A New Housing Market is Forming: How to Take Advantage

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer. Joined today with Henry Washington, Jamil Damji and Kathy Fettke. Happy New Year, everyone.

Kathy:
Happy New Year.

Jamil:
Happy New Year.

Henry:
Happy New Year, guys.

Dave:
I know this episode doesn’t come out till the middle of January, but it’s the first time we’re seeing each other since the new year. Anyone do anything fun over the break?

Kathy:
We got into this routine. I know this isn’t fun, this is weird, but of the cold plunge thing, we’ve been doing it every day.

Dave:
Oh.

Kathy:
Every day, like right now I’m so cold, but I guess it’s good for you. So I’m going with it.

Jamil:
Cold plunges are fantastic, actually. They feel so good. They feel terrible when you’re in it, but afterwards, it’s like being on cloud nine.

Kathy:
On drugs, well, you do. You get epinephrine or something, so something releases and you actually feel like you’re high and it’s a natural high, so then you get addicted to it. So now we go in the cold plunge every day, every morning.

Dave:
Wow. Do you just go straight in the ocean?

Kathy:
That would be one way to do it, but our pool, we don’t want to heat it. It’s so expensive, so we just go in the pool, it’s 50 degrees.

Dave:
Oh, geez.

Kathy:
Stay in there for seven to 10 minutes and it’s cold.

Henry:
Good night.

Kathy:
Come join.

Henry:
Absolutely.

Dave:
I did ask if you did something fun over break, but I guess that that passes as fun for some people. We’re going to get into our topic today, which is a report I wrote, which is called the 2023 State of Real Estate Investing. I basically summarized all of my thoughts and let’s be honest, I stole a lot of your takes from over the last year and basically summarized what I think is going on in the housing market and pose some questions, some thoughts and some advice for what happened in 2023, and I’m hoping we can talk about it today.

Kathy:
Yeah, Dave, that report is awesome, by the way. So good. It’s like you wrote another book in 2022. That’s amazing.

Jamil:
It’s super insightful. I think it should be recommended reading for anybody that’s wanting to get into real estate investing or current real estate investors that may have questions. If this report could become part of even the media consciousness, I feel like we’d all be better prepared. So Dave, thank you for preparing and creating something that is tempered and true and real. It’s not biased. I feel like a lot of times as real estate investors, we want to push like, hey, real estate, real estate, real estate. But it’s like this was a very tempered look and I really appreciated it.

Kathy:
And on the flip side, the news media’s always looking for something terrifying to report on, so they can always, how do I say, manipulate the data into having things look worse than they are. So your graphs in that report give the clarity that people need.

Henry:
Yeah, exactly. That was going to be my point. I think what makes this great, especially for somebody who is new or is not accustomed to looking at data, real estate data, because we say that a lot, make sure you understand the data of your market. And I think what’s great about this is it’s an abbreviated look at different metrics and an unbiased view of you define them, and then you talk about what they mean and then you talk about how it’s currently affecting.
So I think even if you read this five years from now when the market’s completely different, having an understanding of what those metrics are and how they can affect real estate and the near buying decisions is super powerful. So I think this is great.

Dave:
Oh, well thanks guys. And if anyone listening to this wants to download it, it’s basically a full industry report but at Bigger Pockets, we’re giving it away for free. You can download it at biggerpockets.com/report. It’s completely free. And as they all said, it really is meant to give you not just an understanding of current market conditions, but help you analyze the market going forward by understanding some of the market data.
And I appreciate all your kind words, but we do have to debate this, so you have to be a little bit meaner and a little more critical as we move into the next section.
So everyone, if you want to follow along, go download that right now, biggerpockets.com/report. We’re going to take a quick break and then dive into the report so you can understand some of the high level topics that are in there.
All right, let’s just start by getting your all’s take on the 2023 state of real estate investing because I’ll summarize what I put in the report in just a minute, but if you had to say in like 10, 20 words or less, Jamil, how would you describe the state of real estate investing right now?

Jamil:
In 20 words or less? I’d say exciting, opportunistic, motivating, cash intensive, scary, and do it.

Dave:
I like it.

Jamil:
That’s it.

Dave:
I like that you’re saying both exciting and scary because I think that’s a very good way of describing what’s going on. What about you, Henry? How would you describe the current state of investing?

Henry:
Yeah, I think the current state of investing is exactly what we’ve all asked for and what they say, be careful what you ask for. We’ve all invested in real estate so that we can build wealth. Well, wealth is built when the opportunity is created, when you can buy at a discount. Well, this is what buying at a deep discount looks like. So I agree with Jamil. It is exciting and scary, but you need to do it because this is what you asked for. Buy at the discount and start building that wealth.

