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2024 Real Estate Investing Strategy Showdown: Rentals, Flips


House flipping vs. renting vs. build-to-rent: which real estate investing strategies could make you the MOST money in the second half of 2024? At the beginning of the year, many investors believed that interest rates would be coming down, housing inventory would finally return to the market, and inflation had been defeated. But that didn’t turn out to be the case. In this ever-changing housing market, what should investors like you do to make the most money possible with the fewest risks? We asked three of our expert panelists to give their take!

So today, we’re having a friendly real estate investing strategy smackdown to pit house flipping against buy-and-hold against build-to-rent homes. Each strategy has BIG benefits but also comes with some serious risks rookie and expert investors should be looking out for. Plus, these investing strategies are NOT for everyone. We’ll discuss who should (and definitely shouldn’t) invest using each method.

2024 is not an easy real estate market, but our expert investors lay out the exact risks to avoid, how to get around them, and the best ways to build serious wealth while most Americans sit on the sidelines. We’ll talk about the enormous gains you can make even with high interest rates, what James calls the best way to find financial freedom, how to invest EVEN if you have very little time, and the one type of rental property with WAY lower insurance and repair costs.

Kathy:

We are halfway through 2024, and many investors may be wondering which strategy is going to work for the second half of the year, specifically to grow wealth for the longterm. Today we’re having a strategy showdown where we discuss the pros and cons of three investing strategies that are pretty popular with investors today. Hello and welcome to the On the Market podcast. I’m one of your hosts, Kathy Fettke, and today with me is Henry Washington and James Dainard.

Henry:

Thank you host. Kathy, I think you’re going to be the new intro for On the Market podcast. So Dave missed out and might’ve lost a job.

Kathy:

Oh no. Could never replace Dave. That’s

James :

Going to be your new strategy, main host, Kathy.

Henry:

So today we’re going to be discussing three investing strategies. That is buy and hold or we can call it renovate and hold. We’ll be talking about flipping and also new construction. We’re going to talk about the pros of each of these strategies for 2024, but we’re also going to cover the cons. So this show is meant to help inform your investing strategy decisions for the second half of the year.

James :

And this is my favorite kind of show. We get a cut up deal, so let’s get into it. All right, Henry, you’re on deck. You’re up first. So let’s hear a little bit about the buy and hold strategy for 2024.

Henry:

Yes, sir. Well, you know me. I do love a good buy and hold. So for this strategy, you can call it buy and hold. You can call it renovate and hold. When I see this, I think about the brrrrr strategy because that’s such a popular term, but you don’t have to always think about it from doing a full brrrrr. But essentially what we’re talking about is when you purchase a house for less than its market value and then you hold that property for the long term in order to help build your wealth. And so again, I’m not necessarily saying this has to be a brrrrr because when people think brrrrr, I think what they think about is they want to buy a property and they want to rent it out, renovate it, and rent it out, and then they want to refinance it and pull every dollar that they put into it out.

And as you know, market conditions are different, prices are still high, interest rates are still high. And so you don’t necessarily have to do this strategy where you get every dollar out. You can still successfully buy a property, renovate a property, and then rent that property out and consider that a successful real estate investment. We don’t always have to squeeze every ounce of money back out of the deal. Also, I don’t necessarily like to refinance my properties after I fix them up because when you refinance a property, what you’re doing is you’re selling your equity, you’re selling it to yourself, but you’re still selling the equity, you’re getting a new mortgage at a higher balance, and that can hurt the cashflow that you have in that deal. And cashflow is hard to come by already with the interest rates. And so instead, what you can do or what I like to do sometimes is access that equity through a line of credit.

And so that way I have access to the equity in the property if I need it, but I didn’t refinance that property and kill my cashflow. But at the end of the day, you can still find good deals in this economy and you can still rent them out where you’re making some cashflow. It’s just difficult sometimes to actually go ahead and pull every ounce out. But you don’t need to do that. Sometimes you can still do a refinance and maybe not pull every dime out. Maybe you only pull out a little bit to put some more cash in your pocket to keep you going for the next deal, but you don’t have to get every ounce out. And I still call that a win.

