Did High Interest Rates Kill House Flipping?

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined today by James. James. How are you?

James:
I’m good. I’m excited to talk about, we get to hang out some deal junkies today. My kind of show.

Dave:
Yeah, this is your favorite kind of show. We are going to be doing a flippers’ panel today. So we’ve brought in three, well, two flippers on top of James, who’s obviously an expert flipper. We have Tarl Yarber, who has been around the BP sphere for a long time. So if you watch BiggerPockets YouTube, he’s been on a lot of our podcasts before. So if you know Tarl, excellent, very experienced flipper. And we also have Jessie Rodriguez joining us, host of HGTV’s Vintage Flip. He operates mostly out of Southern California.
James, given everything that’s going on, it’s an interesting time for flippers. What are you looking forward to talking to these guys about?

James:
I’m looking forward to just adjustments, right? With every market cycle you got to change all your businesses, but especially your flipping, like how you’re doing it, who you’re hiring, and how you’re [inaudible 00:01:12]. And how people are making money, because people are a little spooked right now, but it’s a good business to be in.

Dave:
Yeah. Yeah. And today I expect that we are going to hear the good, bad and ugly. There’s obviously some good stuff in here, but we both know Tarl, He likes to keep it real and explain all the sort of behind the scenes things that are going on, and it’s not all glitz and glam and some of the challenges of the business. So I think anyone who has has a preliminary interest in flipping is definitely going to want to listen to this show, because I think between the three of you there’s something like 1500 deals flipped, something crazy like that. How many of you flipped?

James:
We have done about five to 600. We’ve been involved in over 3,500 transactions with flips with our clients, blended money and ourselves. So it’s over a billion dollars in flips we’ve done.

Dave:
What?

James:
Yeah, or transactions with flips. So we hit that threshold last year.

Dave:
Wow. Oh my God, that’s insane. All right, well, I’m sorry to have said 1500. Yeah, a little tired. Just a couple deals. Wow, 3,500, that is wild.
Well, today in this episode we are going to hear a little bit about a concept called dollar cost averaging. If you’ve never heard of it before, it’s a term popularized in the stock market. And the general idea is that rather than trying to time the market, you inject capital into your portfolio at regular increments. So if it’s stock market, maybe you take some money, put it in once a month when you get your paycheck or something like that. With real estate, maybe it’s you flip a house every six months regardless of market conditions, or buy a rental every two years. And the idea is basically that because asset values accelerate over time, if you can just pin your success to the average return, you’re going to do really well. And this is sort of just this sort of humble way of admitting you can’t time the market, and you’re just going to ride the general market sentiment. So just wanted everyone to be aware of what that is before we get into that show. But with no further ado, let’s bring on Jessie and Tarl.
Jessie, can you tell us a little bit about yourself for those of our audience who don’t know you already?

Jessie:
Well, what’s up, Dave? Thanks for having us. James, Tarl, how are you, guys? So started flipping in 2010 after the market crashed. I was a big REO agent, so sold hundreds and hundreds of houses. Started seeing everybody else buy my stuff, and I said, “What the hell is going on here? Why are these people buying homes that are depressed, that are underwater, but the rest of America don’t want to buy anything?” And picked up one of the investors, started working with them, became a mentor, and taught me the game of flipping. Still one of my good friends to this day, I still lean on him. And then here I am, 12 years later after doing that very first deal that I bought for $65,000 in Southern California, which is insane when you think about it. It’s like 650,000 now.
I probably should have learned the buy and hold game in 2010, because of what I want to be right now. But over 400 flips later, still active, 17 of my pipeline today in this crazy market that we’re in. I’m terrified of it and love it. It’s an addiction. And I am flipping in Southern California, which is one of the hardest markets in the country to really do it, where my average purchase price is like a million bucks, and average rehab is 350,000. So, when you say 15 or 16 deals, all of a sudden it equals 20 million bucks out, which is a lot of money. And thank God James gives me all his money so I can do it. So yeah, it’s been fun, man. I love doing it. It’s crazy.

Dave:
Nice. Well, we can at least give you a space to talk about your addiction here today in good company.
Tarl, you’ve obviously been around BiggerPockets for a very long time and a regular on our YouTube channel. But for those of you who don’t know, can you tell us a bit about your flipping experience?

Tarl:
Yeah, sure. So I bought a seminar in 2005 when I was 20 years old, it was called How to Turn $10 Into $10,000 in 30 Days or Less. And it was about wholesaling real estate. I did three deals. And the third deal, we made a hundred grand on as a double close, and then I quit, because I hated every second of it. So I didn’t get back into it until 2010. And actually, it’s funny, Jessie, so you said you were an REO agent. Were you in Southern California at the time?

Jessie:
Yeah, Southern California.

Tarl:
Yeah. So I got associated with a company called Charter Home Alliance outside of Scottsdale, Arizona, where we were a SAM contractor for Fannie Mae. So we would do service area management. So we would do construction for Fannie Mae on REOs, and that’s how I got back into the industry, was I flew around and opened up seven different states. And basically in a nutshell, met all the REO agents, met all the contractors, set up tons of networks. And through that we got involved back into investing in real estate mainly because everything was just sitting there, and REO was insane, and we had access to all the infrastructure and operations. Me and two of my buddies basically started another company and then started buying. That went well until February 2014, and then the three of us broke up because the other two became, in my opinion, they became crazy. Money does funny things to third people.
So one of them got into drugs, it was just stupid stuff and I left immediately. Never wanted to do it again. And then in October 2014, one of the funds that we partnered with a lot hit me up in Seattle. This is when I moved to Seattle and said, “Hey, let’s partner up in JV on deals.” And I started fixating real estate at that time. That’s when I started buying a ton from Jimmy, actually, James is there on this. I think in, what, 2015 or 2016 bought 30 houses from me, I can’t remember how many, but that was how I got back into the business.
And then by mid 2015, I stopped partnering with people and started doing everything internally at that point and went crazy. If you add everything up, approaching probably 680 plus deals or so, give or take, since 2010. And that also includes all my partnership ones that I did with my buddies in 2010, 11, 12, 13, and part of 14. And then, yeah, mostly Seattle, Tacoma, since 2015, also Portland. And now I live in Austin.

