3 Types of Real Estate Deals that Work in ANY Market Condition

Dave:
What’s going on everyone? Welcome back to On The Market. Today, we have my friends, Henry Washington, James Dainard and Jamil Damji joining me for what is going to be a very fun episode. How are you all doing?

Henry:
Awesome.

James:
I’m doing great.

Jamil:
So good.

Henry:
We’re not doing as good as James because he’s in phenomenal temperatures and bragging about it, but.

Dave:
He looks so relaxed. He’s like Kathy. Yeah.

Henry:
Right?

Dave:
It’s that California lifestyle, just looking relaxed and healthy.

James:
Kathy is the most… She’s got the most peaceful vibe on her. She’s just a roamer.

Jamil:
Yes, that’s a nice life. Nice temperatures, nice life, Southern California.

Dave:
Today I know all three of you are excited to get into our due diligence section where we’re going to be going into deals that you all are actually thinking about or doing right now, which will be super fun. But before we do that, we’re going to go into between the headlines, talk about some of the latest news impacting the world of real estate investing.
And today we are going to play a new game called fortune tellers where you need to give me a 30 to 60 second reaction and prediction about what is going to happen given the information I give you. Everyone good?

Henry:
Let’s do it.

James:
Yap.

Jamil:
Yes sir.

Dave:
All right, sweet. So the first topic is about second home sales. I don’t know if you have been following this over the last couple of years, but at a certain point demand for second homes spike to 90% of pre-pandemic levels. So nearly doubling over the last couple of years. And all those gains have pretty much been reversed.
Redfin is now reporting that mortgage rate locks for second homes were up 9.1% from pre-pandemic level. So that was 90%. Now at 9.1%, basically back to where we were. Do you think this is going to impact the housing market? And do you think second home demand is ever going to spike like we just saw or was this a temporary blip? Jamil, what do you think?

Jamil:
I think it was a temporary blip. We all got trapped in our houses during the pandemic and we had these dreams and these ideas that, oh man, I want to live near James Dainard in Southern California, and I want that other lifestyle. I want to have options, right? And I think the pandemic gave us this idea that we all have options.
And so yes, there was a great demand, but with that demand, we have all of these situations that we’ve created from there. So I think that the spike in second home purchases was absolutely indicative of the time. And I think that there’s no chance of us getting back there again without another black swan event that pushes us there again.
And so personally I think that’s curved, but I still believe that just the general housing market with respect to rates and pricing, I think that’s also playing an effect. And so I don’t think we’re going to see it come back the way that we had it.

Dave:
Henry, what do you think?

Henry:
Man, I 100% agree. I mean, when you think about the pandemic changing everything, you were 100%, right? You no longer had to live where you worked, right? And so people got these grand… They got bored, and then they started thinking of these grand ideas of where they could live because they didn’t have to work there.
And then also you think about, you’ve got people who now had to live and work in the same space with their family members. And you saw a shift too in pre-pandemic. It was all about open concept and then pandemic hits and people are like, well walls and separation aren’t so bad, right?

Dave:
It’s so real.

Henry:
So people started looking for homes that fit their new lifestyle, right? So the second home spike was huge because people were well like, now I need a place that’s got more space because now I need a dedicated office space so I have to be working. I need to be away from my family in a room somewhere where I can get some peace and quiet or I can’t get my job done.
And the last thing that people wanted to do was lose their job in those unfortunate, uncertain times. And so yeah, that spiked second home and you just got people that got bored. They got bored and they wanted to feel good. They were scared and buying a new home kind of gave people that temporary, hey, this is exciting. I can be excited about something again.
And I think you saw a spike, but this is what everybody’s been saying, when are we going to return to normal? When are we going to get back to normal? Well, this is part of getting back to normal. We’re going to get back to the financial normal that was before, right?
So we’ve got, we’ll get back to second home price sales being down, we’ll get back to interest rates being where they were before that. All these things that people weren’t thinking about when they meant get back to normal is part of that too.

Dave:
Yeah, that’s a great point. James, I’m curious what you think in a broader sense, but also if you believe that this will impact pricing for short-term rentals, because a lot of second homes are in the same markets where people are targeting for short-term rentals. Curious what you think will happen there.

James:
I do think that that asset class is going to be the one that deflates the most or one of the most over the next six to 12 months. It reminded me and I was talking to somebody six months ago about this because these secondary home prices went through the roof in areas that do not typically appreciate that quick.
And they were appreciating probably 10 times as fast as they’re typically done. And, it reminded me of 2007 because it was the same type of concept. In Washington, we had this place called Suncadia. It’s a nice golf course community. People live there, they rent it out. It’s amazing. I had a BRB there myself, but I remember it inflated at almost the same rate as what it was doing right now.
And those secondary markets are the ones that popped the worst too. And so as the demand goes down, I do think that there’s going to be a good 10 to 15% deflation in that market. In 2008, we saw a 40% drop in those asset classes. That was a different thing. It was a totally different type of banking crisis. But as we see things come down, yes, people’s novelty of them do wear off.
They’re going to start selling them and then as people start to get a little worried about inflation, the secondary market, I do think that the VRBO market could slow down as well as liquidity dries up and an inflation starts really eroding people’s access to capital. The first thing that goes is vacations, going places and traveling.
And so I do think that the secondary home market, the Airbnb investor market it’s going to have a little bit of trouble over the next four to six months as it kind of normalizes out. But it’s what comes up must come down and the ones that hockey stick the most, those are the ones that are going to probably come down the quickest.
And if you really look at the secondary hallmark right now, as inflation’s eating up people’s expenses, you don’t want to go buy another house to service if you’re not going to rent it out. And in addition to when you factor in the new rates that are 30% higher than they were four months ago, it really affects your monthly payment to where it just doesn’t become worth it. And if it’s not worth it, things don’t trade.
So that’s where I think things are going to really settle down and come backwards. And and if you are looking for a secondary home, you’re probably going to be able to get one in the near future.