Dave:
Absolutely. What about you, Kathy?

Kathy:
I’m going to do this in two words, pleasure and pain. Really, kind of like the coal plunge. There’s going to be a lot of pain, a lot of pain. This is going to be a hard year for a lot of people. There’s also going to be pleasure. There’s going to be a lot of opportunity for people. So I do want to just send this message out that that’s part of real estate. You win some, you lose some. If you lose some, just know the next deal, you’re going to get it a better deal and win some. And the hope is that at the end of the game, you’ve won more than you’ve lost.

Dave:
That’s a perfect way of describing it. I think all of you are providing a really good summary of what’s happening, which is basically a correction, and that is scary, but it’s also provides opportunity for people who can afford higher prices or who have been priced out or is too competitive or too busy. And so that’s what we’re starting to see.
And if you download the 2023 State of Real Estate report, you’ll see that basically the way I’ve summarized it and not as concisely as you just did, it’s a full report there, is that basically for two years we saw every major variable, every major data point that helps us understand and predict the housing market was pointing in one direction and that was up. That goes from everything from inventory, housing supply, demographic demand, affordability, mortgage rates, whatever, inflation, whatever it was, every single major thing that as an analyst or as a economist you look at was saying prices are going up.
And I know that for a lot of people, it’s felt like a bubble full of irrational behavior, but there are real reasons why prices went up and not all of them are irrational. A lot of the macroeconomic conditions supported that. Now basically since halfway through last year, we’ve seen some of those variables. Some of the things that dictate the direction of housing prices flip sides, they were all on one side pushing prices up. Now we’ve seen mostly affordability and demand start to go to the other side, and they’re starting to drag on housing prices.
And so what we’re seeing now is a much more balanced market. And I know in contrast to the last two years, balance feels like a crash to a lot of people because we were just seeing things go up so quickly. Now we’re starting to see prices flat line and a lot of markets and some markets they’re still growing and some markets they’re starting to decline.
But this is basically creating a whole new housing market that we haven’t seen in a long time. And as you’ve said, this is creating both fear and there is going to be some loss and some pain as Kathy said, but there is going to be some opportunity. And so if you want to understand those dynamics and how those different variables I was just talking about, I go into those in a lot of detail in the report. So go check that out.
But I think for the purposes of this podcast, I’d love to just focus on the opportunity and risk areas. What are the main areas of opportunity you all see, and what are the things that you are personally going to be staying away from? In the report there’s 11 recommendations for how to invest in 2023. And Kathy, let’s start with you. Which of these or you could pick your own recommendations for 2023 do you think is most pressing for our audience?

Kathy:
I mean, the opportunity is certainly to be a buyer. And that’s what we’re doing as we started a single family rental fund. And we’re actively buying because we have cash. And that was one of your points is if you have cash, you have power today, and you don’t have to have your own personal cash. I mean, that’s what OPM is, other people’s money, you got to figure out how to do that. And there’s many ways, but the opportunity to acquire real estate is incredible right now, but it has to be the right real estate.
It might be a little earlier for certain commercial investments because that market still hasn’t adjusted quite yet. It hasn’t corrected the way it might and probably will. So personally, I probably won’t be looking at commercial until the end of the year or until things sort of level out. But in single family or one to four unit, we are extremely active because this is a market where we can … there’s very little competition right now and prices are down and yet demand for rentals is so, so strong because it’s so difficult for people to buy today.
So we’re still offering this amazing service for people to have a house, have a roof over their heads at hopefully an affordable price because we’re getting the properties at a cheaper price, which means we can rent them for less.

Dave:
All right, great. I have several questions about this. So one of the recommendations was use cash if you can. Does that mean that you’re in your fund, are you using any debt or are you making all cash purchases?

Kathy:
Well, as a fund, we’re raising investor capital. So our goal is 20 million in cash. So we are raising that cash and acquiring the properties with cash, which is the game. If you don’t have to wait 30 days to get a loan and you can just come in with cash and close in seven days, well you’re going to get a pretty good deal because there’s a lot of distress out there.
But then the idea is once we have 50 properties or even 20 properties, we have local banks ready to refi and in the fives. It’s incredible. And these are again, local banks who understand the market, they understand the properties, they understand their collateral, they know that we’re getting it so cheap that they don’t feel it’s risky. So then the idea is we’ll buy 20 to 30, 40 homes, refi those, use that cash, go get some more. It’s kind of a BRRRR fund, I guess.

Dave:
No, it’s a great idea because basically you’re reducing your holding costs. You’re buying for cash and not paying that six or 7% interest, not getting any bridge debt or anything like that. And then once you have it stabilized and producing solid income, then you’re able to service the debt, which sounds like a pretty good rate you’re getting.