Kathy:

Henry, I’m curious about the equity line because that does seem unique. I haven’t really heard that. Isn’t it a lot higher interest rate to do that or is it not that different? Yeah,

Henry:

It depends. Your interest rate’s going to be similar to what the market rates are. So you can get lines of credit right now with anywhere between a seven and a 10% interest rate. It’s just going to depend on who that lender is. But at the end of the day, it’s also access to capital. You don’t have to use the capital, but I like to have access to capital in the event that I need to because if a deal comes along that I want to jump on, and if that’s a really great deal and I have room in that deal to be able to use money that has a eight, nine or 10% interest rate, but it’s going to get me into a really great deal that’s going to give me a decent cash on cash return, at least I now have the option to do so. When you refinance, you’re going to absolutely take out a new loan, add an eight or a 9% interest rate, and that new loan, your interest is front loaded in the first seven years anyway, so the majority of your payment goes to interest. And so on a refinance, I’m guaranteed to pay that interest, but on getting access to it on a heloc, I only need to use it in events where it makes sense. But the access is what’s important

James :

And the interest rate is just the cost of the deal. It’s going to go up and down. And the cool thing about the equity lines is once rates do settle, the cost of money will be cheaper. And it’s funny, I hear a lot you you’ve see in the forums, you hear that the Brr methods dead value adds dead. You can’t cashflow. And really the reason I think the renovate and hold is the only buy and hold strategy that really works right now is because you can create that equity position and by creating that equity position, you can tap into it with a heloc. And that’s a tricky loan to get right now, an investment property heloc. And I know for us the best ways that we’ve been able to attain those is by working with local banks in your local market that understand what they’re looking at, not the nationwide banks, but by creating this equity, it’s not always about cashflow, right?

What I think people would need to remember is about that long-term vision. Where are you trying to be in five and 10 years and how do you achieve that goal? And you do that by stacking equity and creating this gunpowder of liquidity that you can trade later for. And the great thing about today’s market is yes, it doesn’t cashflow well, but you can buy value add fixers for cheaper with bigger margins than you could two and a half years ago. And as long as you can create that equity spread, it doesn’t really matter what the cashflow is, you can create that spread and then trade it later, then create it. It’s like you just can bank and bank and bank and you can take a very little bit of money and you can double and triple it.

Henry:

Absolutely buy and hold, right? It’s the hold part that builds the wealth. And what I like about this strategy really in any time, but 2024 included, is that it’s a strategy for anyone, for new investors and for seasoned investors. Really why I like it for newer investors is because it forces you to be a fundamentally sound real estate investor in order to execute this in a way that’s actually going to be valuable to you. It forces you to have to learn how to find deals under market value, which is a skill that you will need throughout your real estate investing career. It forces you to figure out how to find contractors and how to manage your renovation, which is a skill you’ll need anytime you’re buying value add. It forces you to build the relationships necessary to find the lending necessary to get your deal across the finish line. It really forces you to kind of plug into every aspect of real estate investing, but doing so in an asset that has a lower risk because you’re looking typically at singles and small multifamily. So if you’re going to mess something up, you want to mess it up on a smaller deal versus now you’re trying to do a value add multifamily deal on a large scale and you can get yourself in a lot of trouble.

James :

And the beautiful thing about value-wise, it creates so much equity position when you’re creating a 25% equity position on a $300,000 house. If you create a 25% spread so you can tap into a HELOC so you can refinance your cash out, that’s $75,000 that you just created in equity. I hear a lot investors, especially the nine to five investors, I get it, they got a full-time job, they’re busy, they’re too freaked out by the value act. They don’t have the time to manage it. But if you really look at it, anybody can do this. If I bring in a contractor and I give him 20% of this rental property and I’m picking up 75,000, I get to keep 80% of that. That’s $60,000 I just created in equity. And for that nine to five investor that thinks they can’t do it, that just wants to buy the traditional rental, you can give away equity in the deal and still five x what you would if you just bought a traditional rental property. Yeah,

Kathy:

I agree and disagree with you on that because you do have to also count your time in that $75,000 equity that you’ve created for someone like you that’s got a business already set up. And for Henry, you guys are set up for this. For somebody starting out, they’ve got to include the time that it takes. I remember at a real wealth event we did early on, some guy came running up to the stage from the audience. I was like, oh my gosh, he grabbed the mic from me. And he goes, I’ve been trying to do this basically the brrrr method in another state. And he’s like, you’ve got to understand the flights, the hotels, the time spent trying to build your team and find your team. All of that is business setup that you guys already have. So for somebody just starting out, it’s not really going to be that same profit that you’re getting because they still have the startup part of it. Does that make sense? I

