Podcast Summary
Five Rules for Investing in a Down Market: Understand the product, be prepared, take action despite herd mentality, and look for opportunities where others are hesitant.
While marketing is essential in real estate investing, it's equally important to understand the product itself. Many investors neglect this aspect and may struggle during economic downturns. Tucker Merhew, a seasoned investor, shares five rules for investing in a down market, emphasizing the importance of being prepared and taking action despite the herd mentality. The quick tip for today is to not assume that not doing something others aren't doing is a wise choice. Instead, look for opportunities where others are hesitant, and seize them to gain an edge in the market.
Real Estate Investing Strategies: 10/31 Exchanges and Cash Reserves: Investors can defer capital gains taxes through 10/31 exchanges and build wealth with cash reserves during market downturns. Strategies like house hacking can also help grow a rental property empire.
Successful real estate investors utilize strategies like 10/31 exchanges to defer capital gains taxes and grow their rental property empires. Tucker Merihue, a seasoned investor, shared his experience of starting in the mortgage industry and transitioning into real estate investing during the 2007 recession. He emphasized the importance of having cash on hand during market downturns and using strategies like house hacking to build wealth. Additionally, companies like First American Exchange can help investors navigate the complex process of 10/31 exchanges to minimize tax liabilities. Overall, the discussion highlighted the practical and sensible ways to build a successful real estate investment portfolio.
From loans to house flipping and rental properties: Despite market downturns, the interviewee pivoted from originating loans to house flipping and building a rental portfolio, eventually focusing on larger new constructions for higher profit margins.
The interviewee's career in real estate began with a dream of living an unconventional twenties lifestyle, which included owning a boat and a townhome. However, the 2007 housing market crash forced him to pivot from originating loans to house flipping and building a rental portfolio. Over the years, his business evolved from smaller-scale projects to larger new constructions, leading to higher profit margins. The interviewee also shared that he still gets recognized as looking like Matt Damon, despite growing a beard to appear older. Their business now involves around 7-8 new constructions and similar numbers on flips, with a focus on higher profit margins and less volume compared to industry narratives. The interviewee also reminisced about a postcard with his dog on it that stood out during their previous conversation.
Chasing after insignificant deals can drain your energy and productivity: Prioritize high-profit, enjoyable opportunities instead of focusing solely on deal volume.
Focusing solely on the number of deals or transactions you complete, without considering the profitability and enjoyment of each, can lead to a waste of time and energy. Newt Gingrich's quote about lions and field mice illustrates this concept well. Chasing after small, insignificant deals can consume your time and resources, leaving you drained and unproductive. It's essential to prioritize high-profit, enjoyable opportunities, even if the volume is lower. Tucker's experience in the loan origination business serves as a prime example. Despite making a substantial income, he grew tired of the grind and the increasing regulations, which made the business less enjoyable. When it stops being fun, it's crucial to recognize that and consider alternative opportunities. Burnout can lead to lost income in the long run due to a lack of motivation and productivity. Ultimately, it's essential to strike a balance between grit and quitting. When you're feeling unmotivated, it's essential to assess whether pushing through is worth it or if it's time to explore new opportunities. Remember, it's not about the number of deals you close but the quality and profitability of those deals.
Listening to your internal voice for career changes: Recognize when you're burnt out or unfulfilled, pivot to new opportunities, and adapt to market conditions to find success in your chosen field.
It's essential to listen to your internal voice and make a change when you feel burnt out or unfulfilled in your current situation, even if it means transitioning to a new aspect of your industry. The speaker, for instance, moved from being a real estate loan officer to investing in real estate, as he felt it was a better fit for him and offered more opportunities for growth. However, it's important to remember that every side of the business comes with its challenges. For example, in the real estate market, there are varying price points, types of buyers, and product types, leading to unique market conditions. In Portland, the speaker is experiencing success in both the lower-priced and high-end markets, with the former seeing multiple offers and selling over list price, while the latter is experiencing a stagnant market. Ultimately, it's crucial to adapt and navigate the ever-changing market conditions and find the area that best suits your skills and interests.