Dave:
That’s a great point, James. And one thing I’ve been reading about that I think was really interesting in this Redfin article is the authors were speculating that a big reason this is dropping off as well is due to the stock market just tanking.
There’s just so many people who had a lot of cash and just a lot of excess money to spend on a second home because of the stock market now that it’s down 20% of the year or whatever it is as the time of this recording. That until the stock market goes back up again, which could be a while, probably not going to see that demand go up.
All right, for our second headline today we’re only going to do two today. I want to talk about the lock-in effect, which if you haven’t heard already is this idea that because interest rates were so low for so long that so many home buyers and homeowners have locked in rates that are ultra low. And we may not see again for a while.
We might not ever see again in our entire lives. Just to bring some context to this, for years, we were seeing mortgage interest rates at 3%. At some point in January of 2021, it actually went as low as 2.7% for a 30-year fixed rate mortgage. Now it’s at about 5.3 at the time of this recording. And the idea here is that why would you sell?
If you were a homeowner right now, why would you sell your house so that you can enter an ultra competitive market with high prices only to pay more interest on your loan? And that makes sense to me, but the implication here is that inventory could remain down and that could help continue to provide upward pressure on housing prices over the next few years.
So Henry let’s start with you, get your crystal ball out. What do you think is going to happen? Are people going to stop selling in large numbers and is the lock-in effect going to be a real phenomenon over the next few years?

Henry:
Oh man, of course you made me go first so I can say I’m the jerk face. Here’s my general thoughts, right? Yes, people are going to be comfortable with those lower interest rates, especially right now. They’re thinking, I don’t know how high these interest rates are going to go. I’m going to stay put where I’m at.
And all that sounds good now because they just locked in their new interest rate six months ago, a year ago, a year and a half ago. But people don’t typically sell homes as a financial decision. It’s more of an emotional decision, right? They are selling for a particular reason. Maybe their family’s expanded. Maybe they’ve got a new job and they’re making more money. Maybe they are downsizing and want a smaller home.
Maybe they need to move closer to family. People sell their primary residences for more situational or emotional reasons. And does that mean interest rates or what it’s going to cost you doesn’t play? Of course it plays into it, but it’s not the only factor that they’re considering. And a lot of the times we know people see motions overrule the best financial decision point most of the time. And so will the lock-in effect slow down inventory?
Yeah, I think so. I think there are some savvy homeowners out there who are just going to say, hey, it’s better for me to stay put because their lifestyle or their family situation will allow them to continue to stay where they are. And I think the ones that whose lifestyle or family situation changes, they’re still going to look to buy.
I mean, as long as interest rates aren’t 15% or something like that where it just doesn’t… You literally can’t do it. But I think if people have the financial ability to do it, their situations are probably going to dictate that they do it and they want to.
It feels good to buy a new home. It feels good to upgrade your lifestyle. And most people are… There’s tons of people who just aren’t thinking financially for this decision. It’s just not that important to them if they can afford it.

Dave:
All right. James, what do you think? Do you think this is going to have an impact on prices in the housing market? Or is this just going to impact a small number of people?

James:
I think there’s always going to be a section of the population that it’s going to really impact or to where they’re going to be fixated on the rate cost. I mean, I talk to investors all the time. They’re always pricing the rate, because they’re going after rate first like, how do I get the cheapest rate?
And so there is that mindset where I think people are going to lock-in. They can’t see past anything else, but their rate and their uncomfortable payment and they’re not going to be selling. But I do think that investors and people and just the… Or especially Americans, they live in the now.
So it’s always right now, it seems expensive on the money, but it’s going to get normalized in the next six to 12 months. And the more normal it is, people are just going to say, well, I’m going to go do those things now. I’m going to have to refi, even though my rate’s going up. For the next six to 12 months, I think people are going to not be wanting to move around.
But as it gets more normal, as rates seem they stay where they should be, that people are just going to go for it or just going to get used to it. One thing I do think is that a lot of people locked in low rates. They have a lot of equity position.
And if we move into some sort of recession, which it looks like we might be doing, and then with the inflation factor eating up people’s extra income, I do think there’s going to be a boom of cash out refis to where people all of a sudden that’s going to become the norm.

Dave:
Because they need it, because they need the cash rather than because the rate is attractive.

James:
Yeah, I do think that the general public has gotten used to spending money the last 24 months, or at least a portion of it. Not everybody, but people that are buying homes and they’ve had access to money. They’ve seen their equity positions explode over the last 12 to 24 months.
At some point though, as inflation’s getting to 10% in the market, things are getting more expensive. We got these Ukraine… We got these conflicts overseas and we’re going to be going into… As a recession rolls in that could be less paying jobs. There’s other things that are going to eat up people’s disposable income.
And I do think because people do live in the now, they want to keep going with that disposable income and they’re going to be fixated on that rate until they’re not. And they’re just going to say, hey, look, now I’m going to go tap into my good purchase and do refi it out. In addition to people, also bought homes and they went to go build them out and design them themselves.
They traded a house that they lived in for a long time. They got a new property, they got a bigger one and their bids are coming back at record high numbers. And they thought they were making the right trade, but now they don’t have the liquidity to finish the rehab.
So I think there is going to be a little bit of a reset where people are going to have to pull out cash out. And so I do think people are going to do what they have to do. If they can keep their low rate, they will. And if they can’t, then people get used to paying a higher rate.

Dave:
That’s a really good point. Living in the now is a very good way to describe how people spend their money. All right, Jamil before we move on to our deal analysis, part of the show, what is the last word on the lock-in effect?

Jamil:
I 100% percent agree with a blend of both of what these guys are saying. I think what James really nailed there was just how short-term our memory can get with respect to what’s happening in life. Because look, everybody’s talking about, oh my God, these rates are so high. These rates are so high is because we’ve all forgotten.
We’ve all forgotten that 5% mortgage rates or 6% was normal. And then we got used to this two, 3% for a little while, and we’re like, oh my God, that’s where it needs to be. But our brains will reset, and just like James said, we’ll be in the now and we’ll say, yeah, five is normal, 6% is normal. This is totally okay. We’ll forget about the two and 3% mortgages.
We’re going to forget about that. It’s just going to take a little bit of time, and then people are going to move along in a life. And Henry was talking about, situations are going to continue to persist. Life will happen. And no matter how much we want to pretend that we all love to make these really smart and strong financial decisions for ourselves and our families, when it’s time to buy some jet skis, we get jet skis. That’s what’s up. And so I think…

Dave:
It sounds like you’re speaking from experience here Jamil.

