BiggerPockets Real Estate Podcast - 947: 2024 Deals We’re Doing with High Cash Flow and Rock-Bottom Rates (4.75%!)

Starting point is 00:00:00 Have you been thinking that with current market conditions, it's a bad time to get into real estate? I mean, we do have some real challenges like high mortgage rates. There's inflation and low inventory. But on today's episode, we are going to share how it's still possible to get started in spite of the market with some real life examples. Hey, everyone. My name's Dave Meyer and welcome to the Bigger Pockets podcast. I'm your host today. And I'm also going to be joined by three of my friends, three very very very very very very very very seasoned investors from the Bigger Pockets Universe, Kathy Fecky, James Dainard, and Henry Washington.

Starting point is 00:00:41 And we're doing this show sort of panel style, because at least for me, I always find that I learn the most about investing or anything else, just sort of having a casual conversation with some of my friends. So I'm bringing on these three investors to talk about deals that we're actually doing right now in today's market. And I think you're going to learn and see that a wide variety of deals are still possible despite today's chat.

Starting point is 00:01:04 Before we get into the show, our bigger news episode today is brought to you by Rent app, the free and easy way to collect rent. Learn more at rent.app slash landlord. So that's what we got for you today. Let's bring on Kathy, James, and Henry. Before we jump into each of your specific deals, I want to just have a more general conversation about how each of you are approaching investing right now with what we're calling the big three challenges for real estate investors, which are interest rates

Starting point is 00:01:34 inflation, and inventory. So Henry, let's start with you. How have you adapted your strategy this year in spite of these challenges? It's all about just changing your underwriting or adjusting your underwriting, which is something that investors should be doing regardless. Like, no matter what the market is doing, there's always going to be something that's changing in the financial or economic environment. And that's going to require you to take a look at your underwriting for your deals because the goal is you want to find a deal that makes sense in the current environment. And so for us, we are still marketing like we typically do to find off market deals and we are still searching through the MLS for on market deals.

Starting point is 00:02:16 What's changed is what we're willing to pay. We take a look at recent comps, very recent comps. And that's how we are determining at what price point will buy these properties. It's just changing what you're willing to pay for deals. And given that you, Henry, this is sort of your thing, is like looking at off-market deals, finding great deals. Are you exclusively buying off-market? Are you still finding things on market or possible? We're looking both on and off-market, but I'm finding most everything off-market right now.

Starting point is 00:02:46 Okay. Cool. Well, we'll get back to that. I want to hear more about that. Kathy, what about you? How are you approaching investing these days and overcoming some of these hurdles? For my personal portfolio and for investing for the future, I've always had to rely on investing out of state because I can't invest where I am. It's too expensive. And one of the best and easiest ways to do that is with new homes. But, you know, they're new. They're easy to manage from afar, but it can be very expensive and it doesn't cash flow. But one of the opportunities today is to work with builders who in some cases have too much inventory. So you can negotiate the price, but you can also have them buy down the interest rate and insurance is lower on new homes. So I kind of kind of

Starting point is 00:03:29 I get to cover those three things with a new home. With insurance being lower, I can get the interest rate lower, and inflation is actually a good thing because the value of a new home tends to go up faster. And, you know, we said there are three challenges here, interest rates, inflation, inventory. But Kathy, do you consider inflation a challenge or is it just sort of a motivator? Inflation is a reality that we're going to be living with, and I have been living with for the 25 years I've been investing. It's part of what the Fed is trying to create.

Starting point is 00:04:02 They have a goal of 2% inflation. So it's cooked in to our lives. So I see it as a benefit. That's one of the greatest benefits of real estate is it does inflate and generally more than normal inflation. So you're kind of staying ahead of that wave. So I see it as a good thing in terms of investing for the long term and why real estate just outperforms anything else for that reason. But, you know, if the home prices are so high, that's where you've got to negotiate and try to get those prices down. And with certain builders who have oversupply, you can do that.

