headline news has a different interpretation depending on what you’re doing and where you are. For a buyer, that’s going to be a good thing. You know, in the meantime, it’s a it’s a terrible thing uh for people who who own the asset class that that the Federal Reserve is trying to kill, basically, right? So you you have certain areas that went up as much as 40% just in one year. Um so it’s there’s a good chance that those areas are going to that, you know, are going to uh correct. And that’s the way Jerome Powell said it. You know, we’re going to correct the housing market. And I I only see that as one thing. They’re the ones who blew it up. And one of the ways they they blew up this bubble is buying mortgage back securities to keep interest rates low. When you have the central banks buying these mortgage back securities, um and then you pull back, which is what they’re doing, they’re tapering, um now you don’t have a buyer for those. So then rates have to go up. So, you know, again, why would they have done that all the way up until March of this year when prices have already gone so high? They were still stimulating an overstimulated market. And now they’re like, oops, okay, we’re going to pull all that back and stop buying or at least, you know, again, taper the buying. So I listen. I really a month ago, I I would have said something different. But based on what Powell said last week, he’s like, no, we’re we’re going to destroy it. So you you got to pay attention. Now, that doesn’t mean uh some of the things that we’re doing I would change because you know, we’re still buying homes in the 150 even even $80,000 range in parts of Texas where there’s job growth. So there’s there’s always ways to uh work through an economy like this. But at the end of the day, people who are in short-term loans, pay attention. People who are um you know, have overpaid for properties, hopefully you’re locked into a rate that will still make it okay over time, but the value might go down. That doesn’t mean your cash flow will go down, you know, so maybe just if you’re locked into a low rate for 30 years, don’t worry so much even when you see you might have lost some money, just keep holding because eventually it comes back. But it’s going to be it’s going to be some bubbles that get popped.
Guest: Yeah, I think you you can’t increase the cost of money by 40 to 50% and not expect for things to deflate down. Stock market, crypto, housing is also coming down and deflating down. It’s just too expensive on the monthly payment. And the the quicker they get down to a more stable stable market, you know, I’m pro rip the rates up. Get let’s get to where we need to get to to start working off like even what Jamil just said was 100% right. There’s there’s an over reaction right now and there’s more deals in the market. And then once they get to where they need to get to, we can actually level the playing field back out and just buy like we normally buy, which is here’s the math on the deal, execute the right plan, stabilize it out, whether you keep it or dispo it out. And but they do need to get the the the market, everyone should expect or at least I’m expecting a retraction in values because you just cannot increase the money by that much in a short amount of time and not have an over reaction. You know, with every action is a reaction, right? We pumped in too much money, it went flying through the roof. Now we’re sh we’re pulling the money back the other way. It’s going to come down the other way and that is okay. It’s just leveling it out.
Mindy: What sort of uh retraction do you foresee in prices?
Guest: We’ve seen about in the Pacific Northwest, we’ve seen about a 25 to 28% drop off peak pricing. And what we saw in in February, March and April is we saw an appreciation rate that was absurd. It was hitting 19 to 24%, which is just nuts. And so we’re seeing it back down this other way, but we’re still sitting 4 to 5% over the median home price growth from last year. It’s just off that peak peak number. If you bought a short-term deal during February, March, April, May, it’s going to hurt a little bit and stain because those are the values that have just been deflated down. I don’t really see this as like a crash. I just see that we’re deflating things. And so it’s totally different than 2008, which was like a brick wall market free fall down. This is like a slow, we’re just letting the air out. And and you just as the air kind of gets, you know, loosens up, everything will kind of level out. But we’ve seen about 25 to 30% off peak pretty quickly.
Mindy: Okay, that’s interesting and that kind of aligns with something that I was speaking to a local agent in the the front range area in Colorado. And she said, yes, we are seeing a prices going down. But if you look at the the, you know, trajectory from 2021 up in December, if you drew a straight line and skipped the huge bump from the spring, you’d see kind of the same steady growth up into the right. But if you look at with the spring, you’ve got this like huge hump here and then it’s continuing to go. So it’s, like you said, it’s off the the top of the peak, but it isn’t prices falling. It definitely is not 2008 level crisis sort of thing. Um I’m wondering Jamil and Kathy if those are the same if that’s the kind of the same price decrease I’m doing that in air quotes um that you’re seeing.