Jamil:
I don’t jet ski, but I’m.

Henry:
You ever seen a sad guy on a jet ski?

James:
It’s not possible. It’s a smile factor.

Dave:
You can’t be sad on a jet ski. Well, alright, so all three of you are selling the idea of the lock-in effect. I actually think it is going to play a role until the market gets less competitive because why would you enter this market? Why would you sell only to face more bids? But we’re already seeing the market get less competitive.
So I think it will sort of be this trade off. As the market gets less competitive, people will be more willing to sell and get back into it. With that, we are going to move on to our next section where Jamil, James and Henry are all going to share a deal. I know that they’re all chomping at the bit to talk about deals and actually get into the numbers.
This is going to be a lot of fun, but first we’ll take a quick break. We’ll be right back after this. All right, we are back to this episode of On The Market and we are going to do, I think this is the first time maybe in BiggerPocketss Podcast history we are going to break down some actual deals in real time. And we were all chatting before this.
And I know there’s some contentious undertones behind some of these deals. So I just want to get started with Jamil first because he’s got a deal and I think Henry’s going to rip him apart. So let’s just start with this deal. Jamil, tell us what you got.

Jamil:
So to give everybody a little bit of backstory on me, if you don’t know I’m a wholesaler and it’s in my DNA. And so I haven’t held a lot of property. I’m constantly trading. I’m trading, trading, trading, trading, trading. Look at Henry’s already disappointed in me. I haven’t really held anything.
I hold a beach house in California and my home, personal home. And other than that, I trade everything. That’s just what I do. It became really clear to me how much of a mistake that was when just for my last tax bill was just over $800,000, okay? And so my lifestyle has absolutely changed over the last few years.
Success has come our way and I’m super grateful for it. And I’m looking at my best friend and co-star on our TV show who is doing a tremendous amount of business as well. And he got a refund. He got a $3,200 refund and meanwhile, I’m paying $800,000 plus in taxes. And it’s sad, right? It’s sad to me that that’s the differences in our lives because I’ve been so inefficient with respect to how I’m approaching life.
So what I’ve done is I decided I came across this deal and I don’t know if we can pull it up on the screen, if not, I’ll just kind of give us the deal points. This is a multi-family acquisition in the Arcadian neighborhood of Arizona. That’s 85018.

Dave:
Is that near Phoenix.

Jamil:
In Phoenix, correct.

James:
That’s where everyone wants to live right now, right?

Jamil:
Correct. So this is the neighborhood that I live in. In fact, this building is around the corner from my house. I can walk there in 30 seconds. It’s a 53 unit multi-family all one bed, one bath. To give you an idea of the neighborhood, the annual household income, the average annual household income for this Arcadia area is $122,000.
Whereas in Phoenix, the average is about $72,000. So gives you an idea of the demographic that lives in the neighborhood. The median home sales price as of April was $1.7 million. And in comparison to Phoenix, the median sales price is $515,000. So this neighborhood is incredible. Now let me tell you about the deal. So the acquisition cost of the deal is $12.5 million. That’s $235,000 a door.
Looking at the comparables of what is traded in the neighborhood with the same sweet mix, with the same sort of parameters, we have an as is value of around 280 a door without any repositioning. This is a group that owns it right now. They’re out of Canada. And for whatever reasons they are deciding to liquidate.
They had started a renovation. They actually renovated 46 of the 53 units and they renovated them to incredible standards, beautiful, beautifully modern. They’re incredible. Seven of the units are left to remodel. Currently the gross monthly rent is around $63,600. And the units are renting at about $1,200 a month.
Rents can increase to $1,700 a month and that’s conservatively based on the style, the neighborhood and the type of unit that we’ve got. So there’s a large gap in a reposition there. Now, here’s where my problems run. We can take this building down. It’s going to require us to come out of pocket around $2.5 million for the down payment. And we’re looking at a debt service of around $60,000 a month.
So cash flow, as it sits right now is negative or flat. There’s not a lot of income to be made right now without a reposition. But if we renovate the last seven units and re reposition the building, increase the rents to $1,700, we’re looking at roughly $18,000 a month in net income after you adjust for expenses and vacancy.
So we’re looking at a total value once we reposition the building of around $17.5 million. So there’s a gain of around $5 million to be made. On top of that, if I look at and do a cost segregation study on the building, I can save roughly $2 million in taxes. So when I look at this, I can put $2.5 million down to acquire the building.
That’s going to save me $2 million in tax liability. Or I can take the exit strategy that I’m good at and know, and I actually have a contract right now. I have a buyer for the building right now at $15 million. So I can make a $2.5 million assignment fee, would be the biggest assignment fee I’ve ever made, add to my tax liability.
Or I can take the building down and do the right thing, which is, I know what Henry wants me to do. Take the building down depreciate, save money on taxes and create cashflow. So this is the deal. The risks that I see the current rental market could turn. We might see some… Our projections could be off with respect to how much rent’s escalated.
I don’t think so, but it’s possible. We could run into some issues with project management, because this would be a deal that I really don’t have a lot of experience in doing. And so we could mismanage it and we could totally fumble the ball, and ruin that just because of our lives and how busy we are.
So that’s kind of what I’m playing with. Do I take the $2.5 million right now, add to my tax liability and do what I do as a wholesaler? Or do I take the building down, save money in taxes and create cashflow?

James:
Well, my first question is, do you have the 2.5 to buy?

Jamil:
Yes.

James:
Or do you have to raise money and, and give out the equity on the deal? So it’s 100% owned by you?

Jamil:
I will bring in Pace Morby as my business partner on the deal. He’ll acquire it with me. So each of us would be coming in with 1.25.

James:
1.25, and then it’s a 50/50 split on that deal.