Starting point is 00:04:38 Well, James, you also operate in a super expensive market in Seattle and one that is pretty tight on inventory, if I understand correctly. Is that what you're seeing? Oh, it's extremely tight. And we've seen it get tighter and tighter the last 60 days for sure is shrinking dramatically and rapidly. And are you surprised? Because over the last couple weeks, at least, interest rates have gone up. It's making what is already a relatively unaffordable market, even less affordable, but nothing's on the market. Nothing's on the market. I think there's almost a fourth thing in this kind of mix, and it's the emotion of the buyers. Like, do we buy, do we not buy? And, you know, we've been really paying attention to what's going on with inventory, how many people have been pre-qualified. Because I feel like the mindset of the buyers out there have changed to where they have FOMO, where they're going to, where they're going to, I should have bought 12 months ago and rates are the market is no longer in a decline. It's going the other way. And now we have this kind of goal rush coming out of buyers where there's just way too many

Starting point is 00:05:35 buyers for what inventory is there. Okay, great. And are you still making deals pencil? And what's just like your general philosophy to finding good deals and executing on them right now? You know, we buy everywhere and anything. So, you know, we buy on market, off market. the heavy value add we've gotten better buys on.

Starting point is 00:05:56 And we buy a lot of that on market. But really what we've been focusing on the last 12 months is terms. Like how can we structure a deal to put less cash in, what is less of a cash suck, and we're really paying attention to the cash outflow on deals. And how do we really maximize these returns by structuring the deal right? Because if the margins are shrinking, you want to get the right terms so you can really maximize that deal. So we're really focusing on terms.

Starting point is 00:06:22 on development, fix and flip, rental property, whatever it is, whether it's owner financing, to make the deal pencil as pricing has crept back up the last six months. And just to all of you, I mean, I know, Kathy, this isn't your thing. So I'll just ask this to Henry and James, but are you, because of the interesting conditions, are you focusing more on shorter-term holds and trying to flip? Are you still doing buy-and-hold deals as well? Yeah, no, that's a great question. I'd let the deal tell me what works the best.

Starting point is 00:06:52 the deal in my financial situation tell me what works best, we are definitely still purchasing buy and holds. Again, it's a matter of where's the property located? What's the price point I'm getting in at? Can I cash flow it right away? If I can and it makes sense, then I'll keep it as a rental. But a lot of the times, because there's low inventory, I can flip a property and get a great return that would take me a long time to get if I was just trying to get cash flow out of it because of the interest rates. And so it's just more of a matter. What are the numbers telling me? where's the property located and what am I purchasing it for? But we are definitely still buying and holding right now.

Starting point is 00:07:29 Same thing with you, James? Yeah, we're looking at both. I mean, a lot of what we're seeing on the buying hold side isn't crazy cash flow, but we are buying stuff below, you know, sometimes we're buying 30, 40% below 2020 pricing. And it's that value buy where we're going, okay, we can buy this today. Like we just closed on a nearly a 40 unit in a Class A neighborhood. and we're at 180K a door. That was trading for $350 to $3.99 a door when the rates were low.

Starting point is 00:07:58 And so it doesn't cash flow amazing, but the values there. And as long as you believe in real estate, which it does go up over time, this is where you can really crush that deal just by going, am I paying below replacement costs? And I get that massive discount off peak. And then that's really what we've been focusing on the buying whole side. All right. We have to take a quick break, but stay with us.

Starting point is 00:08:20 When we come back, we'll give you the details on actual deals we've each done in today's market, so stick around. Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late-night fridge raids. Yeah, when you're gone, your place is basically on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle.

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Starting point is 00:12:03 in the order of the least complicated to perhaps the most advanced strategy. And so no surprise with this group here. I will be going first because my deals are always the least complicated. And if you don't know this about me, I do live overseas. And so I invest out of state. And I am a very passive investor. But one of my goals for 2024 was to start buying direct deals again, not just investing in syndications and funds. And actually, just over this weekend, I got a duplex under contract.

Starting point is 00:12:39 And I'm proud to say, for everyone out there who's, think it's hard. It was an on-market deal that I found from my agent. I paid pretty much the asking price and it is going to cash flow. It's in a good neighborhood. And it was just a pretty straightforward deal. It's not going to probably be a home run or grand slam. But with my timeline, which is like 10 to 15 years, I feel very good about the fundamentals of this market. It's a great neighborhood in the Midwest. It's growing quickly, strong manufacturing job growth. The average tenancy in the area is over five years. So it's a lot of families that come in and stay. And for me, as an out-of-state investor, that's the kind of stuff I look for is low headache,

Starting point is 00:13:26 easy stuff to do. So that's what I got. What do you guys think of that? I love it. Well, Dave, I think you got the deal done because you know exactly what you want to buy. And that is the key to this market. Like, what is your strategy? What are you trying to accomplish? If you go out and look and you have clarity, you can find the investments. It's, you know, when you hear they're not out there, but if you know what your buybox is and go source it, it will pencil out. And that's the important thing right now. The two to four units, right, the finance is not easy. And the buyer pool is very small right now.