Guest 1: kind of a deflation as opposed to a free for all drop. Absolutely, it’s a and from what we’re seeing, especially from our investor activity, because I primarily wholesale and that means that I’m I’m betting on people betting on the market, right? They’re the the the people that I’m transacting with on a day-to-day basis, these folks are are looking at making projections as to what their value or what the property that they’re buying right now after they fix it is going to be worth in three or four months. And so we’re all putting on our little fortune teller hat when we’re when we’re trying to make these decisions and what I’ve been seeing right now in in our primary markets, right? So we’re talking Phoenix, uh, Tampa, Orlando, these are these are spots where we we heavily transact. We’re seeing about a 10 to 15% drop right now, but again, it I don’t feel like it’s bottomed yet. So that’s that’s what we’re experiencing right now. Some markets faring better than others, but I I I’ve also heard in in in some markets as well that the 25, 30% drops uh have been seen.
Guest 2: Yeah, and there there is no, as you know, uh housing market. Every single market is behaving differently. And some markets were just um really popular. There was job growth or there was big money moving to those areas. Uh so they saw gains that they, you know, hadn’t ever seen. Um you know, again Boise, Austin, Nashville. Nashville, and Nashville was never a growth market, you know. Um Austin kind of was once the tech industry moved there, Seattle, of course same thing when the tech industry, you know, blossomed there, became a growth market. But um these are areas where there’s been tremendous job growth, tremendous migration and the people, you know, the people there couldn’t were priced out, for sure. People moving in, it’s still cheap. It’s still is for people moving into those areas, it’s a it’s a deal, it’s a bargain, but how much longer is that going to be the case? So they you know, they’re definitely the the markets that went up unsustainably are going to feel it the most because no market, no matter how much growth you have can sustain a 40% growth in rents or in home prices. One of the things that does that is concerning is that um shelter inflation, you know, is is one of the big metrics that the Fed or that the government looks at when looking at inflation numbers, energy and and food, certainly and housing, and it’s a lot the rental costs. And, you know, will those rents drop? That that is kind of a bigger issue, right? We’re seeing home prices drop, which is, again, good for buyers, not so good for people who own that asset. Uh but in rents, will we see that same correction? And if we don’t, then the Fed’s just going to keep going at it. You know, because if rents are staying high and that keeps inflation high, and they think the only way to solve that is to kill landlords, you know what I mean? Like what what are they going to do to get where they want and at this point, it looks like Jerome Powell is in battle. You know, battle against inflation that again happened because of too much stimulus of the economy. The way you undo that mistake is you pull that money back out. And the way you pull money back out of a of an economy is through bankruptcy, it’s through job loss, it’s through stock market crashes, you know, that’s how you get it back out. And that’s just a horrible way to run an economy, but it’s what they’re doing and it’s what they plan to do and he’s making no qualms about it. Like this is where we’re going.
Guest: And and he referenced that at the end of his speech. He said, um, the in, uh, inflation around housing would take some time to work its way through, but it will get there. And that’s you know, when you hear that line, that means yes, I think Kathy’s 100% right. They’re going to try to deflate rents, deflate values and create affordable housing. That’s and and that is something all investors should be paying attention to right now as you’re doing your projections.
Guest 2: And on top of that, make it a, make it an opportunity, like the world doesn’t really know this yet. So if you’re in a property that’s maybe not, it’s not your best property, maybe just put it on the market. You might take a loss, but maybe it’s less of a loss than later.
Mindy: I just don’t see how the we’re going to get to a spot where rents come down because even if like just say for instance, you’re you’re sitting on the sidelines right now and you’re like, well, I’m I the rates are too high, I don’t want to buy, so you rent. There’s a lot of pressure right now in the in for the rental market. I I don’t know if it’s the same everywhere, but just what you can see here in Phoenix where you put a house up for rent and there’s multiple people trying to get that property and the rents are stupid high. And so I still don’t understand where that money’s coming from. You know, it’s it all of the pressure, all of the things that are happening, but there is there are lineups right now for people to to to rent houses because they don’t want to make the decision to buy.