Jamil:
Correct.

Henry:
I will give you $1000 for 1% of the deal.

James:
So on this deal, you’re looking at a tax savings of a million in-

Jamil:
Each, correct.

James:
Yeah, a million each on that deal. So basically you’re coming up with 1.25, and you get $1 million tax savings, which is, or off the top, which is going to save you, what? In your bracket, if you’re hitting 800 grand, it’s going to save you 400 grand right away on year one.

Jamil:
Correct.

James:
Or not year one, but it’s going to pop back. One of my biggest questions would be, if these things are all renovated, why is the performance 25% higher than what it’s at right now? If they’re an investment company that stabilize it, they renovated to the highest and best used. Why they’re so far below market?
And do you think that has anything to do with Arcadia being a family neighborhood and one bed, one bath won’t trade well in that kind of climate?

Jamil:
Well, they’re 100% occupied and again, looking at just the rent comparables, 1700 is actually pretty conservative for a one bed, one bath in the neighborhood. You’re absolutely right, it is a family neighborhood. And so there’s less demand for that type of unit. That’s the hands down real thing, but the schools are better here.
There’s still a lot of the population here that’s servicing the people that live in the neighborhood, there householders here. And so I think that just having access to that type of product isn’t needed for the neighborhood, because you can just check, see by the vacancies there’s a demand for it. Now, why are they so underperforming?
That’s a great question, and I think a lot of the rent escalation that’s happened over the last 12 months is a reason for it. I think at the time when they had increased to $1,200 a month, that that was a deal at the time. But I think that they thought that that was the highest that they were at.
And now with where rents have gone, and again, we’re banking on rent staying where they’ve spiked to, right? And so I think that’s the juggling act that we’re in right now, because if for whatever reason rents go down, we’re in trouble.

Dave:
But how much trouble? If rents went downtown 10%, how long would it take for that 10% decline in cashflow to eat away at the $1 million in tax savings?

Jamil:
You’re absolutely right.

Henry:
I agree, and that was my exact thought. You think about what you’re getting in savings from taxes versus what you’re having to put down versus the cashflow you’re going to create by finishing the renovation and putting all the units at market rents. All that’s great. Rents typically don’t go down, Jamil. I mean, does it mean they can’t?
No, absolutely not. Sure, something could happen when they do, but the benefits of this property for you are on the tax side more so than they are on the cashflow side, and you are going to get the appreciation from this property as you continue to hold it. And the thing that I think is great… So I love one bed, one bath units.
I love one bed, one bath units in neighborhoods that are super desirable and family neighborhoods because it gives a subset of people who want to live in that super cool part of town who can’t afford a house a way in. A way to say, this is where I live.
I live in this neighborhood. And so I think you just tweak a little bit of your marketing and you’ll have more people wanting to live there than what to do with. Because being able to get a one bed, one bath in a neighborhood where it costs 1.5 to buy a house on the average is impossible to find, right?
And so I think you’re always going to have demand because even if rents go down, it sounds like in this area, your rents aren’t going to decline as much as maybe Phoenix, Metro might decline, right?

Jamil:
Correct.

Henry:
And so this is… I mean, I’m a buy and hold guy. So for me, this is a no brainer, right? You buy that.

Jamil:
So you’d hold this all day and you would forego the $2.5 million quick assignment fee that as a wholesaler, I want to take?

Henry:
Yap.

Dave:
I want both.

James:
So do you get 100% of the 2.5 or are you 50/50 on that too?

Jamil:
It would be 50/50 because I brought Pace into the deal. I needed his money before I even… I’m $250,000 non-refundable on my EMD.

James:
Yeah. So on that scenario, that’s 1.25. So you’re walking with 650 grand after taxes. And so it’s really if you’re picking up $5 million in equity, if your numbers are right and you’re picking up that upside right there day one on the buy-in margin and then you get up there, you’re picking up three to four million in wealth, plus picking up a million and two in tax savings all for 600 grand. And so do the math on that, you’re 3X in your money at that point, but you have to wait. And so…

Henry:
You can always exit, Jamil. Somebody will always buy this deal because of the desirability of the neighborhood and frankly, the desirability of the units. My one bed, one baths are my best performing units. I can’t rent them fast enough when they’re vacant and people stay forever. I love them.

Jamil:
There’s also a play where we take a portion of the building and we turn them into short-term rentals because it is a resort style building. We got a beautiful pool. There’s a fitness center. I mean, it’s an incredible property. It’s an incredible property.

Dave:
Do it. Hold it.

Henry:
Hold it.

Jamil:
Hold it.

Henry:
Hold it.

Dave:
All right. Is everyone voting hold? I don’t know, I guess we’re turning this into a voting show, but I say hold it Henry’s obviously hold it. James?

James:
I think honestly it’s a no brainer to hold it. You’re 3X in by keeping it right away. Just keep it.

Jamil:
Keep it, okay. Thank you guys. Every bit of me is like, you’re so dumb Jamil. There’s $2.5 million, there’s $1.125 million that you’re going to have to pay taxes on it, but it’s still like, come on.

Dave:
I mean, it’s very tempting, but-

Jamil:
It’s so tempting.

Dave:
We’re here for you Jamil. This is-

Henry:
I’ll be your support group for sure. I’ll be your accountability partner.

Jamil:
James, should I go raise my portion of cash that I require to get into this deal, bring in an equity partner, not be into it for cash at all and just have this as a depreciation play?

James:
I mean, that’s what some people do. You can get the best of both worlds. You could package that deal up, charge an assignment fee to the deal most indicators do. So you can still get your wholesale fee, give out a portion of the equity. Typically, it’s going to be, you’re giving out 70% of the ownership of that building.
Keep the 30, so you can get the best of both worlds, get your assignment fee, keep 30% ownership. You can continue to get fees by managing that project with Pace, and then all of a sudden you’re still making your income and getting the ownership. Plus you’ll get 30% of the cost side depreciation over the tax return. So there is the middle answer of do both.