Starting point is 00:13:57 They're not transacting because it doesn't cash flow. It's a really good asset class to focus on because there's very low demand, very low buyers because of the rates. and many times, even if it's sitting stale, you can pick up that discount to market on it. And it's an asset class that has a wide, you know, as rates stay high for a little while longer, it's a really good asset class to focus on, put your offers out, and pick up quite a bit cheaper than you could two to three years ago. Yeah. And your strategy is the long term, right?

Starting point is 00:14:28 When I first started investing, I was buying close to retail and local investors would just sort of laugh at me. but it's like, hey, I'm from out of state. I can't do these flips. It's hard from out of state. I'm sure some people have figured that out, but I didn't want to blow it. But now you fast forward 20 years. Who cares if I paid retail? Like the properties have tripled in value. And that's what people kind of forget is, yeah, sure, you could get a $20,000 discount or buy nothing because you're not able to do that. When if you're really looking in the long term, it's not going to matter. It's not going to matter. I'm a assuming that's your strategy, right? How long do you plan to hold it? Yeah, exactly. I'm looking to do this for maybe 10 or 15 years at least. You know, I do syndications and funds for shorter turns. Those are the short ones for me because I don't do flips. But I'm trying to build a portfolio of things that when I do personally actually want to retire, which is still at least 10 to 15 years out for me, that these will be able to replace my income and they don't have to be sexy if you give it enough time and that's my

Starting point is 00:15:34 entire approach. You know, I think James is exactly right. If you know what you want to buy, it makes it easy for you to hone in and know your deal when it comes across your desk or know your deal when you see one when you're out there looking. I think what a lot of people may miss with kind of what you're talking about here is can you give us a brief description of like what are, what's the groundwork you had to lay within this market? Because now you have a property, right? somebody has to manage it, right? Like, what did you have to do to find the team in order to know that you could buy this property and it work?

Starting point is 00:16:04 Yeah. So I do have an agent that I work with and who I've known actually just personally for a while in this market. But I did something that I think a lot of out-of-state investors are hesitant to do, but I actually went to the market before I invested. I met with my agent. I drove around. We toured a bunch of houses.

Starting point is 00:16:25 I never actually bid on any of the. the houses that I looked at then, but I got a good sense of different markets, different neighborhoods, the places that I personally enjoyed spending time and wanting to walk around. And that really helped. And then I was able to find a property manager and a contractor. No, property manager I actually just found online, but the contractor are either through my PM or through my agent. And so I'd say it probably took two months to feel comfortable. Just looking at deals and analyzing deals to get a sense of like what average returns were for the market. And this is now the second deal I've bought in this market in the last two or three months. Who'd have thought? You actually go there and see what it looks like.

Starting point is 00:17:09 That was such a great question, Henry, because it sounds like it was so easy. I just found something on the MLS and bought it. And let me tell you, that can backfire. Don't do that. I so recommend that you understand your market and go there. And once you've been there and understand it and have your team, well, then you can buy stuff you haven't seen because then the inspection reports and all will tell you what you need to know. But yeah, great question, Henry. Love that. Yeah, and just for the record, before we move on to Kathy's deal, I probably analyze 20 or 30 deals on the MLS, maybe more before I found this one. It's not like it's just I picked one randomly, but when you analyze deals enough and you get a sense of like what the average returns are in that area,

Starting point is 00:17:54 you're able to spot the ones that are outliers in a positive way. And it just takes that little bit of discipline. All right. So moving on to our next level of complexity here, Kathy, tell us about your deal. Yeah, so same thing. I'm an out-of-state investor. I live in California. It's, it just doesn't make sense here for long-term hold. For me, I know some people do it. And if you just want appreciation, that can be, that could work. You know, but anyway, I do understand this market. It's just outside of Jacksonville. I've been there so many times.

Starting point is 00:18:28 So it was easy for me to pull the trigger on a deal that I found with one of the teams that we've been working with at real wealth for so long. It's a $469,000 duplex brand new. We were able to negotiate the price down. It appraised for $20,000 more. It's cash flowing about $460,000. a month. And that's because we were able to negotiate the rate down to four and three quarter percent. It's a 10-year loan. But yeah, and so the builder has to pay that. You know, that's part of the negotiation. But if they are sitting on inventory, you guys know, like builders can't do that.

