What You Need to Know

David:
This is the BiggerPockets Podcast show 854. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the planet. Every week, bringing you the knowledge, how-tos and market insights that you need to make the best possible decisions in order to improve your financial position and build the life you’ve always wanted.
I’m joined today with two real estate studs, Dave Meyer and James Dainard, to analyze the state of real estate going into 2024. We’re going to help you understand where we are, the market forces that shaped how we got here, and how you can identify opportunities as well as mitigate your risk going into 2024. Welcome gentlemen. What can we expect from today’s show?

Dave:
Well, my hope today is to help everyone listening to this understand some of the complex and yes, sometimes confusing market forces that are driving the economy and the housing market and real estate returns right now. I know that sometimes these things seem a little bit daunting, but I think if you work to understand them a little bit and the things that we’re going to talk about today, you’ll see that you can invest in any type of real estate market. You just need to adopt the appropriate tactics.

James:
Yeah. We’re going to jump into also covering strategies that have became more riskier as the market and the cost of money has gone up, everything’s got riskier, but what are the solutions around that? Because higher the risk, higher the reward.

David:
Making more money while mitigating your risk, all that and more on today’s show. But before we get into it, I’ve got a quick dip for all of you. Dave Meyer, one of our guests here wrote the State of Real Estate Investing report for BiggerPockets, and it is available to you as a loyal BiggerPockets podcast listener for free at biggerpockets.com/report24. This report is going to have all the information that you need to know to make good investing decisions and we’re going to be drawing largely from that report in today’s show. Well, let’s get this thing started and let’s start with 2023. So Dave Meyer, can you tell me what happened in 2023 and where we are now?

Dave:
Sure. This might be recap for some people, but I will go quickly through this so everyone is on the same page and set the stage for our conversation. When we started 2023, the residential real estate market and for anyone residential is basically just anything that’s four units or fewer. The residential market was in a bit of a correction. It was certainly not the crash that a lot of people were calling for, but we entered the year where things were pretty slow, prices were down two to 3% and that was mostly due to affordability or the lack thereof. Affordability you probably know what it means, but it’s basically how easily the average American can afford the average price home and it’s not doing very well. As of actually right now, it’s the lowest it’s been since 1985. That has really just pulled a lot of demand out of the market.
That’s how we entered the year, but buyers didn’t want to be in the market, but neither did sellers. Anyone who’s been a part of real estate this year knows that there has been not a lot of inventory on the market. Prices have recovered a little bit. They’re as of now about up one to 2% year over year depending on who you ask. But home sales volume, as I’m sure both of you as real estate agents have seen, has really cratered a lot. It’s down almost 50% from where it was in 2021, and the whole market just feels sluggish and slow. That’s what we got for sales.
In terms of rent, it’s actually done pretty well. We’re up about 5% year over year, but it is much slower than it was over the last couple of years and we’re starting to see vacancies tick up a little bit, and so I think there’s reason to believe that rent’s growth is going to stagnate a little bit, but that’s where we’re at, is a sluggish market with relatively stable prices.

David:
All right. James, like me, you have your hands in a lot of different elements of real estate and you definitely have boots on the ground in several markets. So based on what Dave just said, have you seen that playing out in practical terms?

James:
Yeah. I mean Dave just summed up everything. It’s just slow and steady right now, and that’s across the board for us, whether we’re flipping properties, developing, renting, we’re just seeing this slow, slow absorption and as rates have increased, it’s just strangled the market and slowed it down, which has honestly been a little bit refreshing for us because it was so fast 24 months ago you couldn’t even think about before what you bought, but it’s been this slow grind, this transition down the last 12 months. We’re seeing it get slower and slower every month, but things are still absorbing and moving. The rates are starting to stall out. We’re starting to see a little bit more activity because buyer confidence is back and we’re just trying to push through this mud. 2023 was the year of the mud where it’s just everything is getting scrapped, your boot’s getting stuck in there and you’re pulling it back out and it’s just pushing through getting to some dry DIRT, which we’re getting to now as rates have steadily down and we’re just getting through it.

David:
I like that. Trying to find the dry DIRT. It’s a great way to put it.

Dave:
You going to steal that analogy now, David?

David:
Yeah. I’m hoping that not enough people listen to this that they don’t know that it came from James and people can assume that I came up with that because that’s really good. The year of the mud.

James:
It’s because I was just offroading and glam all weekend, so I’m still trapped in offroad. Don’t get stuck. Got stuck way too many. I got stuck more times this weekend than I did in 2023, so that is the good sign.

David:
All right. Good stuff. So that’s what we’ve gone through in 2023, but what should we as investors be looking forward to in 2024? What strategies look the most promising and what do we need to avoid? More on that coming after this quick break.
With all these market forces and uncertainty in mind, let’s move into what we can do in 2024. Dave, in your report you cover nine suggestions or tactics that you think people need to be aware of for 2024. We’ve isolated four of those and we’re going to go over them in today’s show. Let’s start with the risks that people need to be aware of.