Kathy:
A really good rate in keeping the LTV pretty low. But again, if it’s a say, a 70 LTV, but we’re getting all our money back out because we’re forcing the appreciation on it by buying cheap, buying deep. Again, another one of your points, buying really deep, getting these really good prices and the buy box is not a deep renovation. We’re buying deep, but it’s kind of a light renovation, which is really cool. When do you get to do that? Get discounts on stuff you don’t really have to fix too much. And that is the opportunity.
Like I said, one of our first acquisitions was a $120,000 home, a three bedroom, two bath home right next to where all the massive new jobs are coming in North Texas, we’re putting maybe 20, 30,000 into renovation, and the ARV is 220, so take 70% LTV on that. We’re getting our money back and just going to do it again. And then once you buy, take that … you buy the houses, you take the money out, buy more houses, then you get to do it again because the bank will lend on that next group of houses that we bought.

Dave:
Kathy, you talking about buying deep, which again is one of the other recommendations here, which I’m going to ask Jamil. I know this is your thing, we’ll talk about in just a second, but the concept here is basically buying below market value. Kathy, in a correcting market where there is risk that market values are going to go down, do you have a rule of thumb how much below market you’re looking for in order to mitigate any risk of further value depreciation?

Kathy:
Well, this is a rental fund, so what we’re looking at really is the cash flow on it. And that would be the rule of thumb because we’re planning on holding these for five to seven years and we already know that markets change and we won’t be in the same market a year or two from now. What we do know is there’s still tremendous demand for rentals. So we’re not so much looking at the asset value, it really is, is this property going to cash flow once we put all the renovation money in it? So deep enough that it’s a BRRRR property, that would be the main thing that we can refi at the 70% and get our money back out.

Dave:
Awesome. Well, Jamil, I don’t want to speak for you and pick which recommendation or what your recommendation for 2023 is, but is buying deep one of them?

Jamil:
Absolutely. If I had a moniker, it would be buy deep, that would be my name. It’s always been my philosophy and I actually lived in that philosophy when the market was going crazy. A lot of folks didn’t believe that you could still buy property at tremendous discounts when people were paying over asking on the primary retail market.
So very quickly, let me explain this. Primary retail market is MLS where the majority of people trade real estate, secondary real estate market is where I typically play in which is off market investor distress properties that typically can’t be financed. So I used to buy really great deals over here and wouldn’t even touch houses on the retail market because they’d be overpriced and sellers were crazy. Everything’s flipped right now. So right now I’m not going off market. I’m not going to private homeowners and saying, “Hey, let me buy your house at a discount,” because they still are out to lunch.
They still believe that their houses are worth what the house down the road sold for in March of 2022, which was the top of the market. And so I don’t even want to have that argument right now. What I want to do is I want to cut that friction out. I’m going on market, I’m talking to real estate agents who have active listings that are 30, 60, 90 days On The Market, sitting, collecting dust, finding out the motivation of why this seller wants to sell, asking whether or not this seller is coming to terms with the current state of events, and do they realize that if they’re going to trade, they’re going to take a massive hit and if they are really motivated to sell, I have a number in mind that I can present. And one out of 10 times I’m successful at doing that. And I’m buying stuff right now at 50% of ARV.
And so when I buy it 50% of ARV, I’m following along with exactly what Kathy’s saying. I could go and rent that out and refi it and go and do it again and again and again and have infinite returns on this situation. And so buying deep is absolutely one of them. And then secondly, not to take up too much time. The owner finance, I know we talked about in your report subject two, I’m still wary on subject two, the 900 pound gorilla in my world in subject two is the due on sale clause that I don’t necessarily enjoy having a wording in a document that really essentially unwinds what I’ve done here in a subject two deal.
So I’m going for owner finance stuff that it may be a little bit higher priced, 0% down, 0% interest, 30 year term. And if I can rent that and cash flow it, pay down that debt, have a good life.

Dave:
And I think generally people lump together creative financing into one thing. And as you said, Jamil, it’s two different things. Subject two is when you assume someone’s existing mortgage, and there is this thing in mortgages called the due on sale clause, which is if the mortgage changes hands, the bank can call the balance of the loan due. And that generally doesn’t happen, but there’s a chance. And that’s what you’re saying, that risk is too much for you.

Jamil:
Yeah, when markets change and especially with strategies and people getting loud, my best friend is the loudest in the world when it comes to subject two. And lenders are going to take notice. They’re going to see these things and they’re going to understand and they’re going to say, “Are we into this.” Are we okay with some of this stuff that’s going on here, and should we be tightening up and paying more attention to …” Look, you do your insurance wrong on a subject two, the due on sell clause gets invoked. So if we’ve got to be this tiptoe in a real estate transaction, I’m not into it.