Mindy: Yeah, buyers have to go somewhere. I’ve got several questions. Is now a good time to buy real estate? Jamil said a few minutes ago, there’s a small window to come where rates, prices are going to drop even though rates are high. Cash investors, investors are heavy with cash, they’re coming in to snap up these properties at lower prices. Do you see rates coming back down in the future so that buyers who don’t have cash can eventually refinance out of these crazy high rates? And I say crazy high rates, I think we should acknowledge that 7% traditionally, historically is not a crazy high rate. That’s a a historical average for a mortgage. The problem is prices have gone up so much that now 7% makes that mortgage payment just like 99% of your income.
Guest 2: Yeah, I mean, it it it just comes down to what your intention is. If if you are uh on the hunt for cash flow, there’s there’s opportunity out there. Even even though rates are still high, um and it’s interesting because the non-conventional uh loans are actually lower than conventional right now. You can, you can go to a private lender. It’s it’s amazing how things have have flip-flopped. But if you’re able to find a property right now that cash flows, so you’re able to get a good price at it, and you’re paying maybe a little bit more for that debt, but it’s still cash flows. Um you know, great. Granted, some areas might possibly see rents go down, but that that is questionable, depends on supply, right? That is definitely a supply issue. If there’s lots of jobs and people need a place to live, they might not buy, but they are going to rent. So if you are buying your own primary residence and it’s cheaper than rent or there’s not a lot of other options, you’re still getting all the benefits of real estate. You’re locked in to a payment, you’re paying down your your loan. Over time, you’re getting tax benefits. So there’s still there’s always good reasons to buy real estate. Same with investing. If you’re buying for cash flow and you’re able to lock in a rate and you have somebody else paying that loan down for you, and you’re getting tax benefits and asset protection, uh and over time, generally if inflation is an issue, then debt is a good thing. Debt becomes less um big, you know, when in an inflationary economy. So all of these fundamentals are still there. If it if your strategy from five years ago or 10 years ago is a strategy that’s worked for you, keep using it, you know, but but just know that some of the things have changed where you’re maybe buying it cheaper, but in in trade, you’re getting a higher interest rate, but maybe the cash flow is the same.
Guest: I say it’s a different type of burr property now or process. Like, you know, 24 months ago how you burp you buy a burr property is you’re buying something with a heavy value add. You’re buying it under disk or at a discount, you’re putting in a rehab. Sometimes you’re stabilizing that at least in our expensive market for 12 to 18 months. We’re not getting any cash flow at that point and we’re having to do all this work. And the reason we’re doing that is to get an equity position and a high cash flow position at the end of the day because we bought it cheaper. Now it’s actually a different type of burr is how I’m looking at everything. I’m running my metrics on a deal and looking at the current rate if it’s at 8%, and if I’m getting a 4 to 5% cash on cash return right now, I do am projecting that rates will be around 5% in about 24 months. And so now I’m actually just looking at deals, what is this going to look like in 24 months? In 24 months, my 4% return, I can buy something that’s actually in a lot better condition now. I don’t have to do all the hard work. I just have to hang on to it at a 4% return. Once the rates fall down to five, it actually goes to like a 12 to 14% cash on cash return. And in addition to because everyone’s a little bit nervous right now, I can get that massive equity position right now. So it’s a different burr process. It’s the same type of process. You’re you’re buying something, you’re waiting on the cash flow to get the big upside at the end. It’s actually an easier way to do it now. I don’t have to go tear a building to shreds to get the margin. I just have to hang in there and stomach some okay cash flow for two years. And so as long as you kind of look at things and just run the math, you can position, change your, change your process and it’s the same end result.