Dave:
Nice. Do you still hate it?

Tarl:
Oh, I’ve never liked it.

Dave:
Not Austin, just real estate.

Tarl:
Oh, yeah. I like Austin. I’ve only done real estate for money, and I’ve never enjoyed it too much. I’ve enjoyed the bank account.

Dave:
Wait, are you being serious?

James:
Honestly, I love that.

Tarl:
I’m a hundred percent serious.

Dave:
It’s a means to an end, right? You don’t have to love it.

Jessie:
I don’t think I’ve ever heard somebody say it like that, that’s so successful. I love the, “I actually hate it, just like the money.”

Tarl:
It’s more fun to say, “Yeah, I hate real estate.” I mean, I hate moments for sure. I love holding onto real estate now, which is great, until a tenant becomes an issue and I hear about it. I do everything I can to know nothing about what’s going on with our tenants on our properties, but I know we’re going through an eviction right now. And I hate hearing about that stuff and whatnot. So it’s great when I look my balance sheet, that’s fun.

Jessie:
It’s funny you say that because I hate rentals. I’m addicted to the flip. I mean, any deal, whenever I buy a rental, and James owns a few, I look at it and I go, “Yes, $200 in cashflow. Woo, let’s go, baby.” Or flip it and make $42,000. And it’s like, now here I am 10 years later and I have eight freaking rentals. That’s it. And it’s like probably should have kept some of those.

Tarl:
We’re in the same boat on that. I didn’t keep my first rental until 2016.

James:
And at the end of the day, each property has a purpose, and that’s the purpose of flipping. We could keep them, you can buy them, but at the time you’re making a decision to increase every property. I don’t really have any regrets of the properties I sold because each flip had a purpose. And for the last 20 years as we’ve been flipping homes, it always has a purpose, and you have to kind of adapt and change with the markets. And right now, the purpose is-

Dave:
The purpose just making you as much money as possible.

James:
It’s to grow your cash. The more cash and capital you have, the more passive income you can have, and the more passive income you’ve got coming in, the more you can chill out, even though I have not figured out how to chill out yet. But it all has a purpose. And right now it would’ve been great to keep them, but in today’s market, it’s hard to keep rental properties because the rates are so high. And flipping has a really good purpose in today’s market, you can buy properties still increase your cash, and with the cost of money being very expensive and everything being expensive, it will grow the capital.
And that’s the beautiful thing about flipping in today’s market, in this market has been changing rapidly with their interest rates. And I think what we’re diving into deep today is you can flip in any type of market. I’m excited to have Jessie and Tarl in here because they’re a bunch of deal junkies, and I get along well with deal junkies. It’s not chasing that deal and growing money. With flipping right now though, Jessie, I know you’re in a very expensive market, the rates are expensive. I know for us as borrowers and flippers, cost of money has gone from 8-9% to 10 to 12%. What kind of changes have you made in today’s market with buying with the cost of money being at where it’s at your whole times, and then also with the dispos taking a little bit longer? Because it makes a huge impact when you’re buying a million bucks, that’s 10, 12 grand a month in your hold times.

Jessie:
Yeah, I mean it’s a ton. So I’m at just under one point and nine and a half still. So my rates are still pretty good on hard money with a 15% down of load to cost. So it’s decent. I loved it when it was 10% down. The key right now is I’m buying a lot less though, James, where I used to keep 25 flips going up one time, and that doesn’t mean I’m flipping 25 at one time, just means I’m holding 25 and making payments on a bunch while I’m flipping 10. So I’ve gone down to 11, 15, because I’m trying to turn them faster. I looked at the math and I said, “How many crews do I have? Let’s divide it up. How fast can I turn these? How long can I let something sit?” Because the problem when you’re a flipper is you don’t ever want to say no to a deal.
Someone brings you an opportunity, you say no, you worry that it’ll come back again. One, I’ve got some patience now and I’ve been okay to say no to some stuff and let them realize, “Hey, I’m still buying. I just need to sit tight on this one because I’m maxed out.” But it’s all about speed. Because we see rates right now are going up. What’s going to happen happen? We’re hitting the winter months. Is it going to slow down? We had a great peak this spring where everything I sold, I sold for five, 8% above list price, which was fantastic. And when you look at it, I’m looking at the average of the whole year. I hate what could be coming here in a couple of months in November and December, where I list something and I might get 5% less now, but I made up for it in the front half of the year.
The way I look at, I’m always flipping, and I’ve been flipping for 10 years straight, is, I don’t necessarily look at every deal on a deal by deal basis. Obviously, I want to win on every single deal, but I’m okay with looking at, “All right, I flipped 28 this year. I was definitely way up on all of them. Couple that didn’t work out because I went overrun on costs, or timing, or I did a bunch of projects where I’m adding accessory dwelling units, so that picked up the timeline set of six months. I’m at 12 months, I’m at 15 months on some of them.” But the value add is so big that I’m able to offset if the market adjusts a little bit.
So there’s a balance there in those that I really like. So a lot of it right now is just speed, speed, speed. And luckily, my money is still pretty good. But when I started I was at three points and 12% on my hard money. I see people like, “Oh, rates are so high, rates are so high.” I mean, I flipped a couple of hundred homes at three points and 12%. So it can still be done, just buy better.