Henry:
Yeah, I think that’s awesome for someone not in your financial position. I think you can afford to do this on your own and you need to do it based on what you just told us. You pay taxes. Might want to keep this one for yourself.

Jamil:
Thank you guys. I appreciate the advice.

Dave:
All right, we’re going to have to come back to this and see how you’re doing, make sure you’re not just going to sell it randomly one day.

Jamil:
July 11th is my close date. So the audience, hold me accountable, ask me the questions. Henry, James, Dave ask me the questions. July 11th is the day. I’m either going to be walking away with my assignment fee or I’m going to be walking away with a building. We’ll see what happens.

Dave:
All right.

Jamil:
Or maybe both.

Dave:
Okay. With that, let’s move on to Henry’s deal. Henry, I’m sure it’s going to be a buy and hold after this. Tell us what you’ve got.

Henry:
It’s a similar situation too. So yeah, let’s talk about it. The numbers aren’t as amazing as Jamil’s, but this is just one unit. So I’ve got a deal. It’s a three bed, one bath single family home in Bentonville, Arkansas in a very desirable neighborhood of Bentonville, Arkansas, right?
And so purchase prices 225,000. Now this area of town is a really, really highly desirable area because of a couple of things. It’s near downtown Bentonville, which is where people want to live in the Bentonville area. There’s so much money being poured into there. There’s museums that have gone up, walking trails.
It is where people in Bentonville want to live, hang out, party, socialize shop. And then it’s maybe a two to three minute walk away from where Walmart is building their brand new state of the art home office complex. And so they are building this complex to compete with the Amazons and the Apples for the talent that they need to hire to keep Walmart relevant.
And so it’s supposed to be this phenomenal state of the art, and they’ve already started construction. And so the purchase price is inflated because of the neighborhood. Typically, if I were going to buy a three bed, one bath 1100 square foot home that was built in the 60s in any other part of Northwest Arkansas, I would probably pay no more than a 100 grand, right?
Maybe 120 grand, but we’re paying 225 for this one because the ARV on the property, because of where it is. They just built a brand new private school. They call it [inaudible 00:33:38] school. You can throw a rock and hit it from the front yard of this place. And so, because people are going to want, wealthy people are going to want their kids to go to this school, right? They’re going to be looking for properties that are closer to these areas.
And that makes it a great Airbnb location too. So the ARV on this property is 550,000, right? And so we’re buying it at 225 and to renovate it to the nines, which is what we would need to do to get that 550. We’re going to have to put 70 to 80 into it. And then we can exit that thing for 550, which puts my potential profits after commissions and fees above 200,000, which is phenomenal for a single family flip-

Dave:
Off 225,000.

Henry:
… In Arkansas, right?

Dave:
So you’re almost doubling your money.

Henry:
Yeah, absolutely. So phenomenal flip, right? But I love the location. And so I have more than one exit. And so I can look at, hey, do I whole tail this thing? Which is just sell it in the current condition that it’s in. And the market says, I can probably get around 310 for that. And I could probably stick that thing on the market and have that money in my pocket in 30 to 45 days.
And that’s about a 60 grand profit to do almost nothing. Clean it up, make some minor repairs, make sure that it’ll pass an FHA or a conventional inspection, right? And that’s about a 60K profit. So I can get 60K quick or I can make sub two or above 200 in four to five months, would be what I would think it would take me to get this done or we can rent it, which is what I would normally do.
But when you look at rents right now, I think I could only get about two grand a month for this thing. And so when you’re buying at 225 and then you’re putting… And now if I rented out I wouldn’t have to put as much into it, but I’d still have to put 30 to 40 into it, right? And so I’d be sub 250, 260, 270 and renting it for 2000. That’s negative cashflow, but I would get off.

Jamil:
What about short-term? What would you get on the short-term rental?

Henry:
Short-term rental, I’d have to put more into it, 70K probably, but I could get four to five grand a month.

Dave:
Before we get into this, can I just ask you Henry? How’d you find this deal?

Henry:
That’s phenomenal question. So I found this deal through direct mail. So this was a direct mail marketing driving for dollar. So I have people, I’ve got about two people who consistently drive for me. So they go out and they identify distressed properties. And then I send those people direct mail. And then I also cold call. I have a cold caller that cold calls this list.
So this was one I’d been sending mail to for a while and didn’t get much of a response. Had a cold caller call him and then boom got them on the phone, and it was just timing. They were just ready to sell. It’s funny. I went to go look at the house. So they called me and they were like, hey, we want to get out of this thing. We’ve had a tenant in there.
She’s not paying rent, and we just want to sell it with them in there and be done with it. And I went to go look at it and it was the first time they’d been in the house in over a year. And so I’m walking the house kind of with them and they’re seeing the same things I’m seeing.
They hadn’t seen it over a year. I literally walk in the bathroom and the floor is having so much water issues that they had covered up with rugs that I literally fell right through the floor.

Dave:
Oh my God, just stepped through the floor.

Henry:
Yes, stepped right through the floor.

Dave:
Wow, that’s ridiculous.

James:
I’ve also fallen through the floor. It’s a sign of a good deal. If you fall through the floor, buy it now.

Henry:
I was like, good timing, because they’re… My price just went down when I went through the floor and they had no idea there was a problem there.

James:
I might need to get an engineer up here.

Henry:
Right, absolutely.

Dave:
So you found it driving for dollars, which is great for anyone listening to this. Obviously that works. So I know a lot of people who say they can’t get deals. This is obviously a good example. How would you finance the 225?

Henry:
Yeah, so we’re going to use a small local bank to finance the deal and they are going to finance it at 70% of the appraised value. And so as long as it apprai… Whatever it appraises for, they’ll loan me up to 70%. So as long as what I need to purchase and renovate that property.
So the 225 plus the 80, if that is under 70% of that appraise value, then I won’t have to bring anything to the table. The lower that appraisal comes back, the more money I’ll have to put in.

James:
And so Henry, what is your plan with this property? I mean, because the math hits on a lot of different ways. It obviously cash flows well on the short-term, but not so well on the long-term. Unfortunately about 90 days ago, it actually probably would’ve broke even.