Guest 1: I just want to point out he because James is, he he the the thing I was saying is is happening, these cash investors coming in, getting just literally coming in and taking huge huge discounts on properties is exactly what he’s said, he just said he’s doing. Guys, this is the If you’re sitting there listening right now and you’re like, mmm I don’t know if now’s the time. Follow the leader of the pack. Follow follow the people who are who are making the market. Exactly he he has the market timed out for the next 24 months. He knows how this plays out. So you should not be sitting on the sidelines and and and letting yourself miss a massive opportunity to come in and get a property at a significant discount. Look, I’m not a fan of an adjustable rate mortgage and please don’t make this sound like I’m I’m I’m I’m saying that, but if if if there was ever a moment that I thought that it would be a less of a risky situation to get into an adjustable rate mortgage, it would be right now. Go in, get a property significantly discounted, lock in a a a rate that’s, you know, get an adjustable rate mortgage, lock in at a lower rate for the next five years if they give them to you like that way, and then refy out of that thing in five years when the rates come back down. But you will get a huge benefit by taking advantage of the market situation right now. Go I do you like froth? I like froth in my coffee. Go get the froth. Now’s the time.
Guest 2: Yeah, and arms people shouldn’t be so afraid of arms today because it it the lenders have learned, there’s much tighter regulation and you actually have to qualify um for that adjustment um if if rates go up. So they’re really qualifying armed borrowers. Uh you know, so they they want to make sure you can handle an increase in payment in five years. And that was not the case 10 years ago. In fact, they were giving out arms we were. I was in the mortgage industry at that time and we were literally, not my idea, someone else’s in the, you know, on the big office in New York was saying, no, let’s just qualify people on a teaser rate. So just just a fourth of what their actual payment will be and see how that works out, which didn’t work out. But today it’s the opposite. No, we’re going to qualify you on the adjustable rate of what it could be. So I’m not worried about arms. I think they’re a wonderful uh wonderful solution for today. And that is exactly why we’re doing a a single family rental fund right now, which some people might think is crazy, but it’s like people can put in a $50,000 investment in that and we’re going in and paying cash and again, get that’s why I said, I’m we’re buying stuff in one of the fastest growing parts of Dallas where all these chip tech um chip manufacturers are moving because of the Biden administration is is subsidizing that uh $52 billion and they’re moving to this North Texas area and yet we’re able to negotiate with all cash offers at like I said, $60,000, $80,000 for a property, put about 50, 60,000 into it to make it really nice for those tech employees. I don’t see how a huge recession would affect that. You know, so there’s still opportunity, there’s tons of opportunity out there.
Mindy: And I do want to point out that Kathy, James and Jamil are more investment-minded than owner-occupant-minded. And if you’re and they’re in it for the long haul. Their holding period is forever, to quote Warren Buffett, my favorite. So if you are thinking about buying a house that you’re going to live in for a couple of years, this is going to be advice that may not apply to you. If your if the rates are still going to be really high in two years and you’re not going to have an opportunity to pull your money out or to refinance and then you’re going to sell and maybe it’s still a down market in two years, maybe it’s not. This is this is going to be different advice. This is more for people who are investing. Um a few minutes ago, James said, run the math. And I think that now, even more than ever before when it was already really important, knowing how to run your numbers is so important and really running them carefully is key. But we’re still, like James said, in historically low inventory market and that is not going to change anytime soon. You can’t just build 4 million houses overnight. You can’t just get, I mean, have you ever tried getting anything approved for the permit office? Even the most generous of permit offices take forever. What does it take? Like, I’ve never built a whole neighborhood from scratch, but it’s like a three or four year process. It’s not just like, hey, I want to build houses in that vacant land over there, and then tomorrow you’re pouring cement. It’s a really long process. So we’re going to have historically low inventory probably for a decade to come. So when this little blip that we’re going through right now changes, if you’re looking to buy a house that you’re going to hold on to for a really long time, we could be in a in a situation where now is an awesome time to buy. And if you want to buy in Longmont, I have a house for sale. Well, what happens in 24 months, guys, when we’ve got depressed building now, we we’re already short 4 million houses. What happens when rates stabilize? What what where does the market go then when we we’ve we’ve had so many builders are pausing right now. And inventory is already short. What’s the effect?
Mindy: The building fairy is going to wave her magic wand and say, poof, there’s 4 million houses.