Starting point is 00:19:04 They have loans they have to pay. They have high cost. They're in the business of selling homes. They can't sit on it. So if you can, you know, work with a builder who has good product and a good market but just is having trouble selling because of interest rates. This is where the high interest rates actually come to my benefit is they're sitting on inventory. They got to sell it and there's certain times of the year where that's even more true than others. So, you know, they just can't can't hold too much inventory. So it's a, it's, I'm super stoked on this deal. And because it's new, again, like I said, the insurance is much lower so it cash flows better. And new is just easier to attract tenants, too. If I like new, they like new too and tend to take care of it. And it comes

Starting point is 00:19:49 with a builder warranty. So I know it's kind of easy investing and some people want to work harder, but I don't. I just want something that's going to appreciate over time. It's one of the fastest growing parts of the country, too. Wow, that's super excited. I'm so glad you brought this one, Kathy, because I do think that new construction is like one of the sort of secret gems of investing in 24 because of this rate buy down. And for everyone listening, existing home sales and the mentality of the seller is so different from a builder. Builders have inventory and the longer they hold on, it's kind of like a flipper. The longer they hold on to it, the less money they're going to make on that. So they are willing to negotiate. Whereas existing homes, a lot of times

Starting point is 00:20:35 that someone who's lived in that home for a long time, they're willing to sit on it for six months or nine months or however long it takes to get that price that they want. So I think this is a great example. And Kathy, I'm curious, like, how difficult was it to negotiate this rate buy down, or are they sort of offering it to anyone who's looking at these properties? It's a deal that we negotiated at real wealth. It's like we found this builder that just has too much inventory, can't sell it, because even though $465,000 sounds like a steal for me in California for a I mean, you wouldn't get a garage for that here. You know, for local residents, it's really tough because of the high interest rates, especially now being close to 7% and not coming down anytime soon, but they want to live in that area. So it was more like, we'll bring you the buyers and we'll bring you this many to help your problem. And, you know, anytime someone's got a problem and you can solve it, that's when you get a deal. So it was a certain amount of properties that they were willing to do it on. Yeah, and I think this, this act, classic class is kind of no man's land right now too, and that's a good place to plan because they

Starting point is 00:21:45 built them for short-term rental investors or just investors, rates are way too high. You get these duplexes and owner occupants are kind of going past because they want that single family house. And because it's kind of no man's land, you can pick them up on fairly good buys because that's the only way at pencils and it's easier to negotiate with an investor to investor. I can only pay this because this is my cash on cash return. They understand. understand where you're coming from. And so you can actually use your own financials to negotiate them backwards. But I think there's some hidden value in this asset class too, because as affordable housing is becoming a major issue throughout the U.S., and we're seeing it now, condo off units

Starting point is 00:22:25 is a big deal. And it's really catching fire throughout the U.S. brand new construction duplexes are much better for you to do this on. They're built a new code. They have a better fire safety rating. they're more insurable. And also they have way better floor plans that are very livable for an end user. And so I think that this asset class, like even in two years, three years, maybe Kathy can even condo them off and sell them separate and double up on some money. It's something that I'm feeling people are going to look back and regret not purchasing in two years because the bill cost is right, the price is right,

Starting point is 00:23:03 and then there's major upside with this affordable housing or, you know, who knows, buyers might have to buy a duplex just to own a property. I just bought two single family homes, brand new construction from a builder who needed to get out of this smaller project and get capital into a bigger project. And I literally took a note right now to have my acquisitions manager start reaching out to builders with excess inventory. I don't know why I didn't think about that sooner. But I walked into two brand new houses, about 30 grand off of each one. They don't cash flow great, but the maintenance is so much lower that you can. kind of pick up some cash flow there. It's a great idea. Yeah, this is such, it's, it's very smart for

Starting point is 00:23:41 buy and hold. And as you've all said, just the lower maintenance, the optionality with condominiumizing. God, that's a, that is a hard word to say. Condominiumized like that. Didn't even know it was a word. I don't know. James, did you make up that word? I have Jimmy makeup word sometimes, but I think that's, I've been using it and it's making money, so it's fine. So we're sticking with it. All right. Great. All right. Well, Kathy, thanks for sharing that deal. Let's move on to Henry's deal. What are you working on? Man, every time we do one of these shows, I'm like, I'm just going to bring them the same old same that I'm always doing. That same old same is working, though. Why would you change it? Absolutely. Yeah, I just went under contract on a single family home. I would close on it today, actually. So it is a single family home purchase price of $140,000. It needs about a $45,000.