Shift in Real Estate Market: Fewer Buyers, Increased Price Sensitivity in High-End Segments: Focus on smaller, quicker projects. Limit exposure to high-end market. Increase self-restraint and efficiency. Buyers are more particular, requiring more time and resources for inspections and repairs.
The real estate market is experiencing a shift, with fewer buyers and increased price sensitivity in the higher-end segments. The median price point, however, remains active with high demand and multiple offers. To adapt, it's crucial to focus on smaller, quicker projects and consider limiting exposure to the high-end market until prices stabilize. Additionally, buyers are becoming more particular and demanding, which may require more time and resources for inspections and repairs. These changes call for increased self-restraint and a focus on speed and efficiency.
Older homes come with unique challenges: Renovating older homes requires more time and money due to foundational issues, height restrictions, outdated materials, and unexpected problems.
Older homes, specifically those built before the 1960s, come with unique challenges and require more time and money for renovation projects compared to newer homes. The main issues include foundational problems, height restrictions, outdated materials like lath and plaster, knob and tube wiring, and old windows. These challenges add to the project timeline and increase the rehab budget. For instance, in the case of old houses, a bathtub from Home Depot may not fit, and walls may hide unexpected problems. On the other hand, newer homes, even those from the 1970s and 1980s, are generally easier to renovate due to standardized dimensions and fewer issues. As the market shifts, it's essential to consider the age of the property and weigh the potential costs and benefits before investing in a renovation project.
Renovating existing construction is financially viable in a depreciating market: In a depreciating market, renovating existing homes is a cost-effective alternative to new construction due to rising costs and permits. Staying near the median price point and addressing regulatory hurdles can help developers navigate the housing market's challenges.
In a potentially depreciating market, renovating existing construction is a more financially viable option than new construction due to rising costs and permits. Additionally, staying close to the median price point in a given area is a general guideline for developers. The recent drop in builder confidence, as indicated by the Housing Market Index, suggests that some builders are hesitant to move forward on projects, which could lead to a housing shortage in the future. From an economic standpoint, the housing market has faced increasing challenges due to a shortage of affordable homes and regulatory hurdles for builders. These factors, combined with current economic uncertainty, may lead to a void in new construction in the coming years.
Regulations and permit processes in housing construction increase costs and risk for builders: Excessive regulations and permit processes in housing construction lead to increased costs and financial risk for builders, making it more challenging to create affordable housing
Excessive regulations and permit processes in housing construction can lead to increased costs and make it more difficult to create affordable housing. Builders face significant financial risk as they must invest large sums of money upfront to build an entire asset, unlike individuals who can make smaller investments over time. This risk, in turn, results in higher expenses for builders. For instance, constructing a house is a long-term commitment of 6 to 8 months, while renovating an existing house can be completed in just a few weeks. Given the uncertainty in the market, builders must carefully consider whether to invest in new construction projects. The risk associated with new construction is higher compared to renovating houses, which is an acquired skill set. As a result, the housing market's health is crucial for builders, and any significant downturn can lead to substantial financial losses. Analyzing the number of new homes being built, the number of homes being demolished, and the number of new buyers and renters can help understand the market's overall health and the potential impact on builders. Ideally, these numbers should generally even out, and any significant deviation could indicate a potential issue in the housing market.
Housing Market Imbalance: Driving Up Rents and Property Values: The housing market's supply-demand imbalance, decreased inventory, and increased buyer competition are leading to higher rents and property values, even for those in higher price points, due to buyer demand and confidence.
The current housing market is experiencing a significant imbalance between supply and demand, leading to potential increases in rents and property values. With a decrease in inventory and an increase in buyer competition, even those in the higher price points are facing challenges in securing financing. Ultimately, it's the buyers' market thirst and confidence that drives market dynamics, making it crucial to understand their motivations and needs. The housing shortage, coupled with the challenges in new construction and financing, could result in continued upward pricing in the real estate market.
Neglecting functional obsolescence can impact profitability: Invest in houses with minimal functional obsolescence to maximize returns, as neglecting these issues can lead to higher costs, longer holding periods, and price discounts in a slower market.