Henry:
Right.

James:
With rates.

Henry:
Absolutely.

James:
I was playing with all the rates yesterday and I was like, man, this is brutal. So now you’re at a point where you’re not. So are you planning on keeping this? I mean, I know what I would do with it, but…

Henry:
Yeah, I love the location. And just like I said to Jamil, I can always sell this because this new home office complex at Walmart’s building is coming and there’s a higher chance that that increases values than it does decrease the values. I don’t think this is an area that becomes any less desirable any time soon.
So I’m willing to bank on the fact that it’s going to go up. And so my initial reaction is I’m going to keep it as a short-term rental. And if I make cashflow every month, that’s awesome. And if I don’t and I break even, I’m okay with that too for now. Because once they finish building what they’re building and as that area continues to appreciate.
It’ll be a cashflow monster on the Airbnb side. And if it decides it’s not, then I can sell it at a different point and still make a phenomenal profit. I’m entering it pretty well for what the ARV is.

Dave:
Can I ask Henry, do you have enough deal flow that if you flipped it, you would be able to reallocate that money into a good cash, other cashing assets that have a better cash on cash return than this one?

Henry:
Yeah, I do. I’ve got other deals that I could flip it into. But I honestly, if I sold this, it’d be one I’d want a 1031 into something. And I like the idea of 10301s, but I think if you don’t have something lined up that’s a good deal to 1031 into, a lot of people sometimes end up buying an okay or not so great deal just because they have to 1031.
And then was it really that much better than paying the taxes? Sometimes it is, sometimes it isn’t. And so if I had something lined up perfectly that was going to be a better cash flowing machine then I might consider doing that. I don’t have anything in the pipeline for that right now. I could probably go get something. What would you do, James?

James:
So my vote… I mean, honestly, I’m a guy that sells that deal. I like the… Path of progress is a great thing. You know what’s coming in there, but if I’m losing six to seven grand a month on that property in negative cashflow, I’m going to claim the equity and reposition that profit into some other deal, or like what you said, keep it as a, I call those equity earner properties or equity in my portfolio growers, where I keep that deal for one year, I take the short-term pain.
I limp along on that property for a 12-month period. And then I 1031 it into something else. Because then you can take that huge equity spread, defer the taxes and pick up some major cashflow or trade into that same exact neighborhood with your equity position and actually get it to be cash flowing. So you’re kind of moving things around.
But right now with things the way they’re going, I just don’t buy appreciation. And so for me if I’m losing money on this deal, which you’re probably negative, what? Five, 600 bucks a month on that, two grand a month on the rental, I don’t like the liability.

Henry:
I absolutely would not long-term rent it. I would short-term rent it.

Jamil:
And that’s assuming that short-term rentals stay as robust as they are. I mean, James had a great point at the beginning of the episode that we may see some pain in the short-term rental market in the coming while. And so that could be something that could become a factor for you, Henry.
For me my vote on this would be the same as James. In fact, I wouldn’t even do the renovation on this thing. I would take your first approach. I’d whole tail that thing, I’d make the 60 grand and I’d move into the next deal.

Henry:
I knew both of you would say those things.

Dave:
I’m tempted because I also am primarily buy and hold investor, but I agree that I’m worried about the short-term rental market. I only have one, but I’m seeing bookings seriously down from last year, and I know several other short-term rental investors who are experiencing the same thing.
These are A class properties in good neighborhoods that are seeing declines in bookings. And I think we haven’t even hit a recession. So I’m personally a little concerned about that. I’ve never flipped a house in my life. So I’m being a total hypocrite here, but I would say flip it.

James:
Oh, one thing I will say is hotels just skyrocketed the last 60 days. I went to book for work out and they’re two and a half times what they were for the last 12 months. So I mean, that could protect the Airbnb a little bit, but yeah, they stepped on their pricing for sure. And these are not areas that I’m going to that people want to travel to. It’s just a work destination, but they’re expensive.

Henry:
What I didn’t get into with this market that’s kind of aiding my decision is that Bentonville is a phenomenal Airbnb market because this is such a tourist destination for outdoor sports. It’s the mountain biking capital of the world. It’s got the Walmarts, the JB Hunts, the Tyson Foods, all headquartered here bringing people to come here to work and stay short-term.
And so you have a lot of people coming here to visit and you don’t have nice hotels here. There’s maybe two to three really nice hotels in the area, and then everything else is extended stays and LaQuintas, and people don’t want those when there’s nice Airbnbs. And still there’s not a ton of Airbnbs and they go quick. So it’s a really unique market for short-term rentals.
And so yeah, absolutely, I know I am picking the riskier strategy and I don’t want to encourage everyone to take the riskiest strategy when you’re doing something like this. I have a portfolio that will help me stay insulated if things turn. So I can choose to be a little riskier when the location, location, location factor is good.
So don’t take me making this decision, new people, as you taking the riskiest option or the riskiest exit strategy on a deal. I have the benefit of being able to do that because I have a portfolio that will hold me up if something goes awry, but I’m also willing to bank on A, the location and B, what’s coming so that I can continue to cashflow this thing big time in the long-term.
And at the end of the day, if in 12 months, 24 months, I look at this thing and I want out, I know I can get out of it pretty well.

Dave:
All right, you convinced me Henry. I’m on team short-term rental now. It’s just my instinct. I mean, there’s just only so many opportunities that be close to a slam dunk economic engine, right?

Henry:
Yeah, absolutely.

Dave:
If you could pick being in Silicon Valley or any of these giant things back in the day-

Henry:
That’s what I’ve been telling people.

Dave:
… Walmart is not going anywhere. And Walmart in a recession is going to do better, I want it.

Henry:
Going to do better.

Dave:
Hotel this to me, Henry.

Henry:
What I tell… Go today, James, Jamil, anybody listening go today and look at home prices in and around Microsoft’s home office. Go look at home prices in and around Amazon’s home office. Go look at home right around, literally less than a mile away from it. Go look at what they’re selling for compared to anything else in that area.

James:
But how much is the 550 ARV? How much is that up from 18 months ago?