Starting point is 00:24:34 renovation and we're going to look to sell it for about $265,000. If you consider my closing costs and my commissions of about $18,000 and then holding costs of about $12,000, I would look to net somewhere between, you know, $55,000 and $65,000 as a profit on this. This is, it literally came across my desk a few days ago. I say it came across my desk. It's one we've been working on for a while. So one of the ways we generate leads is through marketing and we get this lead from my title company. I tell my title company, if you see landlords that are selling off their portfolio, so if you see the same landlord selling something multiple times, then would you mind seeing if they would be willing to talk to me because I would love to be able to buy their properties? And so she connected me with this landlord

Starting point is 00:25:24 who had been selling off a couple properties. We went to lunch and I said, hey, what's your strategy for selling these off? He wants to do maybe one every couple of months over. over the next couple of years. And so I said, well, I'd love to get first look at those and kind of get you your money quick. And so I've bought now two properties from him, but this one came from somebody he knew in his network that was going to sell and he didn't want to buy it. So he passed the lead to me. And then I just had to stay following up with this person probably for about eight months until they were ready to do the deal. And as soon as they said they were ready, I went and had it under contract and I don't know, less than three hours. So it's just a matter of

Starting point is 00:26:00 making sure that you let people know who you are, how you can help, and what your buybox is. And then when the lead comes, you got to jump. You got to make the moves quickly. Henry, before we jump into the details, I just want to talk about your acquisition strategy here. Because you had mentioned that you're finding most of your deals off market right now. Is this strategy representative of something that you're doing a lot or you think other people can realistically get into? Yeah, I think anybody can find off-market deals. There's a bunch of different methods to find off-market deals and they all work. It's just a matter of you have to find the one that you can afford to

Starting point is 00:26:41 fund appropriately. And when I say fund, that means you're either going to spend your time or you're going to spend your money, right? You know, Kathy found a deal that didn't cost her any money to find, but it cost her and her team some time, right? And so you just have to research the strategies, figure out what they cost in terms of money or time and then pick the one that you can afford to fund with one of those two assets that you have. And then you just apply it relentlessly consistently. This one didn't cost me any money. It cost me time. I had to let my title company know what I was looking for, which was landlords selling off their portfolios. If you see them, can you introduce me? Then I had to go to lunch with somebody a couple of times. I had to send some text messages and

Starting point is 00:27:19 stay in contact. And then that turns itself into a deal. It took, like I said, probably about eight months. but that means it's work that you have to do. Anybody could have done what I did to find this deal. And if you do that long enough, then it's not like waiting eight months, right? You know, it's like you do this so many times that they start to hit every couple of weeks or every couple of months and you sort of have a system for it. Because if you're thinking, oh, I don't want to wait eight months. Well, if you start now, then, you know, before you know it, you're going to start generating

Starting point is 00:27:48 leads, but you can't, you can't force it. You just have to put that time at. It's relentless consistency. Yeah, when inventory is light. Just ask the question. Whoever you talk to, do you know anybody that wants to sell? Property managers, title reps, your neighbors. When you go buy a property, every time we buy a property, we go ask everyone around us, do you want to sell? What brokers, we reach out to brokers. Do you have sellers that want a transitionary sell that want time, patience, the inventory is hard to find?

Starting point is 00:28:18 Do they want time to go find the house and then we'll close at convenience? Is it a landlord selling off property over time. What Henry did is it's awesome. You're building a pipeline of purchasing. I did the same thing with a large builder in Seattle where I bought nearly 25 homes over him over four years. And he always calls me first because we're dependable. It gets him what he wants. He knows who he's dealing with. And, you know, in that excuse, if I can't find a deal, you're not asking the question enough. And just ask the question, reach out, explain what you want to do, and inventory will come in. Yeah, I absolutely agree. Same thing with the new home builder. you know, they don't want to lower their prices because that's a new comp, right? And they're selling

Starting point is 00:28:58 more of them nearby. So when you can say, hey, instead put that money towards buying down my rate, it kind of keeps the price higher for them for future sales. So, you know, again, negotiation is all about finding out what the other person who has a problem really needs. When you're looking at a property, whether you're a retail or investor, and there's new construction going on, call that broker, what considerations got made? Because they do pack, considerations in to keep that price up. You might be missing out 20, 30 grand in credits just because you're not asking that question. So always dig into that. So far, you've heard about my on-market duplex, Kathy's new construction, and Henry's flip. And right after the break, we have James's

Starting point is 00:29:39 more advanced deal. But stick around because you're going to want to hear what he's up to. Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late-night fridge raids. Yeah, when you're gone, your place is basically on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that

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Starting point is 00:30:37 so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax, knowing guests are taken care of and your place is in good hands. You travel, your house works. Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. Here's the truth about passive investing. If the strategy isn't right on day one, the returns won't save it.