James :

Still believe that anybody can do it. I will put this on the table for anybody that wants to invest in Seattle. If you want to put up the money, put up your credit, put up the house, I’ll renovate the house for you. If I take 25% equity,

Kathy:

Nice

Henry:

Money where his mouth is,

James :

Yeah, that’s a win for me because I can stack equity throughout. There’s an open offer, Henry the same. And so I think it’s about looking, how do you bust through your objections? My objection, I don’t have the time, I don’t have the boots on the ground. We’ll partner with the people with the boots on the ground and bring it in. And by bringing in that partner, you can create so much more equity.

Henry:

And so kind of the elephant in the room when you think about investing in general, but especially with investing in 2024, is how risky is it, right? That’s why people are on the sidelines because there’s so much fear right now and so much uncertainty with real estate and with interest rates and with pricing. And so I would say one of the biggest risks people have or fear when looking at this buy, renovate and rent strategy is what if I overpay? And what if prices start to come down because people think that this market crash is just looming in the background somewhere and one day it’s just going to hit us in the face. And so when you think about this strategy, this is why I like this strategy because you are forced to learn how to find a good deal. And so the goal here is you have to understand what a good deal is in the market you’re looking to buy, and you have to understand what’s the strategy I’m going to use to go find that good deal?

And then once you do that and you analyze your deal properly and you realize you do have a good deal, you have to think about, okay, the risk of a market crash, is it a thing? Maybe, maybe not. But if you look historically in a market crash that typically means prices are going to drop somewhere between 5% and 2020 5%, right? That’s typically the spread. So if you’re buying a deal at a 30% discount or a 40% discount, well then you’ve covered yourself in the event of a market crash, right? You’ve helped to mitigate your risk by buying a deal that even if the market crashed, you would still be able to have some level of equity in the deal that is your safety net. So that is probably your biggest risk. But this strategy, if executed properly, automatically has built-in risk mitigation. And that’s why I like it. We’ve hit our first strategy, they renovate and hold, but after this we have two more strategies. So stick around.

Kathy:

Welcome back to the show.

Henry:

James. I know you’ve seen a lot of houses and you flipped a lot of houses. So talk to us about your strategy

James :

Flipping. Flipping has changed everything for our investing trajectory in life. The reason why it’s been so great not only in our career but over the last 12 months, is you can create massive gains and create huge returns in a very short amount of time. And when we are in a world, it’s funny, I hear everything’s risky because it is, the economy’s a little bubbly. Construction costs are hard to control. Philippines just too risky right now, what’s really risky is falling behind and not being able to keep up with these expenses in life. Inflation’s high cost of money’s high. You got to rapidly grow your capital if you want to stay in this game. The reason I like flipping is you can be as hands-on or hands-off as finding your deals you want. If you want to get into this business. Once you build your construction team and your funding teams, then you go find deals.

The way you find deals, wholesalers, brokers and auctions, these are people bringing me properties so I can focus on my flipping business rather than going out and finding that deal and spending all the effort there. Or if I want to make even more money, I can go direct to seller. So it’s a very versatile way to find deals. So what’s the cost when you’re flipping a property we see on TV all the time, I know we all hear these numbers like I bought this property for a hundred grand, I put 50 in and I sold it for 300 and there’s 150 grand in profit, but there’s some gaps in that math. And one of the things that I think one of the biggest traps that flippers make, including myself, is the whole times and soft costs on a flip can be very expensive, right? When we’re buying these properties, you have to take it down with hard money or soft money where the interest rates are 10 to 12%, that’s expensive debt.

You have to be able to service that debt. And so if I’m taking a loan out for $200,000 on a flip project, I have to give $2,000 to that lender every month until that project is sold. And if you go into a long project, let’s say it’s 12 months, that’s 24 grand. You got to stay up with other costs that have really affected and changed over the last 12 months that we’ve had to look out for in 2024 is your insurance has gone through the roof. Getting insurance on flips was very simple three to four years ago. Now with the amount of claims and insurance costs rising, we are having to pay two and three x higher than what we were paying. And as a volume flipper, when we’re doing 50 to a hundred properties a year, if you’re paying two to three grand more per policy, it turns into a big number.