Dave:
I also think that the interesting thing in addition to what you’re saying about the popularity of it is that in this type of rising interest rate mortgage, the bank has less incentive to let you hang on to a 3% mortgage, because they could come in, call that due, and then try and get another mortgage at 5%, which is much better for them.

Jamil:
Absolutely.

Dave:
But to your point, seller financing on the other hand-

Jamil:
Hold it.

Dave:
… that it’s basically whatever terms you can negotiate with the seller, and so there’s a lot more flexibility and if you do that properly with a good contract, it’s a lot less risky.

Jamil:
Correct. And that’s where my two biggest bets right now are buying at 50% of ARV and holding and then going and looking at sellers who may not be interested in selling at a discount, but wanting to offer terms because the market is, they have to have flexibility with demand being where it is right now, the flexibility that I need you to provide me is 0% interest, 0% down. I’ll give you your price, but give it to me over 30 years. I make sure that I can cash flow that, stick in a renter, let that renter pay that thing down and hand that property off to my kids. It’s all good.

Dave:
Awesome. Well, I have one more question for you Jamil, and then I’m going to turn this question to Henry, is about flipping because one of the things I wrote in the report is to flip with caution. And in that I said that experienced flippers, James is not here today, but experienced flippers, Henry’s going … I’m going to ask you this, are probably doing really well in this market, but to me, it seems like a dangerous thing to start trying with. And so I’m curious, you sell a lot of your wholesale deals to flippers. Can you tell us a little bit about just market sentiment with flippers right now?

Jamil:
They’re actually really bullish. And so again, because you’re able to get these really deep discounts if you stay in a price point that’s accessible because look, a 7% mortgage on a 400 or 300, 350,000, $450,000 house can still be affordable in a dual income household. And in that situation, that house will sell On The Market. And if you can offer great value, a great product with great design and you pay attention to the quality of the thing that you’re putting out there, you will dominate in this game.
However, if you’re an inexperienced flipper and you’re using dolphin gray on all of your walls and you are not, I know I … dolphin fin gray will drive me crazy. If you’re not tiling your bathrooms all the way to the ceiling, if you were cutting corners and doing dumb stuff, then you will lose your shirt. And so flipping absolutely be experienced, understand what you’re doing, stay in the right price points, you’ll win. If you fall, break any of those rules, you deserve it. Sorry. You do. You messed up.

Dave:
All right. Well, thank you. Henry, you were nodding along with that and I know you do a bunch of flipping. So what is your feeling about flipping in the next year?

Henry:
I mean, I think you nailed it on the head. It’s, you need to flip with caution. And we have to remember this, real estate is a numbers game. It’s always been a numbers game. It’s just when the market was super hot, you didn’t have to necessarily pay as close attention to all of the details of the numbers. Now, if you want to be successful, you have to understand a lot more metrics in order to make the proper offers. And so for us, it’s a numbers game.
I will absolutely buy a property that I’m going to flip if I can get it at a 50% up to 60% discount because I look at my past three flips, my past three flips sold, one sold for 9% less than we listed it for, one sold for 17% less than we listed it for, one sold for 2% higher than we listed it for.
So if you’re doing the math, that’s about an average of a 12% drop. And so if previously when the market was better, we were buying at a 70% discount and turning great profits when we flip it. So now I just factor that in on the front side. If I can get it at a 50% drop, I’m making the same if not better profits than I was when the market was hotter because the analytics, the data’s telling me where I’m going to be able to typically sell those homes.
So if the ARV is a certain number now, I subtract about 12% and I can back into my offer price that way. So we’re just doing the math more diligently on the front side to understand what we’re going to buy. And then I just have to live by that. I have to be more strict about the offers that I make.
I used to joke, because 2021 and 2022 or 2021 and 2020, the prices were so amazing. I’m like, “Man, I should have bought everything I made an offer on in 2019 and 2018.” I remember passing on deals over $5,000 that in 2022 or 2021, that was silly, but hindsight’s 2020. But those fundamentals are going to save me in this market, those fundamentals where a deal doesn’t hit my numbers, even if it’s just 5,000 off, I’m not jumping on it because the market’s not forgiving right now. So I have to be very strict with my numbers. And if you can do that and understand your market and understand what’s causing people to buy, Jamil’s absolutely right.
If it’s a two income household, it’s much more affordable and just understand what’s actually selling. If I look at my market right now, we’re still selling somewhere around 90, 90% list price to sale price. It’s a 10 to 12% typically drop. So things are selling, they’re selling when they’re priced correctly given the current market. So if you can pay attention to the metrics, that helps you understand where to buy and you buy and you stick to your guns about your offers, I think flipping can be still profitable. But you’re absolutely right, you have to do it with caution and you have to be very, very strict.