Henry:
Not a ton. That’s a phenomenal question.

James:
There we go. Well, then the upside could be then Henry, I’m not totally against your idea. I’m not a short-term rental guy, man. That thing is painful for me. I don’t know why.

Henry:
I’ll just give it to somebody else to manage it.

James:
You’ve got to have a certain thickness of skin.

Henry:
I don’t manage it. Absolutely not.

Dave:
All right, well, speaking of Microsoft’s headquarters, let’s move to Pacific Northwest over here with James. Tell us about your deal.

James:
Yeah, Henry got me with the Microsoft’s. That all of a sudden I started thinking about it. Hey, so we found a deal. We have deals in all different types of price ranged up at the Pacific Northwest. Sometimes we’re spending $2 million to buy it. Sometimes it’s much cheaper depending on what you’re looking to get.
So this is a deal that we sourced off market. We actually hired a call room called Call Magic. And so we pound the phones on landlords that maybe want to trade out. So this guy had owned the property for a long time and it was a good time for him to sell it. What it is, is a three bed, one bath, 1,250 square foot house in Tacoma, Washington, which is about 35 minutes out of Seattle, 40 minutes out, sub market that’s been appreciating at a pretty high rate.
And in addition to, it’s got a 450 square foot unfinished basement on the house. So right around, it’s going to be roughly around 18, 1900 square foot fully finished. The reason I like this deal all the way around is because the purchase price is actually $285,000.
The reason I like that is this is going to be a recession proof deal. So there’s multiple exit strategies on this. And so as we’re looking at this, we can look at three different options. The first option is we just renovate the upstairs, 1200 square feet. We put 70,000 in and we sell it for sure at 469.
We have comparables that are actually at 475 to 485, but because of what we’re going into with the rates adjusting up, we actually kind of tick that back down 5%. So at the 4 69, we already baked in the cushion on the resale. Or we can put in 90 to 100,000 into the renovation, finish the basement, add another bathroom and then the value’s going to be at 499 to 535.
We have three comps at 535, but again, we kind of backed down our comp to 499 to adjust for the interest rate hikes because all those comps were from February, March, and April, which the market was a little bit hotter then. So what we’re looking at on the two flips is we’re looking at we can make about 50,000 on the first way, the cosmetic, which we can probably get in and out in four to five months which is going to be about a 50% cash on cash return.
Or we can do the larger renovation, which is going to take about seven months and we’re going to profit out about 60,000 with a little bit of upside to where we’re going to get about 55 to 60% cash on cash return in the next six months. Or the third option is we can do a bur on this one. And the reason it’s going to work as a burs is hitting all the different metrics.
We’re getting that equity position. We’re buying it cheap enough to where we’re at 285 to max out the rents on this. We’re not going to have to finish out the whole basement as well. So we can do a quick renovation, put a renter in there. It will rent for $2,500 a month. We have four different rental comps. One’s at 2,800. So there’s a little bit of upside still left in the deal as well.
And then we’re going to be able to cashflow that deal about 150 bucks a month after we renovate it. We purchase it with hard money, refi it into a new conforming loan. We’re going to leave about 15,000 to the deal, cashflow about $150 a month, which isn’t that much, but we’re picking up $100,000 equity position.
So the reason I like this deal all the way around is I look at when I’m looking into transitioning markets or any kind of recession type of market that we might be going into, right? Stock markets, it now is a bear market rather than a bull. We can do this deal any which way. And we ran our numbers at our rental. The cashflows at $150 a month at 6.5% rate.
If the rate settled down, it drops down to 5.0, we can actually increase our cashflow to almost 250 to 300 a month and keep that equity position. So typically with single family houses, we own a lot of different apartment buildings, a lot of different… We go with larger rental properties typically, but I call this my portfolio builder type of purchase where you can buy this.
You can leave very, very little money in the deal, refi it, keep it for one year. And then I’m planning on trading that out in one year and then reloading that into a two to four unit at that point with the $100,000 gain. Just because the tax hit on the first two flips just isn’t going to be that big of a benefit to me.

Dave:
Can you tell us a little bit more about Tacoma? I don’t know anything about it. What’s the big economic engine around that area and what kind of neighborhood is this in?

James:
So Tacoma’s got a lot of ports. The one big thing that’s driving is the transit, has been drastically improved over the last two years and is continuing to grow. So they have a big train transit station going into all the different neighborhoods of Tacoma, especially North Tacoma. I bought a 12 unit right next to that as well.
I like to go where the path of progress is just like Henry was saying. He likes the areas where he knows there’s growth. Transit’s helping with the growth to get people to Seattle. It’s about 40 minutes out. It’s kind of like a hipster city where it has a similar vibe to Seattle, but a little bit more settled down.
I would say that the job growth is still developing down there. Most of people do commute quite a bit to Seattle. The transit is helping. That’s what surged it recently. And then the affordability factor of people getting just burned out on the expensiveness of Seattle is they move to Tacoma. They can get the similar vibe. They got a similar feel.
They kind of like this more quiet in general down there, but they’re paying 75% less. So people are going where the affordability is. There is some things in the works right now like in the… It is a port city. So there’s more import export going on in there.
Tesla, from what I hear is looking at opening up some warehouse space. So there is some anchor businesses starting to come in through that area just for affordability reasons.

Henry:
Yeah, man, well, you’re speaking my language as far as the rental numbers go. So for sure, I like that. I’d actually do something a little different with this one, is I would do everything you said on the rental side, except I wouldn’t cash out refit. I’d HeLOCK it. And I wouldn’t sell my equity.
So I’d take a HeLOCK out on that, equity on that 100,00 get about 85 of it on a HeLOCK and then leverage that to buy something else if I needed it before then. Because if I’m in a cash position where I don’t need to sell or to refi something to take the money, then I won’t, because your interest is front loaded on a new loan, right?
And so cash out refi and getting access to that money. It’s more expensive to cash out refi it than it is to get a HeLOCK on it at like four to 5%, maybe a little less, and then leverage it that way is what I would do.