And so insurance costs has been a battle that has been hard to keep up with. And then property taxes and utilities are all more expensive. So every month that goes by, we got to pay a hundred to $200 in utility costs. We have to pay that property tax expense, we have our insurance expense. This can add up to about roughly, depending on the deal, it can be 300 to a thousand dollars extra per month. You got to put the cash out late for, and that’s the thing with flipping is that you have to make sure that you balance your liquidity. You always got to have that six months of reserve so you can handle these expenses as they kind of go through. And the thing about flipping in general too is you have to be able to control your costs. Flipping, I believe is the greatest way to cut the line in financial freedom.

I can take whatever capital I have and I can grow it by 30 to 50% in a six month window, but that’s if I can control the expenses and the cost of the renovation. That is the hardest part of rehabbing homes. How do you know how to control the cost, put the right scope of work in to maximize that value? But the beautiful thing is you can cut up a deal any which way and bring in your construction partners like I was just talking about, and there’s so many moving pieces and flipping. You can bring it all in-house with the right partners and execute these plants.

Henry:

I think James flipping, I love flipping, obviously I do a ton of flipping, but I also do flipping in a market where my purchase prices are probably not far off than the example you used, right? So I’m typically paying somewhere between a hundred to $200,000 to acquire a property and then I’m going to spend somewhere between 30 and $70,000 to renovate that property and then I’m going to sell it for somewhere between two 50 and $375,000. That’s a typical flip for me, and that in my market feels safe because I think you hit on something really important with flips is that it does cost money. Sometimes people want to get into flips and they’re like, I can use hard money and private money and I can take it down with none of my own cash and then I can go renovate it and the bank’s going to give me the money to renovate it so I don’t have to use my own cash for that, and then I’m going to turn around and sell it.

And then what they forgot is that A, they might not have budgeted their renovation correctly. So if you only budgeted $40,000 and it costs you 60, that 20 grand’s coming out of your pocket, plus you’ve got a mortgage payment every month, and if you’re using private money or hard money, that’s 10 to 12% interest only payments while you’re renovating that property. So that’s going to cost you a grand or two every month. Plus you’ve got the utilities that’s going to cost you about 500 bucks to a grand every month, plus you’ve got the insurance and if you’re holding it too long, you’re going to pay some of those taxes as well. That tax bill may hit you. And so it’s not really a low money strategy. You’ve got to have some capital to be able to do it. So I think yes, 2024, you can flip houses and make money, but who should be doing it? Is this new investor strategy, is this a seasoned investor strategy? Has it’s gotten more expensive to do this? How do you see that in your mind?

James :

I think flipping it can be any, it depends again, your core teams, right? To build your flipping business, you need your core team. Your first one is your deal finders, then it’s your lenders. How much access to funding do you have? Whether a lender’s going to require me to put in 10%, 20%, I need to know those costs. Then it comes down to who’s your execution team? Who are my contractors? Who can I put on this project that are going to control my costs, give me accurate budgeting and help that project get moving forward. And as long as you build the right team, anybody can flip it. There’s lots of passive investors too. Right? Now, I passively flip. I’m a very active flipper in Seattle, but when I invest in other markets flipping, I’m passive, I underwrite the deal, I send the wire and then I receive half the profit.

If we can average out 30 to 40% in six months, cash on cash return on a flip, and if I get a giveaway half just to get involved, I’m still making a 20% return. Where do you find 20% returns anywhere else? It’s very hard to achieve. And so it’s really, again, comes back to that, even that value add construction, thinking through those objections, bringing in those right partners, but you’ve got to figure out where the gaps are. If you’re low on capital and you have the skillset, go partner up with someone that can put the money together for you. And if you don’t have the skillset, go tap someone that knows what they’re doing and provide them with the capital and then go make your returns together. But you have to be able to make sure that the operator and everyone does need to control those costs and control those timelines because as a flipper, nothing’s more miserable than being stuck in permit jail. Oh

Henry:

Yeah.