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Starting point is 00:32:08 and if you want to learn more, visit BiggerPockets.com slash retirement. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize

Starting point is 00:32:27 exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection. One claim can erase years of returns. If you own a rental property, don't assume you're covered. Have NREG review your insurance with someone who gets investing at NRE.com slash BPPod. That's N-R-E-I-G.com slash B-Podd. Welcome back to the show. All right, great. Well, let's move on to our last deal, which I think is going to be the most complicated. But James, let's see what you got.

Starting point is 00:32:56 And we can see if we rank these appropriately. You know, it's really just cutting up a deal. You know, so we flip homes, we build homes, we buy apartments. We, you know, we do a little bit of everything in the Pacific Northwest. And we don't really care what it is as long as it pencils out. It already sounds complicated. As long as it's got the juice, James Danard's in. I want the juice.

Starting point is 00:33:20 So, you know, we locked up this property prior to interest rates shooting up. It was a piece of land in Kirkland, Washington. We got it through coal calling just through people at high equity that own their properties for 50 years. We use a easy button lease so we can call thousands and thousands of people a month. And it just generated a random seller lead. And what it was, it was in a primary of Kirkland. We got in contract at 1.3. $3.5 million with this seller, not paying the commissions out. So total basis was about 1.4.

Starting point is 00:33:52 We were going through permit and we were permitting a 5,000 square foot house that was going to be worth about $3.5 million at the time. Now, once rates shot up, the market compressed and the value dropped down to three really quick because there was this emotional drop as we were getting close to having permits issued. And so what we did is we contacted the seller. They also were where the interest rates went up. And we said, hey, we have a problem with this deal now because everything's changing. And we were honestly willing to walk away from earnest money, even though we had almost a permit in hand. But instead, we talked to the seller. We found out he wasn't in a hurry to close. He just really wanted his high price. That was more going to be beneficial for him over the next 10 years.

Starting point is 00:34:34 And we renegotiated to close on permit. And then we re-permitted the property for three DAD use. and the reason we wanted to do that, that's a detached dwelling unit. So they're like micro townhomes on this lot. Now you can't build townhomes on this lot, but you can build detached structures. And the reason we wanted to do that is more affordable. The target price on those at the time were 1.35 million each. And so the reason we wanted to reprimitted it, it went from a value of 3 million up to 3.7. And so it gave us a lot more padding in our deal.

Starting point is 00:35:09 Now, luckily, the market with affordable has gone up even more, and now we have a combined value of almost 5.25 on a property that we negotiated to close on permit. That means the day we close, we can get a construction loan, we can start building tomorrow, and we can be in and out of this deal in 12 months rather than buy it, develop it, permanent, and then build it out, which takes twice as long. And the better thing about this deal now is we were able to re-permanate, increase the value up dramatically. And there's a lot of investors right now sitting on the sidelines with cash that want to get it to work. We were able to raise all the money for the deal. So we have no money in the deal. And we have five to six hundred grand in profit and a very, very high demand competitive market with almost no inventory. Wow.

Starting point is 00:36:00 That's awesome. I just want to reiterate for everyone just to make sure everyone understands what you did, James. and correct me if I'm wrong here, but you had a property under contract, but the economics of it changed, right? Interest rates changed, inventory changed. The market was no longer what you wanted. And what you did was went and renegotiated with the seller to get it so that you could close on permits.