James:
I was getting loan shark money back in the day, it seemed like in 2008 we were financed at four points at 18%, and that was the best we could do in 2008. And I’m pretty sure my legs would’ve got broke. We didn’t even turned the money.

Tarl:
To that point though, Jimmy, I mean, those of us that were in the market even that time period, I think about why Jessie didn’t buy you hold onto much. I didn’t hold on too much. It was hard to get long-term financing, but it was easy to get… You had hard money, so it was like a lot of us were flipping because money was harder to get, but deals were out there. And I think that’s just something to realize a lot of us, we can’t wait for the market to crash if it crashes at all. But when it does, money’s harder to get and people usually run away from at that point. Or they don’t keep the deals or they flip them or whatever, a wholesale or something like that.

Jessie:
Yeah, because the DSCR wasn’t around in 2008, 9, 10, 11 and 12, when you could buy everything for under a hundred grand in California and then BRRRR out of it. That’s a newer product. So you’re right, I remember having these amazing deals, having a ton of equity and then being like, “Okay, I can’t refi out of them, because I already own four or five in my name,” where there used to be a cap on conventional financing on how many you can have in your name and things like that. So it’s been good the last couple of years with all the BRRRR, and the DSCR stuff.
And James, you mentioned earlier about there’s a function for the money and right now maybe if we can’t refinance out of stuff, or it doesn’t make sense to hold the rental. So yeah, this is the capital growth phase of our business for the last few years. You guys, I mean, James, you probably held onto a lot of deals in the last two, three years when you were able to get three and a half, four and a half percent DSCR loans, I would imagine. Now, if those aren’t penciling, now you’re like, “Just turn the money, build more capital. If the market shifts in another two years and rates come down again, then you move to that cycle again and you hold more rentals.” Am I guessing that correctly?

James:
Yeah, as capital gets constrained, and I think this is a good thing to discuss, flippers have to adjust. In every market you have to adjust. And money was really loose. You had DSCR loans, which were basically loans that covered… Your income would get you qualified for the loan, right? So if you had higher rents, the lender’s going to lend your loan amounts based on the income you’re bringing in. Hard money was cheaper too. Down payments were lower. And what’s happened with hard money is it’s gone kind of back to what it was. Standard hard money downs were 20% down. And lenders have to protect themselves as the market gets riskier, and that’s what it is done for flippers is it’s tightened up the market again, but it’s just, as the money increases, that just means we have to pivot. And so Jessie and Tarl, what pivots have you guys had to make when you’re buying now, when you have an extra two to three points on your monthly interest?
I know it’s affected us quite a bit, because we’ve been flipping a lot of multimillion dollar properties. So if I got a $2 million loan, my payment is 2020 grand a month. And if I got 10 of them, it’s a big nut. And so that basically boxes me into where I can only do a certain amount of projects of that size. What pivots have you guys made to buying in today’s market? Because as the market has cooled down, it’s also created some amazing opportunities. We’ve been buying things a lot cheaper right now. How have you adjusted around? For us, we got to buy deeper, we add extra carry timelines on there. If our average flip was taken to about six to seven months, we’re running our performance at eight to nine months just to be safe. What adjustments have you made with this cost of money, because has really locked up some flippers and it’s made a lot of them go to the sidelines rather than just keep buying?

Jessie:
Well, I’m seeing, I’ve moved a lot back to the minor cosmetic when I started in 2008 and 2010. So [inaudible 00:16:52]. Trying to get into a property and see if I can flip it at four months, but not doing the additions, not doing the accessory dwelling units like I’ve done for the last couple of years. It’s not to say I won’t do one if I see a big opportunity, but I’ve got a handful of the deals that I’ve sold in the last three months that it was lipstick. I mean, it was just new cabinets, new countertops, laminate wood floors, the way I used to do it. The stuff that I don’t want to post on Instagram, the finished product looks like something that Tarl would have to flip my flip. But I’m getting in and getting out fast and make it 40 grand, and the carrying costs are very low, hard moneylenders are very happy with me right now, my private guys because turning the capital.
Because a year ago, they’re like, “Hey, man, you’re holding onto this low for 12 months, 14 months. We need you to start turning this a little bit quicker.” So I’m really glad the adjustment happened, because it kind of got me back to the beginning of when I first started flipping, and how it was just a volume game, just quick, quick, quick, instead of chasing big home runs on large purchase prices. That’s probably the biggest adjustment that I’ve made.