Guest 2: I I think I actually have changed my mind about this. I I have changed my mind about inventory just recently because, you know, at a time when the uh government’s basically or the Fed is pulling the plug on economy and people are losing money in the stock market, they don’t have that extra money. When you have extra money, you buy things you don’t need, right? Uh and when you don’t have it, you don’t. So there are people who, you know, got short-term rentals that maybe they’re like, oh, this isn’t going to work or they got rental properties and it’s not working out the way they thought. Um you also have baby boomers getting a lot older and and dying, you know, the oldest ones. And then you’ve also got the millennial population that over the next uh three years or so is a really large generation, but then after them, it starts to wain. So I don’t know that I’m in the camp anymore that that this inventory problem is going to last forever. I actually think it’s going to normalize in in a in a year or two, if not sooner. So that’s something to pay attention to um as the population, as the demographic demographic shifts a little bit.
Guest 1: Interesting. I I I’d like to talk to you about that further and sort of expand on that a little bit because it’s a it’s a very um contrarian perspective and I I at the same time, I’m I’m curious as to like what data, like I know and I know you make decisions very thoughtfully, so I’m I’m I’m I’m interested as to what made you make the shift.
Guest 2: Oh, I can’t I just interviewed uh John Burns on the Real Wealth show and he sent me all his slides and and he he studies demographics and he’s just got an enormous amount of data. We we’ve known for a long time that um that the the largest part of the millennial generation is now from from 2020 to 2024. This was going to be the biggest buying pool and we weren’t prepared for them. But after that, the Gen Z population is smaller. So when you look at the at the population growth, you’ll see this bump, but then it’s a bump. So what’s behind them is less people, less buyers. At a time when you’ve got baby boomers aging. So it is a blip in time for sure where we weren’t prepared. We didn’t have the inventory inventory. We shut down the economy. We stopped producing, and yet we had all these families formed. So, uh you know, if if if we had just planned things a little better and not stimulated the economy at a time when when there wasn’t enough to supply and the huge demand, then we wouldn’t be in this situation. When I say we, I’m not talking about me, I’m talking about the Fed.
Mindy: I know that’s depressing you guys, but I I’m a firm believer that no matter where, you know, there’s always opportunity in any city.
Guest: I think inventory is honestly going to go into overcorrection mode for a minute because that’s what like real estate, it it when it goes up, it comes down, right? It just and then it levels out. And and the thing about the American public and the American consumers is they’re very reactionary. We’re seeing it now. We are getting really good buys right now because people dump and they they’re just reactionary in general. And so as you see those things, people get FOMO, they they want to maximize that equity. They’re seeing other things like their stock accounts getting shrunk down too. People feel like they’re losing wealth right now and when they feel like they’re losing wealth, they make very bad decisions and very quick decisions. And so we may see this surge of housing come to market, but then it will work its way through and it’s all okay. You just don’t want to be the reactionary person giving away your asset or selling off your asset too quick or, you know, or just trying to buy too quick as well. Um but it it’s to be expected when rates increase, when the we go into recession, things will slow down, inventory will increase and we’ll work our way through the system.
Mindy: I think that’s interesting your comment about the surge of inventory. In during the spring, uh I’m a real estate agent who primarily represents buyers and I would look in my MLS, my local MLS and uh houses came on the market on Thursday, showings were Friday, Saturday, Sunday, offers were due Sunday or Monday and they were under contract on Tuesday. So on Wednesday, there was nothing on the market. I’m talking like maybe 10 properties in my city of 90,000 people, there were 10 houses available up to like $700,000. And this was every single week for about three or four months. And now I can go in and search and there’s 75 or 80 houses, which is a whole lot more, but still historically low. There should be 100 or 200 houses on the market to give you a really good uh mix of houses to to buy and to look at, and there’s still low inventory. It’s just I think there’s so many people who are not in real estate, who don’t pay attention to this. Not everybody’s as big a geek as we are about real estate, guys. So they don’t, they don’t know that 70 houses is low. They think, wow, there’s seven times more houses now than there were in the spring. So we’re back to normal. We’re not even close. So I just think that this is this is very interesting that um we’re having this inventory conversation. I I think the Kathy is incredibly intelligent and she just spoke with somebody who is far smarter than I am, but I just I hate to argue with you. I I don’t see a change in the inventory and I hope I’m wrong.