Understanding the product, or the actual house, is as important as marketing skills in real estate investing, especially in a slower market. Functional obsolescence, both internal and external, can significantly impact a property's value. Ignoring these issues might have been tolerable in a hot market, but they will matter a lot more when the market slows down. For instance, houses with shared driveways or those located on busier roads can face significant price discounts. Moreover, dealing with functional challenges that cannot be controlled can also lead to higher costs and longer holding periods. Investors should focus on houses with minimal functional obsolescence to maximize their returns. As the speaker shared, neglecting these factors while the market is rising might not seem problematic, but they can significantly impact profitability when the market cools down.
Market conditions impact buyer preferences and pricing strategies: Investors should consider market conditions when prioritizing property features and pricing strategies to minimize financial risks.
In real estate investing, market conditions significantly impact the desirability of certain property features and pricing strategies. In a hot market, buyers may prioritize convenience over shared spaces or older homes despite their drawbacks. However, when the market cools down, buyers become more selective and demand upgrades such as multiple bathrooms, larger closets, and modern windows. Additionally, underestimating potential repair costs or adhering to overly optimistic pricing can lead to financial losses. To mitigate risks, investors should consider worst-case scenarios and adopt a straightforward decision-making process, focusing on projects that meet their minimum pricing requirements.
Navigating Real Estate Investments in Uncertain Markets: Flexibility and adapting to changing market conditions are crucial for successful real estate investing. Know your breakeven point, adjust pricing strategies, and stay informed about market conditions to minimize losses.
It's important to be flexible and adaptable when dealing with real estate investments, especially during uncertain market conditions. The speaker shares his experience with a property in Maui and how he had to reassess his expectations and pricing strategy due to changing market conditions. He emphasizes the importance of knowing your breakeven point and being willing to adjust your strategy if necessary, whether that means selling at a lower price to get out of the deal or holding on to it as a rental. The speaker also advises against trying to chase the market down and instead suggests focusing on getting the property sold as quickly as possible to minimize potential losses. Additionally, he notes that it's important to stay informed about market conditions and median prices in your area to help you make informed pricing decisions. Overall, the key takeaway is that real estate investing requires flexibility and a willingness to adapt to changing market conditions.
Missing out on deals due to ego pricing: Experienced investors and wholesalers focus on speed to capitalize on new pricing metrics and avoid missing out on potential deals due to being too attached to a specific price point.
Focusing too much on the ego metric of not selling a property below a certain price can lead to missed opportunities for making money. Instead, experienced investors understand that there's an opportunity cost attached to sitting on a deal, and they aim to redeploy their capital as soon as possible to make the most of new pricing metrics. Additionally, in a market where prices are dropping, speed is crucial for successful real estate investments. Properties that are not as old as previously considered, and avoid red flag properties, are recommended. For wholesalers, the same principles apply. They should focus on speed and not miss out on potential deals due to being too attached to a specific price point. By doing so, they can maximize their profits and stay competitive in the market.
Targeting specific property types for wholesalers during uncertain markets: Focus on in-demand property types and identifying end buyers to streamline the process and increase chances of success in uncertain real estate markets
During uncertain real estate markets, it's essential for wholesalers to focus on targeting specific, in-demand property types and identifying end buyers before marketing for deals. This approach simplifies the process by reducing the need to market to multiple potential buyers and allows for a more straightforward transaction. As discussed, rehabbers typically prefer simpler, quantifiable projects, such as ranches or homes that are not too old, located in good neighborhoods, and without functional issues. Understanding this principle can help wholesalers navigate market fluctuations and maximize their chances of success.
Becoming an expert in a specific real estate product: Focusing on one real estate product and becoming an expert can lead to finding good deals even in a less competitive market.
In today's market, it's beneficial for real estate investors to focus on one specific product and become an expert in it. The market has seen a lot of competition and high spending on marketing in recent years, but now the tide is turning, and there's less competition and fewer distractions. In 2009, Tucker bought a 3 bedroom, 1.5 bath ranch-style home on Curtis Avenue in Portland, Oregon, for $134,000. He found the deal through an REO agent and was able to buy it on the market. The renovation cost was only $31,000, which is virtually impossible to achieve today due to the significant increase in rehab costs. This story illustrates the importance of being persistent and knowledgeable in finding good deals, even in a less competitive market.