James :

When you’re sitting there writing the check, I had to pay, and this was the worst case scenario, I was paying 20 grand a month for 12 months to get a landscaping and a wetlands delineation permit just stuck in permit jail. That is not normal. But those costs are real and you just really want to account for it. They do creep up and if you’re low on capital, bring in that partner. And so look where the gaps are and then put the pieces and the puzzle together.

Kathy:

Yeah, James, something you said at the beginning of that was when you’re building your business, and I really want to emphasize that it is a business, it’s active income. When you flip, you’re doing active work, which means you’re taxed that way as well as ordinary income in most cases. And for this show we were talking about long-term investing. So I can’t emphasize enough the importance of understanding the difference of active income where you’re either building houses or you’re renovating houses and selling them. The IRS sees that differently than a buy and hold. And the buy and hold is where you get all these enormous tax benefits and long-term growth of that property, the passive side of it where you’re collecting the rents passively and you are watching the property go up in value passively. So just know the difference and you shouldn’t take a business lightly.

This is not for weekend warriors. I saw people in my own family do this where it’s like, Hey, the house next door is for sale. I’m going to buy that and renovate it. Actually, sorry my brother, but it is my brother who’s a contractor, a licensed one, totally knows how to renovate a house, but he was busy with his own renovation business. And so the one he was going to flip for a year, and just like you guys have said, you can’t do that, that your profits will be eaten up by all the overhead unless that property is being rented or it’s generating income of some way while you’re waiting for it to get completed. So just keep in mind, it’s so much harder as a weekend warrior or if you have a full-time job where you already have a business or you already have a job that’s bringing an income perhaps for someone like you, it’s better to invest in what I’m going to be talking about.

James :

One of the biggest risks are you’re dependent on third parties in this business, and that is the hardest thing. You’re dependent on contractors to show up, do their job for the contract that they’re quoted for. You’re dependent on a city to issue you permits and a timeline that’s reasonable. You’re dependent on the economy

Kathy:

And the prices of supplies. I mean, those have been fluctuating a lot.

James :

There’s a lot of outside variables that can really put you back on your buns and it could happen and it’s a real thing. And that’s the biggest question I tell everybody or always, is it worth the risk to you? And if it is, put the team together and if you want to be more passive and you have that nine to five job, it might not be for you, but for me, I want to cut the line. I want to grow that money, grow that capital, and also I want to learn more and more and more and what the lessons I’ve learned from flipping and rehabbing have made such substantial impacts in our portfolio because the type of apartment buildings, single family houses that we can buy, renovate and increase the value on. And so I do think it is the best skillset that you can learn as an investor is learn how to leverage properties correctly, implement a construction plan, and you can explode your portfolio.

Henry:

Alright, we’ve gone through our first two popular strategies in 2024, but we do have one more right after this quick break while we’re away, make sure to search on the market in your favorite podcast app and then hit that follow button so you never miss an episode.

James :

Welcome back to On the Market podcast. So now that I just got on my high horse about value, let’s talk about new construction. Kathy, another way you can create value is just by building. So what have you seen in investing in the new construction space in 2024? Yeah,

Kathy:

Well, there are so many people who have really busy careers, whether they’re professional athletes training all the time or they’re in the tech industry making a really nice salary, but working 80 hours a week, I’m in la So you’ve got a lot of people in Hollywood and in the entertainment business that work hard. They just don’t have time, but they shouldn’t walk away from real estate investing because of that, not when we’ve seen historically that the greatest wealth is built through real estate. So new homes are really a solution for that. As you guys know, I’ve been doing this for 20 years. I’ve been helping people invest in new homes for 20 years for that reason because you generally have a warranty when you first buy. It’s usually a one year warranty. So in that first year that you buy a new home as a rental, if there’s anything broken and it’s on the builder to fix that generally.

So that’s super nice, that keeps your cost down and then in some cases they’re sitting even longer warranty. So make sure you understand the warranties. I always tell people, get a final inspection on that property on the 11th month and get everything fixed. That’s smart. Some things, again to keep in mind, like I said, not every builder is great. One nice thing about buying a new property is you can put a really low earnest money down like $5,000. Don’t put much more than that down, in my opinion, to tie up a property. Now your money’s tied up and you’re not making any money on it, but there’s plenty of builders who will just take a $5,000 deposit for you to reserve that home. And in that time, what’s kind of exciting in the time that the home is being built, you’re making any growth on that.