Tarl:
For me, I mean, full disclosure on my part, I wouldn’t say I’m one of the guys on the sidelines, but I definitely for sure am not on the starting line right now when it comes to investing out there. I’ve been looking for any excuse whatsoever for probably the last four years to stop buying properties. And last year I already moved out of Washington, all my properties I own are in Seattle and Tacoma area, and I was just looking for an excuse even before the market shifted and before rates even went up to just stop buying in that area to begin with for a period of time. I think it’s just because I was burnt out of that area and I just didn’t want to be there. That had nothing to do with markets whatsoever. It just had everything to do with personal lifestyle. But when the market changed and when the rates went up, I used that as a reason to say, “All right, I just don’t want to buy right now.”
So we closed everything out last year. And then here in the Austin area, I was really seriously looking for some time. What we instead did when it comes to finance and money, when it comes to debt wise, the stuff that we have done has been more with private capital, and also with private lenders instead of traditional lenders. And any type of financing that I’ve had to do outside of that has all been just internal stuff that I’ve already had with lines of credit and so forth. And it’s just made it a lot cleaner on our end.
Right now, I’m very seriously digging into multiple markets to jump back into. I’m still looking at Seattle/Tacoma to jump back in there again. That’s why I was like, “Hey, Jimmy, I’ll call you later.” But for the most part, there’s a few other markets that I’m more focused on, just because of cashflow purposes and being able to buy cash, raising money and so forth to be able to do that, instead as a cash hold, instead of having to deal with having to get debt and rely on DSCRs and all that stuff right now with rates being so high.
And that’s what I’m more focused on more than anything right now. It’s forced me to do what I should have done a while ago, which is focused on the long-term. I think one of the things that I’ve loved about house flipping is that, I joke about you get to weigh your money instead of count it, when you do it. But at the same time, I have a good buddy of mine that only bought and hold since basically 2009. And he does really, really well with budgets, right? He’s making 200 bucks a month on a house. He’d have to save money up and go buy another down payment, and get another down payment and save up for another down payment, or leverage and get a line of credit, and then use that to go get more down payments on the houses and then pay those off, so forth.
So he is really good at budgeting. When you look at a lot of house flippers that were making a lot of money, we were the opposite. We didn’t have to budget it as much because we were making so much cash and whatnot for it. So it also had me thinking short term all the time, like six-month increments instead of long-term increments. And for me personally, with the way rates are, I’m happy that it’s done that. I am hoping that the rates don’t ever go down anytime soon. I hope they stay up.

Dave:
Why? Because you want prices to go down?

Tarl:
I don’t think it’s going to affect single family as much as people might believe due to rates. We can talk about unemployment, I think that’ll affect single family more than the rates will. But if the rates dropped right now today, I think it would just destroy our economy in so many ways. There’s reasons for that. It’s already on track for that. But real estate shouldn’t spike up like it did the last few years. We all know that. We’ve all benefited from that. I’m thankful for it. But at the same time, if it all of a sudden just dropped dramatically right now, it’s going to create more issues than good.
And also bring more people back in the market and create more competition in the short run drive prices up again, which I don’t think is a good thing. And I got a lot to say about that, but that’s where my brain is right now. I want the rates to stay up right now.

Dave:
So, why then are you considering jumping back into the market? And are you looking at flipping or more of a buy and hold strategy?

Tarl:
Both. So the reason why I’m jumping back in is I can’t time the market, it’s at the end of the day. For me, I took a little break, and being able to just have more fun and shore up some stuff on my end, we’ve been putting more money into the deals we already have. We have some commercial properties, we’ve built up more. We have some single families, we have some build projects that we wanted to get back on track and stuff for our end. And more focusing on that to be more strategic this time, and not just reacting to just flip, flip, flip, buy, buy, buy, because you have a machine that you have to feed. That’s one of the things that is cool, is you get to build this great operation when it comes to flipping, but at the same time you got to feed that machine. And I always kind of hated having to flip to feed the machine, versus being able to keep everything and whatnot, which that’s just more my mentality lifestyle wise in my head. Dave, I’m sorry, I ranted, what was the question again?

Dave:
No, you answered my question. I was just asking about flipping or renting. It sounds like both.

Tarl:
Yeah, both opportunistically. But more on the long-term thinking of it. So dollar cost averaging houses and whatnot, being able to sit there and go, I can’t time when the best market is. I’ve thought the market was going to crash since 2016. And every single month I’m like, “This is the month we’re all doomed.” And I’ve been wrong every freaking time. So when Covid hit and your bank stopped lending, I’m like, “Get rid of everything.” We didn’t do that, but I was definitely thinking it. So I’m sure some of us were too.
But at the same time I’m like, “I can’t do that.” So instead, I think single family is still a good investment. I think that, for me, getting back in the game more hardcore over the next 18 months has a lot to do with what I think might happen in the multifamily world and commercial world later down the line, so that we’re building up our credibility still in the space in different markets. So that way when things kind of fall apart in the other asset classes, we already have the ground and operations set up in the markets we want to be in to be able to maybe grab some bank owed properties that are more in the multifamily side.

Dave:
And before we move on, Tarl, I want to ask, because I think you’re the only one here who’s actively looking at new markets. What are you looking for in those new markets for flipping or buying hold?

Tarl:
So we’re looking at everything as cash. So we’re not really caring about the interest rates as much. So things have the pencil out there. So it’s got to be, I could list some of the markets, but for the most part, if we’re buying something cash and forcing the appreciation on it through the burst strategy, but without actually refinancing instead holding a cash, then these markets have to be able to pencil out at least on an eight cap of some sort, seven to eight cap, for a rental buy and hold. But that’s also forcing the appreciation through the bird strategy. And at the same time, there’s got to be demand in those areas and have property management in those areas, and all that stuff, because we don’t self-manage inside. So there’s great markets that I’ve been looking at that are fantastic for maybe a flip, but would suck for buy and hold because property management would suck in that area.
And at the same time for us, we’re looking at where are people moving to? Where are the jobs going? What’s the sustainability? Was it one trick pony kind of town that’s out there that’s dependent on one industry? Just all the basic stuff that you’re going to want to look at for long-term growth. Versus flips, there’s tons of, I think you could flip anywhere, in my opinion. Doesn’t matter what’s happening in that market, I literally think you could flip anywhere and jump into a market and make something happen. It’s just, do you want to hold onto that property for five to 10 years in that market? That’s where the challenges come in that kind of change our thinking on things. I’ve never thought long-term in this business, ever, so it’s always been six months at a time. So it’s been an interesting game that we’ve been playing lately on my end to get rid of that thinking.