James:
Yeah, a lot of the reason we do the cash out refi anyways, or it ends up being yeah, a little bit of cash out because when we’re doing that deal to buy that we need 15 to 20% of total project costs. So if we’re at 230 or 285 is the buy and we’re putting 70 in, that’s roughly 350 grand. So we got to come up with about 70 grand to do that deal.
And that’s going to finance us back all the construction costs. Reason we do that is we’re setting it up with usually a hard money or soft money lender to close quick, because these are deals that to get this price, the seller’s also saying, hey, close in five to 10 days. And so we’re kind of beating those terms. And so no matter what we’re going to have to refi anyways.
A lot of times when I am looking at if I know I’m going to leave less than my down in, I can bring in a secondary partner too and line up the financing at the same time and do a rate and term refi. Because yeah, that cash out, it does bang you for half point right now.
And so that’s a great thing to bring up, but yeah, so a lot of times we’ll bring in a secondary lender too just to cover part of it to where they’re almost… We have a first at 75% of total project cost, maybe a secondary guy at five to 10% just to get the rate and term refi done. And that’ll keep your rate lower.

Henry:
We’ve got to get you working with some of these small local banks and get you 100% financed on these things, man, on these quick flips that you’re turning around.

James:
Oh, we love the local banks. Problem is they can’t fund in five days.

Henry:
Yeah.

James:
And I’m a five day offer guy. I’m going to come in. I want the right price, but I’m going to close quick. But yeah, local banks are the most untapped resource with a lot of small investors. Yeah, I like your program. 70% of ARV, that’s a great loan.

Henry:
Yeah. Wells, 70% of appraised value. They appraise it as it sits, but they’re in-house appraisals. So they base it on comps and usually it’s pretty favorable.

Jamil:
I was taking notes listening to the way that James is approaching this deal. It’s so outside of the way that I do business. I mean, it’s brilliant James and I love your approach to this. I think what Henry had mentioned getting the HeLOCK on that, sounds to me like the most favorable way to pull the money out without having to take that hit on that fee.
But again, my brain’s just like, the lizard brain in me is just like, James, what kind of assignment fee could you get if you wholesale that right now?

James:
So on that, that would roughly… We’re probably picking up 15, 20 grand on an assignment fee on that deal. Because I mean, there’s got to be meat on the bone for that next investor. if they need to… They’re going to need to get 25, 30K out of that flip.

Henry:
Jamil, send him a hedge fund to assign it to it like 95% of-

Jamil:
Oh, yeah, I’ll get you a better… I’ll get you probably 25 or 30K on an assignment fee on that.

James:
That is true. And that’s something we always factor in. We wholesale a lot of deals ourselves too where I would wholesale this. If I can’t cover my mortgage, I probably am not the guy to flip that property down there. We spend a lot more times on larger projects. I like to be on bigger, more profitable deals because it eats up a lot of my resources.
And so I probably wouldn’t flip this. I would wholesale it to a client at that point that is down in that market, that has the contractors that work on that type of product. But I’m going to keep it because I want to build up my portfolio. Anything that I can stick inside my portfolio that’s giving me a massive equity push that’s paying for itself when I run in my numbers conservatively, that’s something I want to stick in my portfolio.
I’m going to keep it from a minimum of one year. And then again, I’m going to trade it out for something else. I don’t like taking on more debt on too many properties. I got that 2008 whiplash where I got kind of smacked from over levering.
And so for me, I’d rather deleverage and roll it into something else just to reset. Plus I like resetting my depreciation schedule. Every time you make that trade, you can reset that and then get the more tax benefits in there as well.

Dave:
So you’re keeping it, you’re holding it for at least a year.

James:
I will have this for one year and a day, probably. It’s one year and a day, get it to the 1031, get it to my… So I can save the taxes.

Dave:
All right, well this has been fun guys. We should-

Henry:
This is super fun.

Dave:
We’ll ask our audience, but I think we should be doing this a lot. This is a lot of fun. I learned a lot. I hope everyone listening to this learned a lot as well. We’ll be back in just a minute for our crowdsource section before we get out of here.
All right, welcome back. We just have a couple of more minutes. We did let that section go along, because that was just great guys. Thank you all for bringing these deals. It was super helpful. You guys learned anything?

Henry:
Yeah, man, I learned I need to have James review my tax strategy.

James:
I definitely get smacked with taxes. So yeah, I actually want to go check out, I was serious, I want to go check out Arkansas.

Henry:
Come on.

James:
I mean, I like the Walmart factor. I like the outdoor. I mean, it sounds like the Pacific Northwest, but a little warmer.

Henry:
Dope bro.

James:
You’ve got tech. You’ve got outdoor nature and you don’t have 50 degree, 45 degree rainy days.

Henry:
Dude, this place will blow you away. We’ll show you a good time. Come on out here.

James:
Done.

Dave:
James, let me know when you’re going. I’ll meet you there. Jamil, are you in?

Jamil:
I’m so in.

Henry:
Come on, let’s just record an episode here. Let’s do it.

James:
I’m in. Done.

Dave:
Yeah, let’s do one in Arkansas. That’ll be a lot of fun. We’ve been talking about doing it in Amsterdam, but I think Arkansas might be a little more beautiful.

James:
Same, same.

Dave:
All right. Well, we were going to get to some questions from the On The Market forums on biggerpockets.com, but this show is running a little long. We do have to get out of here. So I am just going to leave everyone with one call to action, which is to go on biggerpockets.com and fill out our audience participation survey.
I don’t know, participation, whatever you want to call it. Audience feedback survey. We want to hear what you think about On The Market. You can vote on what your favorite episode is, what type of information you’re getting the best out of it. If you have any ideas, topics you want us to cover, we would love to hear from you how we’re doing so that we can get better.
Topics you’re interested in, it would be super helpful for us. Just go to biggerpockets.com. When you go to the forums, one of the top forums is On The Market. We will be posting a audience feedback survey there. So please go do that. And thank you all for being here for that. I will say goodbye on behalf of Henry, James and Jamil.
We’ll see you all next week. On The Market is created by me, Dave Meyer and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, 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.