So when you can get into an early phase of a project, just recently I bought through my daughter. My daughter’s now selling international real estate and she’s all about Tulum. There’s a lot of growth happening in Tulum, Mexico. I bought a phase one single family home through her just mainly to support her, but we paid $286,000 for that. It’s like eight odes on the property. They’re selling phase two now for three 80. So just in the time that I’ve only put down a small earnest money deposit, we’ve made like a hundred grand. So if you time it right, if you get into a market that’s growing rapidly, you get in phase one in a really nice subdivision, you can make a bunch of money without doing anything, but there are risks too. So I don’t know, what are your guys thoughts on new homes?

Henry:

I like new construction and I like build to rent. Now the difficulty can be finding a build to rent where you’re all in at a price point where the rents actually create some cashflow for you. But I think where some of that cashflow comes into play is that you have the deferred maintenance costs. So whereas me if I buy a value add and rent it out, I’m going to have a higher maintenance cost on a yearly basis than hopefully you would on a new construction. And so you’re able to minimize some of the maintenance and then that counts or can be counted as cashflow for you. But that doesn’t mean the maintenance costs aren’t coming, it just means they’re deferred and so they come at some point. What I also like about new construction is there are loan products out there where you can buy a piece of land, get a construction loan, and then let’s say you buy a piece of land in an inexpensive area. And so now you’re able to go and get a construction loan to build an entire building and you’re able to leverage your land essentially as your down payment. And so you’re building a new property with very little money out of your pocket. There are some pretty creative ways for you to leverage small local banks to be able to build new construction homes, and I think that that’s pretty cool for people getting started.

Kathy:

That’s so true. We have a construction to perm loan on one of our new builds, so we got the construction loan and it just converts into long-term and it makes a great short-term rental. Another thing, like you mentioned, insurance is a lot lower on new homes because they’re built to a different standard, especially in Florida, they’re built to hurricane standard, so the insurance rates are pretty low. Property taxes, they can be low to start, but they could go up once the houses has been reappraised. But another few things to keep in mind is just because you’re buying a new home doesn’t mean that it’s totally rent ready and those discussions need to happen beforehand during the time that you’re writing up the contract because one time in the first new home that I built, I just assumed that my purchase cost was my purchase cost and I didn’t realize the refrigerator and none of the appliances came with it. And then we had to put in blinds and it ended up being three or $4,000 out of pocket I wasn’t expecting. So just make sure that everything is super clear in the contract when you purchase of what you’re actually getting.

James :

And I think that’s an important thing that you brought up Kathy, and this is why new construction is really beneficial for investors that want to be more passive is you get to buy a product that is warrantied, it’s been perfected, it’s been signed off on, and it’s built to a new energy code and standard. And those new codes and standards make these houses stand for a lot longer. And so you have a lot less deferred maintenance, but it also reduces your insurance costs pretty dramatically. When you’re buying a newer property, your insurance quotes are going to be, I mean, what we’ve seen is they’re nearly 30, 40% cheaper than what even if we’re buying a house renovating it to a 2024 code and then stabilizing it, they still charge us a lot more on insurance because of the original year built. And these costs are constantly going up, and it’s a good way to hedge in your portfolio of I have assets that aren’t going to increase maybe some of these other properties will.

The other thing I love about new construction right now is you can buy almost a below replacement cost in some of these build to rent neighborhoods. The deals I know we’ve talked about, Kathy, I’m looking at what you can buy those for on a price per square foot and you can’t even those houses for that price of what you can buy ’em for today. And anytime you can buy something that is cheaper than you can build it for, it’s typically going to be a pretty good long-term investment down the road. And as far as value add goes, the reason I do like new construction, because even if you want to create value add, you can do that. It’s a lot more systematic than renovating. When you are building a property, you’re hiring a builder, you have a set of plans, they come estimate off those plans, they’re giving you a firm bid, and then you schedule it accordingly with renovations, you rip open a wall and all of a sudden you find things that you didn’t know were there and they shoots your costs up. Whereas when you’re bidding out a plan, you’re bidding out a plan and you have a firm bid. And what we have seen too is our pricing on construction has gone down 10 to 15% for building new in our local market, but our renovation budgets have not budget at

Kathy:

All. It’s interesting,

James :

The professional trades have more people on staff, they got to keep busy, and so they’re negotiating more. Whereas your mom and pop’s contractor that works on our flips, they got one or two jobs, they’re still busy. And so it is been a really good way to scale is looking at that new construction. And not only that, you might have a head showing come buy it off you for a lot of money in three, four years down the road anyway, so you have the right buyer that might buy it off you anyways.