James:
And I think what Tarl mentioned is a lot of flippers did, they took a little break to look at what’s going on with their current existing business to change their strategies around reset, because this market is creating different types of opportunities to flip properties a different way. Things that have caused us issues are the cost of labor. The market has gone up dramatically over the last three years. The labor has been a nightmare getting people to work, and getting people to show up. Especially in expensive markets, like Jessie, I know you’re in LA, right? Not only was there a lot of flippers going on, there was a lot of residential purchasers buying and building their dream homes, which are sucking up a lot of our flipping talent. Jessie, how have you combated? Because I know in West Coast cities, Tarl’s there, I’m there, they’re expensive, the labor’s a lot more expensive.
As we go into this new market, rates have changed, is creating different types of opportunities that you can buy. So things that we’re looking at is, how do we also reduce the labor costs and do things a little bit differently? What have you been doing to get those costs down? Because that’s a big deal going in. Money’s expensive, labor’s expensive, and the resale’s not quite as expensive as it was. So you got to change things around. So what have you been doing to battle that labor market down? It’s been a huge nuisance for us.

Jessie:
Yeah. So I think that the fact that there was Covid and everybody started building, actually helped me, because I definitely had a laziness factor where I had my handful of crews that I’ve worked with for so long that I stopped kind of micromanaging the numbers. It’s like a roof would used to be 10 grand, then it went to 22,000 or whatever, and it was like, “Well, but my prices went up a hundred grand. So I’m making more money so it makes sense that they’re making more money.” And I just didn’t question it. Then last year’s market happened. And all of a sudden it’s like, “Oh my god, this market’s going down. What are we going to do?” And I adjusted and I said, “Okay, well, I need to just get through my inventory.” So I stopped buying for nine or 10 months total, just kind of like what you talked about.
And it was all a function of I just want capital to come back in so I can reassess. And when I was doing that, all of a sudden I’m like, “Hey, I need to go get three bids for this roof. Let’s clean up all these systems. Let’s button down the budget. Let’s make sure that we’re not just being sloppy because we’re used to doing so deals and used to making money and we weren’t watching it.” So the biggest thing we did, James, was just kind of get back to the basics of saying, “Hey, I love you and I appreciate you and I know we worked together for five years, but your prices have creeped on me a ton, so I’m just going to go get two more bids.” And then I can get those bids and I could go back to leveraging them.
And the one thing, because when you have a crew that you’ve been working with for five years, 10 years, that they’ve never had to go get another job, because they know that Jessie’s always feeding the machine like Tarl said, right? It’s like, “I got to make sure I keep buying a house, because I don’t want to lose that crew.” That is a legitimate fear, because I don’t want to have to go out there and train. Well, last year when I knew I was downsizing the business and slowing it down, I was like, “Oh, I’m starting over, essentially. I don’t mind going and interviewing new crews.” And that was huge.
I brought my cost down on these rehabs like 30, 35%. And it was kind of sad to say how loose I was for so long, because when money’s coming in, you don’t necessarily need to micromanage every little piece of it. So for the last 10 months, 11 months, we’ve been buying a ton, and scaling the business back up. But at these better margins now, at these better expense models, which has been really, really cool. So plus, making sure that I’m flipping them faster. Yesterday I did a video where I said, “I’m busting the Dave Ramsey debt model of stacking payments to chip away at one credit card, then move all that money to the next,” it’s called the flip stacking model. I’m moving three crews to a house today.
Because I’m like, “Hey, if this market’s going to adjust on us the next three months and I’ve got 11, am I working on 11 at a time and then I’m five months from now, and then they all come on the market?” I’m like, “No, I need something on the market in two weeks.” So it’s like landscape crew, exterior crew, interior crew, pulling from three different houses onto one and get everything, get that house done in two weeks, and then stack that crew to the next one. Because now I just want to make sure I’m getting something on the market every two to three weeks, instead of the last five months of like, “Oh, I’m going to have all these beautiful projects, and then you’re kind of slow because waiting for a sub.”
It’s like, “No, I’m moving everybody and I don’t care if they’re on top of each other, and I don’t care if they’re off at me, that the painter doesn’t like that the one guy’s there, and they’re always pointing fingers.” It’s like, “Deal with it. I need this house done. Everybody’s on. We need to be on the market by September 15th and then the next project by October 1st, the next project by October 15th.”
So that was I think a topic that I did, or an idea that I did, six, seven months ago when the market was different, or a year ago, and it really worked. And then all of a sudden I stopped doing it again. And then now I’m like, “Go right back to that model. Let’s push, push, push.” So just micromanaging the crews more than ever has been a huge way to get those costs down and making them realize that I’m not just a fat cat that they can always count on and that I’m not checking their budgets or their numbers anymore.

Dave:
It’s really interesting, everyone, you sort of get complacent and you start trusting people. And I mean, it’s just inevitable. But I’m curious, how big a turnover was it? You run a lot of crews, how many are you still with that were with you before you started this crackdown?

Jessie:
So last year, seven crews that I had for multiple years, and I’m down to two.

Dave:
Oh, okay. But are you still at seven total crews, but you replaced five?

Jessie:
No. So from seven down to two, up to five. Added three more. What I’m realizing is the old model of the two-man crew, or the three-man crew, that would do everything on a house, doesn’t seem to make sense today like it did seven, eight years ago. I’m actually finding that it’s cheaper to go to every single sub, than the idea where it used to be like, “Oh, this one crew does paint, laminate baseboards, they install cabinets, they do all the minor electrical, minor plumbing.” Now it’s like, “Dude, it’s cheaper for me to go with a stucco guy than to have my two-man crew,” because when you’re paying these guys 200 bucks a day, or 250 a day for a two, three-person crew, and then it takes them three weeks to do stucco versus a professional crew that comes in, the cost may be the same, but the speed. That’s the biggest thing right now. Everything is speed.
If I can have a stucco crew out there while I have the wood floor guys on the inside, while someone else is building a fence and the exterior, it’s better to go that route because I just knocked out three trades in the same week and a half than having that crew that kind of jumped, because I was trying to save 20 grand. It’s not saving me 20 grand when we have 10% interest rates on these hard money loads.