Jamil:
I wanted to just quickly add in there, I think that 12% drop that Henry’s talking about, you can even play with that with design, with some really, really good design. And if you pay attention to the quality of the product that you put out there and you pay attention to the trends, you look at the magazines, you see what the HGTV shows are. And again, I’m not just saying this because I’m on an A&E television show, Triple Digit Flip, which is an amazing show. You guys should all watch it, but I don’t just say that because of that. I mean it. Design matters right now and it didn’t before. So if you pay attention, you might not lose that 12%. You might be able to still sell at that list price or close to list price because you nailed the renovation.

Dave:
And Henry, just for clarity, you’re saying 12% off list price, but did you still turn a profit on those deals?

Henry:
Yes, absolutely we turned a profit on those deals. That’s because of the due diligence that we do ahead of time and where we made offers even because these are properties that I bought as the market was coming down, and so we just anticipated that if we have to sell at 10 to 12% at 10, we were actually looking between 10 to 15% drop. Can we still turn a profit? And absolutely. So no, I’m not making the profit that I was anticipating making, but absolutely we’re still turning a profit. I haven’t had to take a loss yet.

Dave:
Good for you. Kathy, did you want to jump in there?

Kathy:
Yeah, I just wanted to make a comment on what Jamil said and say I auditioned several times for HGTV flip shows, and I would tell the producer, we’d get down to the last group and I’d say, “I really don’t love flipping property. It scares me. I’m a buy and hold investor, and I think this would be a great show on buy and hold because we could just, it would be so much easier to film. You just stare at the property for five years,” and they just didn’t go for it, man.

Jamil:
Oh, that’s great.

Kathy:
So, I don’t know.

Dave:
I don’t understand that. That sounds like a great TV show.

Kathy:
Seems like a great show. Every year the rents went up 4% and you could just do a little show on that.

Jamil:
Great pitch. I’ll introduce you to some people, Kathy.

Kathy:
Okay. We could picnic outside the house. I don’t know. That’s why there aren’t any buy and hold shows. It’s so boring.

Dave:
But it’s fun in the long run.

Jamil:
Amen.

Dave:
All right. Well the last one of the recommendations I wanted to talk about, Jamil called me out for stealing this from Henry before we started recording, but basically one more I wanted to get into is investing in hybrid cities. And so as Kathy often reminds us, and we talk about very regularly on the show, every market is going to behave differently. And as we’ve started to see the really sexy pandemic winning cities are really starting to see the biggest corrections.
I’m sure Jamil, you’ve talked about that pretty honestly about what’s going on in Phoenix and in your neighborhood cities like Boise, Las Vegas, Austin. Then on the other side, there are cities that don’t typically appreciate but have strong cash flow. These are cities like Detroit or Milwaukee or a lot of places in the Midwest generally speaking, and that is sort of how things used to go before the pandemic, there was some cities that were really strong cash flow, but they didn’t appreciate as much.
Then there are cities that appreciated like crazy, but they generally don’t offer a lot of cash flow. But there are these hybrid cities, and I do think my prediction is that we’re going to return to regional patterns that were before the pandemic, where some markets are going to continue to offer great cash flow. Some are going to appreciate, but not both like we’ve seen over the last two years. But there are some cities that do a little bit of both well, and those are the hybrid cities that I recommend. Henry, I’m guessing you would consider Northwest Arkansas one of those regions?

Henry:
Yeah, man. Absolutely. It’s a great hybrid city. You know me, it’s the unsexy markets.

Jamil:
Let’s use Dave’s term of boring. Boring.

Henry:
Yeah, that’s very true. It’s very true. It’s the boring markets, the places where people typically don’t think of when they’re thinking of investing out of state. This is a large country. There’s a lot of places that can offer you great cash flow and/or great appreciation. Again, what’s cool about is it’s a data game and instead of looking at real estate metrics, you’re looking at more economic indicators.
And if you can find the economic indicators of what’s driving people to live there as far as the economy’s concerned, and then so if you look at certain types of jobs and then look at the job growth across those industries within that area, and then compare that to the average price of a single family homes or small multi-family homes in the area, you can find some pretty sweet areas that offer job growth, growing in industries that are growing and rent prices that are either growing or flat.
But if you know that people are moving there and they have to for these jobs, it gives you a great indicator of places that potentially can give you phenomenal cash flow at reasonable entry prices. Because affordability, it’s subjective. So for people who currently live in a city, they may feel like it’s not affordable for them to afford to live there, but if those people are in Cleveland and then someone from California is trying to invest and they looked that same price, that price point in a place like Cleveland or some other city like that, it seems much more affordable because their dollar goes a lot further.
And so just paying attention to the economic indicators in jobs or industries that you feel are going to be around for a while and then comparing that to what it’s going to cost you versus what the rents are. It’s not hard math. You can find some great unsexy markets or great boring markets that are going to return you phenomenal cash flow.