Kathy:

Yeah, and it’s really not that big of a difference right now in price. I mean obviously it depends on the market, but the median existing home price in the last NAR report was $407,000. The existing home price rose 5.7% and on new homes it’s 433,000. So the spread isn’t that huge between existing and new, again, depending on where you are. So if it’s just a little bit, it’s not going to show up that much in your loan costs, but then you get a brand new home where you probably aren’t going to have a lot of maintenance issues.

Henry:

Kathy, one of the things that I think hold investors back, especially new investors with new construction is the risk or potential risk of unknown costs. So what’s it going to cost me from the day I start till the day my home is built, right? There’s a lot of costs in there, there’s a lot of time in there. And I think that’s another risk is when’s the payout happen? If I’ve got to put all this money down for the upfront cost, how long is it actually going to take me before I actually seeing some return on my investment? So what do you do or how can people try to understand what a new construction is going to cost them on the front side, and then how do they mitigate some of those risks?

Kathy:

You’re really talking about the difference of if you’re going to build the house from ground up, getting the construction loan and taking that on versus letting a builder do that for you and you’re just putting down a small earnest money and they’re taking on the construction loan and they’re taking on the overhead and you have a set price that you’re going to pay once finished. So there’s just different ways of buying new construction. Obviously if you are buying the land and you are hiring the contractor and you’re getting the loan, you’re going to have holding costs. You’ve got insurance on that land that you’ve got to pay, you’ve got builder insurance. There’s a lot of costs that you’re right, you’re paying to get it built and that’s money you’re not getting a return on until it’s finished. So that all has to be added in. But if you are a passive investor and you just work with a builder and you let them take all that risk and you just give them a $5,000 earnest money deposit and you don’t have to pay a thing until the house is finished, that’s a way that you mitigate all of that risk and the builder is taking the risk. That’s what we generally recommend for newer investors or busy investors that don’t have the time to deal with the details.

James :

And the one other risk I think people should look out for new construction is just the location you’re buying in. Some of these build for rent neighborhoods and developments have gotten massive and there’s a lot of short-term rentals, midterm rentals and rental properties getting built in a very small radius. And that would just be the only thing I’m always cautious of is just don’t buy in too big a PLAs because if there’s even a 5% decrease in value or a 5% rent drop, it can be really detrimental against new construction performance because typically when you’re buying new, you get a little bit lower return, right? Because it’s easier, you should get a lower return, but if the metrics get off a little bit, it can really hit your performa. And so just really check that demand.

Kathy:

I cannot agree with you more. I had somebody come to me and say they were building 400 homes in a subdivision that were going to be all rentals. I’m like, you’re crazy. You’re going to have 400 rentals competing against each other. That’s a nightmare. So yeah, you don’t want to be one investor in an all rental new home development. The only one winning there is probably the builder.

Henry:

Alright, so we’ve covered three strategies that we think will work in 2024. We covered buy and rent, we’ve covered house flipping and we’ve covered new construction. All of these strategies can work and all of these strategies will continue to work as long as real estate’s around because it’s really about how do you adjust as the market adjusts and if you can adjust what your buy points are and how your hedging your risk, then any of these strategies work and we’re all living proof that they are all currently working and hopefully are going to continue to work. So I hope that information was helpful for people. One

James :

Thing I got to say though, Kathy, is you forgot older, the very sweeter the juice

Henry:

Old houses

James :

You going to renovate and get the juice out of ’em.

Kathy:

I do like myself a good wine and I did just get back from Scotland where they aged their whiskey for, I don’t know, 14 years. So I agree with you there, but with housing,

Kathy:

Take it new.

Henry:

Well, that was a lot of fun and hopefully it was helpful to our listeners. Thank everybody for listening. We’ll see you on the next episode of On The Market.

Dave:

On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

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