Tarl:
I think the biggest thing you just said to everybody listening to this is how much we’re all excited to be learning how to flip houses because we want to learn construction. And all of us got into this business because we love construction. And the fact that you’re just mapping out a lot of what you just said, Jessie, though, requires a lot of project coordination, project management, timing, being able to figure out, making sure the subs don’t step on each other and stuff that you don’t have electrician going in there at the wrong time. And the same thing with plumbers and HVAC guys and whatever.
But that requires a lot of, which is all true, I mean, the three of us, Dave, I don’t know if you flip, sorry.

Dave:
Nope.

Tarl:
For the three of us that do, most of us have gone to that model of hiring subs directly versus the one GC, but it is because we leveled up our construction game because we had to, right? At some point. If we all wanted to, we’d hire one GC and walk away and never see the house again until it’s done and they call us up saying, “You can list it.” That’d be freaking awesome. That doesn’t happen.

Jessie:
We just have to be better buyers to do that, right? We can get it for 30 cents on the dollar, let the builder do it, make his 25% GC fee.

Tarl:
Yeah, but that’s what happened when the market shifted. I think it brought up so much to people how bad they were at their operations in their business, in a sense. And where our business as house flippers or investors, the 80 plus percent of it is in the construction of the rehab on the day-to-day working aspect of it. The acquisition side of it, you can be like me where we don’t door knock or do direct marketing, we just go buy from wholesalers and agents. So you have to have that aspect of making sure you’re comping the properties correctly and you’re getting the right deal. Or you can be a business that’s also direct marketing, acquisition and sales, all that great stuff, and you’re buying the properties in additional to rehab. But if you’re just focusing on buying the properties and most of the business is in the construction of the rehab and making sure you’re staying that budget, and with the way things have been, I think it woke up a lot of house flippers to be how bad they were at that.
And in order to make the business work today, it’s having more sure numbers. I remember, Jimmy, I don’t know if you remember this, I remember you and I talking on the phone I think in 2022 or 2021, I can’t remember. I think it was 2021. We were just like, “Let’s just throw darts to figure out what construction cost is going to be today because it’s changing so dramatically.” But that said the other aspect of when the market shifted a lot of house flippers, there’s a number of house flippers that were terrified of losing their ass, basically, and losing money, and the way rates are and whatnot. And because their projects were behind and there’s a bunch that did, but Jimmy, not to keep bringing you up, but I remember us being at BP CON last year and we were kind of talking about that, and I agree a hundred percent with what you said, is these guys that were complaining about losing money, they’re not remembering that they made a million bucks flipping houses already. They just didn’t save any of their money.
So the reason why most house flippers lose at markets like this is because of poor cashflow. And I mean, business cashflow.

Jessie:
And how most flippers the last few years thought they were Gs is because they flipped the house and it made a hundred grand more than they expected. Even though the rehab costs went up 50,000, and they still made a hundred, right? It’s like had nothing to do with the flipper, had to do with the market, just went up a ton because of Covid. And then they started getting cocky, and then they started buying at lower spreads, because everything was like, “Well, this deal has upside.” And that’s terrible. I mean, that is the quickest way to exit this damn business as a flipper, is to break your buy box just because you want to do a deal.

Tarl:
Yeah, or spend all your money. I mean, we lost 150,000 last year on properties, but that would destroy a lot of people. But at the same time it’s like, “All right, because we have cash that we were able to handle it, and it’s also an average of all the houses we do and everything, it’s just part of the business.” But I guess the thing I’m trying to say is that if you’re in this business, make sure you’re managing your cash flow because things change, stuff happens.

Dave:
Along those lines, are you seeing people leave the business not as voluntarily as Tarl may have due to force of circumstance?

Tarl:
I have. You could see it in, I mean, I don’t know who else has access to this stuff, but you could see it in the amount of people looking for new debt. And so what I’ve noticed is that people that were the A players before Covid and during Covid, were more likely to wait and see because they’ve already built it up. That’s what I’ve seen at least from people I’ve talked to, all the event stuff that we host and everything, that they’re more likely to not be jumping head first, because from what I’ve noticed, they don’t want to lose what they built. So it’s more of a fear aspect of, “I’ve built this up, I don’t want to lose it by risking it.” So they’ve already risked it before they build it, so they don’t want to do it again. And that’s not everybody, for sure, but there’s definitely a good chunk of people out there like that.

James:
And scared money don’t make money.

Tarl:
A hundred percent, a hundred percent.