Dave:
Absolutely. And a couple of the ones I listed in the report were Birmingham, Alabama, Philadelphia, and Madison, Wisconsin, but there are plenty of them out there. Kathy, what are your thoughts on this? I know you always talk about looking at these large macroeconomic indicators. Do you think we’re going to head back to some of the more, the sort of the traditional divergence in regional markets that is normal in the housing market that sort of went away through the pandemic?

Kathy:
I think it just depends on your objective, really. If you are at a stage in life where you’re really just looking for cash flow, you don’t really need growth, you just want to travel the world or raise your kids, whatever it is you want to do and have cash flow that supports your lifestyle, then you want to be in those cash flow markets. And those are usually markets that haven’t gone up so much in price.
And so the price rent ratio is in balance, and Birmingham has always been on our list for that, for cash flow markets. We love Birmingham. It’s a great city. At Real Wealth, that’s been on our list. Indianapolis fits that, Kansas City. These are markets that just chug along. There’s enough growth and job growth that you can get a little appreciation and cash flow kind of in any market.
However, if you are really trying to build a portfolio and grow your wealth into millionaire status, that’s not necessarily where that’s going to happen. Although the last few years it has, those areas have gone up quite a lot. And we were buying in those areas in 2012 and 2010. I mean, I think we were paying 30, $40,000 for properties that are worth four or five times that today. So depending on when you buy and if prices have gone down enough, you could see upside really in those markets as well.
But again, if you’re trying to grow a net worth, then I personally still want to be in those growth markets, and right now you can get a deal. It’s better than last year, especially if you’re able to negotiate with the seller to have them buy down points on your loan. And this is what we’re seeing.
I mean, people are talking about things really slowing down, but we’re not seeing that at Real Wealth. We do one webinar and everything sells in that one webinar because the seller, we’ve negotiated with the seller to pay two points to buy down the rate. So they’re getting a better deal on purchase and they’re getting a darn good interest rate and it cash flows in a growth market.
So to me, that’s where I want to be. Now, granted, with our fund in Dallas, we’re still getting kind of both. It does feel hybrid, but I know what’s happening there. There’s new airport coming in, which I didn’t really want to say because now everybody knows it, but I just said it. And so many huge employers building factories, building their headquarters, they’re not going away anytime soon. So to me, it’s like a supercharged hybrid market in North Dallas and South Dallas, kind of all around Texas, honestly. So yes, since it’s a debate, I’m going to debate you and say for me, I still want to be in hyper-growth markets, that cash flow.

Dave:
Nice. I like it.

Jamil:
She likes cake and eating cake.

Kathy:
I like cake and cake and more cake, and then I have to go in the cold plunge to burn it all off.

Henry:
Dave, I want to ask you a question. So if you’re looking at these hybrid markets, for me it’s a matter of looking at what are the economic indicators as far as job growth, because that is an indication also that people are going to have money to be able to buy these things. But what are some of the other metrics that you’re looking at that are going to ensure that you’re going to get appreciation as well as cash flow?

Dave:
Yeah, I think it’s not rocket science. It’s like population growth and economic growth are the two things. And we talk a lot about job growth, but I think one thing people overlook is another really easy one is wage growth and net income in these markets. Because if you’re expecting rent to grow and prices to grow, not only do you need quantity of jobs, but you need them to be higher paying.
So I think those are some easy ones that people can look at is population growth, wage growth, the unemployment rate I think is going to be particularly important over the next couple of years. And if you want to be conservative, which I recommend in this market, I would look at historical unemployment rates pre pandemic, because what happened in the pandemic is crazy. We saw an unprecedented thing. But look back to markets, what happened in different markets in the last recession or the last economic downturn and see which markets performed well, which ones were more resilient relative to other ones in terms of job growth, wage growth, and population growth because those are likely the most diversified economies and they’re probably going to continue to do pretty well into the future.

Henry:
I think one of the other benefits of the boring or unsexy markets is that they’re typically somewhere in the middle of the country and a lot of these places that kind of had tremendous growth over the past couple of years were coastal cities or places closer to the coastlines, and even during the last downturn here, we weren’t as heavily affected, but we saw it coming. We saw the ripple effect of what happened on the coastlines coming.
And so all that to say is if you’re going to invest in some of these markets, not only can you find your cash flow and your appreciation, but what’s coming won’t be as much of a surprise to you. You’re able to plan for how you get into these assets knowing what’s coming down the road. So you have some foresight when you’re buying in these markets.