Guest 2: Well I think it the boom’s going to go for a while. Like I said, it was 2020 to 2024 that before all of this. I mean that was predicted that this millennial population would be at home buying age and in household formation age. So I don’t think it’s going to change like today. Uh but just you know, the the kind of 10-year outlook in the future, maybe um maybe we’ll see some shifting then. Unless, unless, you know, again, government, we depend on government policy unless there’s a change to immigration because uh the birth rate slowing down too. So if if we become more open to immigration, that could change it.
Mindy: Okay, I think this has been a fantastic discussion. I really thank you all so much for your time today. Uh let’s remind everybody where you guys are normally found every single week.
Guest 2: Uh I’m at realwealth.com and I’ve got the real wealth show and then my uh my syndication company is grow developments.com.
Guest 1: You can find me on my YouTube at Jamil Damji, also on Instagram @jdamji. Check me out Saturdays at 10:00 a.m. on A&E to watch us flip houses, make mistakes and try to make some money.
Guest: First and foremost, check us out on the On the Market podcast. This is where we all get to hang out. It’s by far one of the highlights of my week. I I mean just an amazing people on the on the show. And then for uh more like construction tips, investor tips, check me out on Instagram, J Dane Flips and on YouTube at Project RE.
Mindy: Okay, James, Jamil, Kathy, thank you so much for your time today. This has been a lot of fun. Don’t miss checking out James, Kathy and Jamil along with Henry Washington and Dave Meyer on the on the market podcast, which is available every place you get your podcast.
Mindy: Holy cats. That was one of my favorite episodes. I love talking about real estate and Kathy, Jamil and James are so informed and so smart. Some of my key takeaways from this episode are number one, investing can be scary. And there is always risk involved in investing. And the best way to mitigate that risk is to be informed. So, look at what’s going on in the market. Interest rates are the big story. Listen to what the Fed is saying. Like Kathy said, she listens to what the Fed is saying, she listens she watches the videos, she reads the articles. All three of our guests today listen to the videos and read the articles and they’re really doing their research. It isn’t just, hey, I bought a house, now I’m an investor. You really need to stay informed if you want to continue to grow as an investor. But there is like James said, there is uh success down the horizon. There’s uh a light at the end of the tunnel and he’s he’s predicting about 24 months we’re going to see a different in rates, we’re going to see prices starting to go up again. So now is a really great time to be buying a house so long as you can afford the payments currently. Uh like Jamil said, the market, he’s seeing a price corrections in his market. I’m seeing price corrections in my market and that’s not super awesome when you’re the seller. It’s it’s a good time to be a buyer right now. It might become an even better time to be a buyer in the next few months. The market is going to be down for a short period of time. So there is opportunity to buy even with these current higher interest rates. But inventory is going to continue to be down for years. We are not going to be able to correct our low inventory, historically low inventory situation in just a few months, in just a few years. I don’t see us getting back to correct inventory levels for a decade and even with Kathy’s very well-reasoned comments about, you know, the baby boomers was the largest generation that we’ve had and they are getting older, they are starting to pass on, even with them passing on, we’re still 4 million housing units short. That’s the number that I keep hearing from all of my people in the data analysis department of Bigger Pockets, Dave Meyer, who happens to be the host of on the market, which is where all of my panelists came from today. Um I keep I keep hearing that we’re 4 million housing units short. And even if we’re three million housing units short or five million housing units short, that’s not overcomable in just a few months. That is years, even decades down the road that we will finally be able to figure that out If we start taking steps now. But like they said, builders are even starting to pull back. So I really do think that inventory is going to be a factor for a while and there are outside factors affecting our current inflationary period that are outside of our housing market control that I think will come into line very shortly. Um I think we’re looking at an interesting window right now of opportunity for those who can afford to buy. And one last takeaway, my biggest takeaway, if you are at all interested in investing in real estate, you need to add on the market to your podcast rotation. It’s hosted every week by Dave Meyer, who I think walks on water. He is incredibly smart, data analyst guy who’s been with Bigger Pockets for, I think like six years. He has this amazing ability, just like Kathy, Jamil, and James, he has this amazing ability to take complex uh real estate and economic ideas and theories and translate them into understandable English. So, uh that is an excellent podcast to check out every week, wherever you get your podcast. From the Bigger Pockets Money podcast, this is Mindy Jensen signing off.