James:
People are leaving and it’s like good, I’m thankful. Because honestly, it was too oversaturated for a minute and people were making bad decisions. And what we talked about is people got lazy, including myself. It’s like you could buy anything and it was going up in value. You could mismanage your project, you were going to make money. Now it’s gotten back to the grassroots of flipping. Buy a good deal, manage the construction, manage your plan, you can make account for your cost, and you can make money at it. And what it’s done, it’s funny because you hear people say like, “Oh, flipping’s a terrible thing right now.”
I hope everyone continues to think so because the margins we are getting, we were buying at a 30% cash on cash return prior to Covid, and that’s with leverage in there. It’s about a 13 to 15% cash on cash return. Now we are hitting 50 to 60% cash on cash with big fixers in there. So the margin has doubled, so it makes it less risky, even though the market’s a little bit hairy right now. Rates keep creeping up, it’s very sergy, people show up one day, they don’t show up the next. And you kind of have to weigh it out. But as long as you can pat it and there’s enough margin in the deal, my worst case scenario on a couple of my deals is I work for free. I’m still going through the process, but if the market corrects further, there’s still enough padding in there to get the deal done.
And so there’s some really, really good opportunities if you can put your pen to pencil, and you want to figure it out, like Jessie said, bring out more people, have it bid out numerous times. We basically fired every one of our contractors from the last couple of years and we restart, because it’s either get on the ship or get off the ship. And unfortunately, a lot of them, now they’re all calling us for work too. “Hey, can I get work?” And it’s like, “Hey, no, I will give you work, but we got to talk about this.” And so the sediment, it’s funny, it goes in surges. Your flippers are no different than your consumers. Every time the rate shifts like a quarter point, they show up to your house and it goes back up, they don’t show. The flippers are the same way. They’re like, “Oh, I heard it goes well, I’m going to look for a second,” and then pull back out. So you consistently keep buying, the margins are better.

Tarl:
Yeah, that’s a dollar cost averaging aspect of it, where, I mean, you can’t time the market you just got to… But I mean, everybody’s got their personal preference with what they want to do with their money at the same time.

Dave:
But Tarl, I wanted to ask you about that because dollar cost averaging I feel like works really well for rentals where there’s less risk of principal law, actually losing money. You could underperform, but it’s kind of a paper loss. For people who are relatively new, do you still recommend that strategy? Because if they have all of this capital invested into a pretty volatile industry right now, you might not get to average it out. It might just be one and done for you.

Tarl:
Yeah. No, you got to make money on that deal.

Dave:
Your first one, you got to hit it. You got to make money on that first deal. You got to make money on the first 10, right?

Tarl:
None of my advice ever, ever, whether it’s on my Instagram or anything I’ve ever done, has ever been for new people. I just want to throw that out there.

Dave:
Okay. All right. Fair.

Tarl:
No, you got to have money to lose and be okay with it. And you’re always risking. I mean, everything at the same time, and everything we do, is educated guessing. That’s what it is. We’re like, “Hey, I feel really well-educated and I’m guessing really strong because I’ve done this enough.” You’re measuring risk. Risk equals reward. It’s all about mitigating that risk and whatever you’re comfortable with. And I’ve seen a lot of new people that when the market was going up, still lose their ass, because they didn’t know how to measure their risk associate appropriately. It doesn’t matter what’s going on with the market, it could be going up and you could lose money, and there’s plenty of people that did that, right? And there could be going down and you can make a ton of money. So I’m not really too concerned about that. But whoever’s investing, I mean, if you’re taking your hard-earned cash or other people’s hard-earned cash, I hope you know what you’re doing. That’s what it boils down to.

Jessie:
I always say, and this is going to go opposite, I always felt like flipping is not risky. There’s so much science to it if you follow the science, and you establish a really good buy box, 65% of a RV. You know what I mean? The market would really have, everything would have to go wrong, which of course it could happen, but even through the last year, there was one loss that I took in the last 10 years on a house. There was some breakevens, or made five or 10 grand. And that loss that I took was out when I went out of state, when I left my core market and I was like, “Oh, I want to buy in Park City.” I also bought it to be an Airbnb. So I had this one plan and then decide, construction went bad, everything took forever, storms hit, and then I was like, “You know what? Forget this, dude. I don’t want this rental. The rents aren’t going to be as good.”
And then I decided to sell it, and that’s when I took the hundred thousand loss. And I was honestly happy to take it, because I was like, “Just get me the heck out of this market.” I moved to something I don’t know, go back to where the science makes sense for me, where I know Southern California real estate like I know it inside and out being a realtor here for 17 years. And so I feel so comfortable and safe flipping if I stay within my parameters.

Tarl:
I do want to add to that though. It’s just not to throw it out there, but it’s for those people or anybody listening to this that’s not on the West Coast, they might not have those same experiences with flipping and feeling comfortable with it, because us on the West Coast, we definitely benefit when it comes to market appreciation versus other markets and so forth. So it’s not always the same when it comes to that market.

Jessie:
Well, and that’s why I won’t buy out of state. You see a lot of talk about go get deals in Columbus, Ohio, or rentals. It’s like, even to buy a rental in California is so expensive. But when I look at like, okay, it’s expensive, I get more depreciation, I’m going to get more of an appreciation play over years, because this is one of those markets that goes up the most, rents increase at a crazy high rate. So if you are really good at buying every great flip, or not every, most great flips are usually good rentals because you’re buying for 60 cents on the dollar. And then we have all this upside. So it’s like when I have this great debate with friends that are like, “Dude, go buy 50 units in Ohio,” and I’m like, “I’ll go buy a four unit in LA where a one bedroom rents for 3,500 bucks a month.”
But I think I stay within my comfort zone, and why I think it’s safe to be an investor, right? Follow your buy box and stay where you know the market. I bought one deal a couple of months ago in Johnson City, Tennessee. Random as all can be because I was like, I want to test a place where I’m buying something for 70 grand that if everything goes sideways, it’s like, “All right, who caress? It’s 70 grand. I’ll still make a 5% cash on cash return, no debt on it,” stuff like that. And then I’ll see if I feel comfortable and start to go in those directions and do a little bit of more out of state. But every time I do the math on it, I’m like, “Just go buy a fourplex in LA.” With ADU laws, make it six units. It’s such an easy way to make money, I feel like, in a comfortable area.

Dave:
All right. So before we get out of here, this has been a very interesting conversation. Did not go the way I was expecting it to, and I like that.