Jamil:
Last thing to add, pay attention, especially in these, again, the boring market, the unsexy market, whatever you want to call it, they have pockets that are very sexy within them. There’s areas in Birmingham where I would absolutely kick it, hang out, buy a house. There’s lots of entertainment, food, great things to do. So be mindful of that. If you’re going to be conservative, be conservative in those markets, but go find the popping spots in those boring, unsexy markets and you can’t lose.

Dave:
All right. Well, I think we covered five of the 10 recommendations for 2023. So if you want to check out the other ones, again, biggerpockets.com/report. The last part of the report are just five questions I have. I don’t really have an opinion about any of them. It’s just five things that are going to probably impact the housing market for next year and the year to come, but there’s a lot of uncertainty about them. And you can read all about them, but there’s one in particular I wanted to ask you guys as we wind down the show here.
And that is about the commercial real estate market. Generally speaking, what we’ve been talking about today is mostly residential, four units and below, but the commercial real estate market is very different. It is dictated by a lot of different principles and variables. Particularly of interest to me is how loans are created in the commercial real estate space. So let’s just talk about that a little bit. Kathy, you alluded to this earlier when you were saying that you think … you’re avoiding it for at least the first half of 2023. Can you tell us why?

Kathy:
Because of Brian Burke, if you haven’t listened to that On The Market interview, definitely listen. I’ve said it before, whenever I run into him, which is often at different events, I’ll pull him aside and say, “What are you doing?” Because he’s just so knowledgeable and he’s been so successful.
The commercial market just hasn’t landed yet. It’s in a bit of a free fall in my opinion, but it doesn’t even know it yet. It doesn’t know. It’s kind of like it drove off the cliff and it’s just one of those cartoons, doesn’t know it’s falling. And so a lot of sellers are still blind to what’s happening and a lot of buyers as well. But the big story is money. Real estate doesn’t work without leverage in most cases, and certainly not in commercial, most people don’t have 150 million to put down on a building or 30 million or whatever it is. So it’s just dependent on leverage.
And right now, leverage is really in question right now besides just higher rates, which completely affects the value of the property and that somehow people don’t see that is confusing to me. It’s like when your costs go up, the value goes down of that property unless you can increase income and you can’t because rents are kind of stabilizing. So how are you going to make these numbers work?
But the bigger issue, again, was in another podcast that was so fantastic on a market on liquidity market, what bank is going to lend and even has the money to lend on commercial property given the scenario and the situation? So with so many resets coming where pretty good assets, decent assets have loans coming due and they’re going to have to refine, the money might not be there, and if they can find the money, it’s going to be more expensive. I’m concerned, honestly. I’m a bit concerned about what’s coming in the commercial markets and maybe it’ll get fixed and turned around. Maybe the Fed will come in and save all their buddies in real estate, in commercial real estate. I don’t know, that happened. Let’s not forget that the big banks kind of bail each other out. They don’t want to go down either. That could be a solution there. I don’t know. I’m staying out of it until it stabilizes.

Dave:
Just for the record, we had Brian Burke on last week. It’s a fantastic show if you wanted to check it out. It was just a week ago. I think it was show like 69 or 70. And also Kathy is referencing a conversation we had with the CEO of Fundrise, Ben Miller, to talk about leverage in commercial real estate, which is episode 65 if you want to check that out.

Kathy:
Those were so good.

Dave:
Yeah, great, great shows if you want to listen to that. Jamil, what are your thoughts on the commercial spot?

Jamil:
I got a really interesting insight having a conversation with Grant Cardone just recently, and he’s forecasting a catastrophic situation in the multi-family space coming around the corner. And this is what is his prediction, that a lot of people bought some fantastic assets on some very short-term bridge financing because the market was so overheated and it was so exciting and people were getting in and there were so many syndications and so many purchases made, and a lot of that debt is going to be coming due and none of it is going to be able to be refinanced.
And so there’s going to be an incredible implosion, he calls it the big bridge collapse is going to take place and there’s going to be a huge opportunity in multi-family investing, but it’s not now. And so I’m a fan of Grants. I watch what he does in multi-family investing.
I personally, you guys know my story with multi-family. Every time I touch the burner, I get burnt. And so luckily I didn’t buy that 12 and a half million dollar asset that I was going to purchase because I would be here right now crying my eyes out because I would’ve literally been losing millions of dollars. Instead, I walked away from a half a million dollar earnest deposit to live another day. And so I was going to be one of those people. I was going to be one of those folks on the bridge where it was about to collapse. And I think there’s going to be a lot of investors out there who were going to be caught up in it.