Starting point is 00:36:23 And I've never done a development deal, but from what I understand, the idea here is that rather than buying something, then getting approval from the city to go buy it, which just sucks up time and holding costs and all that stuff. stuff, you're basically saying, hey, seller, you hold on to that property until I'm like ready to go. So that way, once I buy it, we can put shovels in the ground the very next day. It reduces your risk and hopefully increases your profit. And so that was one thing. But you also changed the plan from just doing a high end home to these detached ADUs, which really seems like a great way of just like,

Starting point is 00:37:05 taking what the market's given you right now. Like you said affordability was doing well. And do I have it right? Is that exactly what sort of what happened? Yeah, we switched the plan, how we closed on it, our timetable on the deal. And then what we were going to sell because, you know, as developers and flippers, we want to sell product that has the most amount of buyers there. There's a lot more buyers in that price range in that local market than there is three and a half million. You know, that's saying of you play in traffic, you get the most amount of hits. That's where you want to be as a Flipper, developer. You don't want to go into no man's land. That way, I don't have to sell product to Kathy as a duplex. It's go to where the buyers are, and that's why we wanted to reprimidate. It was

Starting point is 00:37:43 safer, more buyers. That means more transactions are getting done. It's super creative to think about what are some of the ways we can pivot and monetize a deal that we have on the table. I think one clarifying question I have is you switched to a strategy of building the detached additional dwelling units. and it was my understanding that the ADU is for additional dwelling unit, meaning there needs to be some original dwelling on the property so that you can get permits to do the additional units. But if this was a piece of land and there was no main dwelling, how do you build additional units?

Starting point is 00:38:20 That's a great question. It's all about reading the code. So what you can build on a single family lot in Washington now is we can build a single family house, an ADU house, and a detached dwelling unit. So that means we have a house that's attached, by the micros of walls, and then an ADU and a D-A-D-A-DU. They are all the same size.

Starting point is 00:38:40 They don't have to be different size because it's more about lock coverage. And so it's really about reading the code, having a good architect team. That's what's so important to build your team. What is going on in today's market? How can you maximize it? And also, we were able to secure this deal before this strategy caught fire because in today, you would have to pay $1.7 million for this lot, not $1.35 with what's going on. And so stay in front of the trends and that's how you can hit home runs because,

Starting point is 00:39:09 you know, it's, again, no one's really looking at it. When you, when no one's looking at it, you take big swings. So to clarify, you contracted the lot before the strategy was super popular. So the lot value was lower than is what you're saying. And then in order to get this strategy across, you're essentially building a main house that's the same square footage as the other houses. It's just that one of the ADUs has to be attached to that main house. And then you have a detached dad-do. So three units total. Is that what I'm hearing? Yep, three units total. And it depends on your coverage. And it's even better if you can get a big lot. Subdivide it, then you get six. We do that in Seattle. We got two projects like that going on. And so it's all about density. Density dumps

Starting point is 00:39:52 dollars. It's a super smart. It definitely helps you maximize it. And this kind of thinking is what is needed to solve the affordable housing crisis. I love it. And the idea of negotiating with the seller to get the permits first, we've done that on raw land. It's even easier with raw land because it's so hard to sell it in some cases that, you know, and you don't want to buy it without the, you know, knowing that you could do something with it. So being able to have that kind of negotiation in advance of like, hey, I'm not going to close until I'm able to get these permits or the zoning changed. It's great. Love it. All right. Well, James, you were was the most complicated. Let's be honest. Very, very enlightening. And for those of you who have this

Starting point is 00:40:35 skill set could be an awesome approach to investing right now. But all of you, this was so great. For everyone listening, we did not plan this out this way, but I think it's really cool that each of us brought like pretty different strategies, but relatively all achievable strategies. So just as a recap, like I did an on-market buy-and-hold duplex. Kafflex. Kathy, also did a buy and hold duplex, but she did new construction and was able to buy down her rate to improve her cash flow position. Henry's doing a flip that he sourced an extremely creative way, and James did a really interesting pivot on a development deal that is going to, it sounds like, is going to turn out great for each one of us. So hopefully this shows you all that

Starting point is 00:41:23 finding good deals right now is, one, a matter of persistence. It is not as easy as. as it once was. You do have to put in that time and effort. But it's a lot about understanding your own strategy, understanding your own market, and then just pulling the trigger when you find what you're looking for. All right. Well, thank you all so much. Henry Washington, Kathy Fecky, James Dainard. We appreciate you all joining us here today. And thank you all so much for listening. We'll see you very soon for another episode of the Bigger Pockets podcast. Do you ever notice how every passive investment somehow turns into a very active lifestyle? active spreadsheets, active phone calls, active stress.

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BiggerPockets Real Estate Podcast - 947: 2024 Deals We’re Doing with High Cash Flow and Rock-Bottom Rates (4.75%!)

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