Successful real estate investments with quick turnarounds: Quick rehabs, simple designs, and strategic locations can lead to substantial profits despite rising labor costs in real estate market.
In the real estate market, labor costs have significantly increased over the years, but smart investments with quick turnarounds and efficient rehabs can still yield substantial profits. The speaker shared an example of a deal they made in 2009, where they bought a house for $134,000, renovated it for $31,000, and sold it for $10,222,009 in just three days. This deal was successful due to its quick rehab, simple design, and location below the median price point. However, they also faced challenges in securing financing for rehab projects back then and had to rely on cash and personal funds. In contrast, they later bought a larger, older house on River Road in Milwaukee for $155,000, which required extensive rehab and resulted in a lower profit margin. Overall, the key lesson is to carefully consider the size, age, and location of properties, as well as the cost of labor and materials, when making real estate investments.
Older homes: Profitable but costly investments: Renovation costs and capital gains taxes can eat into profits, consider market conditions and expenses before investing in older homes, pivot towards rehab projects and focus on building a strong team for growth.
While older houses may seem like a great investment due to their location and potential for profit, the costs of renovations and capital gains taxes can eat into your earnings, making it difficult to turn a substantial profit. The speaker shared an example of a house they bought and sold for a loss, despite its desirable location and the fact that they made money on the sale. They emphasized the importance of carefully considering the costs involved and the current market conditions before investing in older homes. Additionally, the speaker mentioned that they have been focusing on improving their business by auditing expenses and creating new lists of potential properties in areas with desirable construction types. They have pivoted towards more rehab projects instead of focusing solely on buying land to build on. They encouraged listeners to do the same and be aware of the types of leads they are attracting to their business. In the upcoming episode of the Bigger Pockets Business Podcast, Brandon will be discussing the importance of building a strong team and delegating tasks effectively to grow your real estate business. Stay tuned!
The Importance of Persistence and People Skills in Real Estate: Successful real estate investors prioritize persistence and strong relationships to overcome challenges and succeed in the business.
Successful real estate investors, according to Ryan Welch, don't give up. This business isn't easy, but those who persevere and handle relationships effectively are more likely to succeed. Ryan shared that he doesn't read many books but enjoys listening to podcasts and applying life lessons to business. He recommended "How to Win Friends and Influence People" as a valuable resource for anyone, regardless of their profession. As for hobbies, Ryan enjoys playing basketball, snowboarding, and golf. He even built an indoor basketball court at his home. When asked about the difference between successful real estate investors and those who don't make it, Ryan emphasized the importance of persistence and effective people skills.
The importance of perseverance and local podcasting in real estate: Push through challenges, continue learning, and build relationships through local podcasting for success in real estate
Perseverance and grinding it out are essential in real estate and life in general. Tucker, a successful real estate investor and podcast host, emphasizes the importance of pushing through challenges and continuing to learn from experiences, even when faced with setbacks. He also highlights the benefits of local podcasting for relationship building, lead generation, and market visibility. Tucker's long-running podcast, The Real Deals Podcast, and local show, The Portland Real Estate Podcast, have been valuable resources for him in the real estate industry. By consistently producing high-quality content and engaging with local professionals, Tucker has built a strong network and seen significant business success. His advice to those starting out is to stick with it and embrace the opportunity to connect with new people through podcasting.
Understanding Risks in Real Estate Investing: Be aware of potential pitfalls, position properly in the market, learn from past experiences, focus on long-term goals, and find an investor-friendly agent to help navigate market changes.
Key takeaway from this episode of Bigger Pockets Radio is the importance of understanding potential risks in real estate investing, even during times of success. David Green and Tucker Goodroe discussed the significance of being aware of potential pitfalls and the importance of being prepared for market changes. Tucker shared unique insights into the importance of proper positioning in the market and the potential consequences of being in the wrong spot when the tide goes out. The hosts emphasized the importance of learning from past experiences and focusing on long-term financial goals, rather than timing the market. They also highlighted the value of finding an investor-friendly agent to help navigate the market and make informed decisions. Overall, this episode underscores the importance of being informed, prepared, and proactive in real estate investing.