Dave:
Yeah, there’s so much to that. First of all, your story with that property has been a rollercoaster. Just as a reminder, Jamil is going to buy a deal. He had to walk away from it due to financing issues and lost a good deal on earnest money. But now you’re saying that you’re happy about that even though I’m sure it hurt at the time, but it could have been worse if you actually went through with the deal.

Jamil:
Oh, I would’ve been out millions and millions and millions of dollars. There’s no way I would’ve gotten out of that thing because we were, again, overpaying for the current situation, and we would’ve been sinking money into capital improvements. We would’ve been doing a lot of renovations in there. We would’ve been trying to push rents, and we may not have been able to do it. And then when it came time to refinance, we’ve going to have all these lenders looking at us and saying, “Sorry, this just doesn’t pencil out any longer.” And so we would’ve had to come to the table with more liquidity, which we may not have had. And so we probably would’ve ended up giving the asset back and losing our down payment, losing our renovation expenses, and letting some other investor come in and take the opportunity.
And so that’s exactly what would’ve happened, and I think that there’s going to be a ton of opportunities and a ton of situations exactly like that are going to come to you in the next 12 to 18 months that people are going to be able to take advantage of. And like Kathy said, pain or pleasure, someone’s pain is going to be somebody’s pleasure in that situation. I’m just glad it ain’t me.

Dave:
Yeah, I mean, it’s such a good point. Regardless of commercial real estate, just good lesson on recognizing the sunk cost and walking away from it and damage control. I’m sure it hurt to walk away from that, but it’s limiting your downside risk and actually clearly was the right move at this point. Henry, what about you? What are you thinking about the commercial market?

Henry:
Yeah, man, I’m obviously cautious with it. I don’t do large commercial deals, not that I wouldn’t do the right commercial deal, but I have always been in the same boat, and this is just my investment philosophy in general. If I am going to do something outside of my normal bread and butter, my bread and butter is singles, small multis, buy and hold and single family flips. If I’m going to do something outside of that, it’s got to be a home run, no-brainer deal. And I have not seen a ton of those opportunities. I actually see the opposite.
I’ve seen people coming in and paying tremendous amounts of money for these large scale multi-family deals, and even in more specifically in my local market, there’s a ton of new construction, large scale, A class, multi-family properties being built. I mean, literally, you can drive five miles and see five different places being built, and they’re all A class, they’re all competing with each other.
And so as these things are coming into completion, I drive through, and the parking lot just aren’t full. So I know there’s been a ton of money raised and dumped into these properties, and so I think there will be opportunity, just like Jamil and Kathy said down the road of people who can’t get financed for these when the loans come due. But also I see an opportunity in the C class apartment space because I think they’re just not being looked at as much, because just what I see is people when they want to buy the multifamily, they want to buy the A class, they want to dump all their money in the A class, but there’s phenomenal opportunity in the B and C class, especially in the hybrid markets you’re talking about, because not everybody in these hybrid markets is buying. And so I would buy the right B, C class opportunity. I would stay away from A class in my market.

Dave:
All right, well, great. I tend to agree with you guys. I am going against one of my rules or rules of thumb about real estate to not try and time the market, but with the commercial market, I think I’m trying to time the market a little bit, I think. When Kathy and I spoke to Brian, he’s put it well. He said that there’s like a pricing exercise going on, or I forget exactly how he said it, Kathy, but he’s basically said, “People don’t know how to price multi-family assets right now, and that’s not a game I want to be a part of. I’m going to wait until the buyers and sellers figure that out, and as a passive investor, I’ll wait to see where they land before jumping back into that.”
I also recommend, listen, check out, show 721 on the Real Estate podcast. I just finished recording that with the CEO of Bigger Pocket, Scott Trench, who shares his thoughts about the commercial real estate market. Really interesting insights there. So if you want to learn a little bit more about that, check out 721 on the Real Estate Show.
All right, well, thank you all so much. This was a lot of fun. If you want to read the full report again, it’s biggerpockets.com/report. It’s full of all sorts of more information, background, context, recommendations, thoughts for next year. If you want to invest in 2023 and take advantage of some of the opportunities and avoid some of the risks that we’ve been talking about on this show, hopefully that will be a good place for you to get started.
And of course, keep listening to this podcast over the course of the year where we’ll keep you updated on market conditions and help you adjust your real estate investing strategy to meet those market conditions.
Henry, Kathy Jamil, thank you all so much for being here. Thank you all for listening and we’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Genal, and a big thanks to the entire Bigger Pockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.