Tarl:
We could change it. What do you want us to say?

Jessie:
What was the topic?

Dave:
No, I love it. I really like the diversity of opinions here. It’s great. But I am curious if people are interested in getting into flipping. Let’s start with you, Jessie. Do you have any advice on what they should be thinking about as we head into, not just an already difficult time, going into a difficult season of the year with rates marching upward? What advice would you offer?

Jessie:
I’d say when you’re penciling something out, overestimate on your rehabs, overestimate on how long it’s going to take. Just build a buffer in every single direction, which means it’s going to be harder to buy the deal. But if you do that, then the science is going to make sense and you’re going to be safer. So, I also think that flipping, I made a lot of money through the downturn, I made a lot of money in the up. I think we’re going to be fine, and just stick to buying something and be quick with it. If you’re going to buy something and you’re going to, “Oh, it’s going to take me 15 months to do,” don’t do it. Don’t buy something that’s tenant occupied. I get people all the time, it’s like, “I’ve seen this great deal. It’s got tenants in it.”
Like, no, not in California. Do not do that, right? Buy something vacant. Buy something that could be a minor cosmetic fix. Get in and out 90 days or back on the market in 90 days, and you’ll make a little bit of money. You’ll win, you’ll feel good, you’ll learn a lot, because it’s education on the first five, 10 deals, right? You’re going to have to go through all those growing pains. And us with four or five, 600 deals, we’re still learning.
So I would just take it safe. And I’m not a big off market guy. I’m big into agent outreach. I love getting deals from realtors. I feel like I get some of the best deals I’ve ever gotten. Not necessarily the MLS, but just realtors. So it’s focusing and hitting agents like crazy, and letting them know you’re an investor, I think is one of the best places to get a deal even right now.

Dave:
All right. Tarl, I know you are against giving newbie advice, but could we ask you for one nugget?

Tarl:
What’s escrow? That’s the quick no, anyways.
No, no. I’m totally onboard with that. I think one of the very first thing is, what is your buy box? What is the deal to you? And that doesn’t mean, what’s the deal to me? What’s the deal to Jimmy? What’s the deal to Jessie? We’re all different buy boxes at the end of the day, even though Jimmy and I were in the same market forever. But still, he’ll buy stuff that I won’t buy, and vice versa. There was a period of time where I bought a ton in Tacoma for years. And I’d get the deals from Jimmy because he didn’t want them then. But now he’ll take them all, I guess. But at the same time though, it’s like, “What’s your buy box?” So if you’re looking at a lot of deals and it’s like, “I don’t see any good deals.” And most of the time when I’m talking to somebody new and is saying there’s no good deals, it’s because they don’t know what a good deal is to them yet. They haven’t really refined that buy box for themselves.
And then once you have that buy box, make sure it’s realistic in whatever market you’re in. Because that’s the other aspect. You can have a great buy box that any of us would love, but then it might not be something that exists in the market that you’re at. And additionally, if everybody’s in this game at different levels, so some people are starting out with zero capital, some people have a lot of capital. At the end of the day, it’s like you really only need three things to do any deal, and that’s time, money, and expertise. So which one do you have? Are you the person with all the time that has no expertise and no money? Well, then you’ve got to go find people that have those things and add value, or go figure out how to wholesale, or something like that.
Which is a lot harder than it looks, by the way, the wholesale. It looks like it’s easy, but it’s not. You have to know a lot about the business to be very good at wholesaling. But that said, maybe you have a lot of money, but you don’t have the time and you don’t have the expertise. Cool. Maybe you shouldn’t go flip a house. Maybe you should go lend that out to somebody or partner up in JV. So just know where you’re at in that game and know what a buy box is for you, and then start looking for that stuff.

Dave:
That’s great advice. Thank you. James, you got anything for us before we go?

James:
Yeah. I think the best advice, if I was starting over again, is, everyone’s taught to chase the deal. If you get the good deal, you’ll make money. And flipping is a business, and you got to build it backwards, right? You don’t go start selling trinkets on Amazon and just going out and buying product without understanding the cost. Build your team, then build your buy box, because your buy box is going to get built based on the resources and people you have around you. If you’re new, go get your lender locked down. How much cash you need to put in that deal? What’s your cost going to be on that? Go work with contractors, find out what they’re good at, and then based on your resources, build your buy box and go start buying.
And so everyone, don’t skip the line and go buy the deal. Go get prepared to buy the deal and buy the right one. And if you have the right people around you and you have the right systems around you, that’s where you can flip in any market. And so focus on the people and the resources, not the deal right now. Once you have that, then go start buying.

Tarl:
That’s what I meant to say. All that.

Dave:
I concur. We’ll edit it. So it sounds like you all just said that. All right. Well, thank you all so much. This has been a great conversation. We appreciate your time and expertise here. Jessie, if people want to follow you, learn more about you, where should they do that?

Jessie:
On Instagram, at Jessie Rodriguez, J-E-S-S-I-E, for the spelling of Jessie. At Jessie Rodriguez.

Dave:
Nice. What about you, Tarl?

Tarl:
At Tarl Yarber, on Instagram.

Dave:
All right. James, why don’t you just tell us where we can find you?

James:
Best way is probably Instagram at jdaineflips, or jamesdainard.com.

Dave:
All right. Well, Jessie and Charles, thanks again.

Tarl:
Thanks, guys. It was fun.

Jessie:
Dave, thanks so much. James, thank you.

Dave:
On the market is created by me, Dave Meyer and Kaylinn Bennett. Produced by Kaylinn Bennett; editing by Joel Esparza and Onyx Media; research by Puja Gendal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show on the market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.