Dave:
Yeah. So we’re going to highlight just a couple of the suggestions that I’ve made and just so everyone knows, these are suggestions that I personally am pursuing and just that I’ve gathered from talking to dozens of other experienced investors about what they are doing in the next year. And we’re going to go over a few if you want to see all of them, make sure to check out the report. Again, you can see this for free. But one of the main ones I wanted to ask James about actually is I am feeling cautious about BRRRRs and Flips. That’s not my sweet spot, but just looking at some of the numbers as an outsider looking in on this industry, I’m curious what you think about this value add business model heading into 2024.

James:
I think value add is really where the strategy is right now because again, if you can’t find cashflow, the only way to rack a return is to implement the right planning and force that equity up. In times where everything’s more money… It’s like every time you go to lunch, it’s a hundred bucks now where it used to be like 20 or everything has got more-

Dave:
Where are you eating lunch?

James:
I feel like I’m not eating lunches at the fanciest places, Dave. I will send you pictures of my receipt, but I do have kids and it just adds up.

Dave:
Okay. For the whole family? Okay. I thought you were eating all by yourself.

James:
The whole family. No, not for me. No. I’m always on the chase of that $10 teriyaki to be fair, but it’s about trying to get those huge equity gains and people get nervous about these two strategies for fair reasons. They are very risky and the reason they’re risky is your cost of debt on your takedown financing is three to four points higher. Things take longer. When you are selling a property, you are keeping them for a longer period of time. As the market slows down, things are transacting and they’re transacting for what they’re listed for. We’re not seeing those huge drops off lists, but they take time and you’ve got to ride it out and you have to ride it out with expensive debt. So that’s where the risk is, is this cash suck of where you’re just constantly feeding these investment beasts until they are through their stabilizations and the sales.
So it’s about calving cash reserves right now as you go into the deal. The good thing is there’s big margin deals in today’s market in all markets and you don’t have to do as many. You can pick one, work through that, but you have to have the reserves, whether it’s a fix and flip or a BRRRR, it takes more time and you have to be able to keep up with that debt and service it. The biggest risk with BRRRRs right now is that floating rates. There’s been plenty of times I bought rentals in 2023 and I performed my rate at like 7% and all of a sudden it says 7 1/2 and you’re going shoot. I mean when you have a half point adjustment, it can really knock down your cashflow, it can take two to three points off your return.
So it’s about just kind preparing and padding everything out. If you’re buying a short-term investment, add an extra two to three months to your debt cost and your hold times. That will get you through. It lets you plan for your liquidity. If you’re buying a rental property and you have a longer stabilization period, throw an extra half point on your rate, see how that works. And then the underwriting is so essential now. People got a little bit, I hate to use this word, but lazy 2020 to 2022. You would buy something and if you did not underwrite it correctly, it was still going to have growth. Now if you don’t underwrite it correctly with the right values, the right income projections, all of your gunpowder, all of your cash is going to get locked up in the deal and that’s the risk of BRRRRs right now.
The point of BRRRRs is to grow your capital, grow your assets and keep your money. If you miscalculate, the banks are only going to leverage you so much with 75% loan to value and making sure that your DCR, or that your debt covers at that point. So you got to make sure you have your coverage. If you don’t underwrite correctly, your money’s getting trapped. So you just want to really slow down on those deals, work through the angles, make sure that you have the right team put together and then lock your debt now. It is not the days of let’s go buy something, figure out the debt later. If you’re buying a property to keep it, make sure you are fully pre-qualified with a mortgage broker, that you understand the rent income and that you can cover. And if you can’t, you might want to look at the next deal or make sure that you work that into your gunpowder and what your cashflow projections are going to be.

David:
Okay. So take things a little bit slower, spend a little bit more time upfront underwriting and spend a little bit more time on the back end actually executing on the plan. That’s a problem that I’ve noticed in 2023, things were moving so quickly that it was very difficult to pay attention to all the moving pieces once you got into the construction when you were trying to execute on the deal. But like you said, things worked out because of how much the values were increasing and even the rents were increasing and then rates were usually going down. So at the end of every deal it was sweeter than when you went into it. Now you’re saying hey, you actually want to assume the worst. Assume that rates are going to go up a half a point or so, and assume that you’re going to have to spend a lot more time executing and making sure that the things get done that need to get done on the deals that you’re buying. Dave, I want to throw it to you. What are two strategies that you see an upside for in 2024?

Dave:
All right. I have one conventional advice for you and one unconventional one. So I’ll start with one that you’ve all probably heard of which is house hacking. And house hacking works in pretty much any market conditions and in almost any market throughout the country. If you’re unfamiliar with the strategy, it’s basically just an owner occupied rental property where you live in one unit, rent out the others or live in one bedroom and find yourself some roommates. But in 2024 there was something very exciting happening with house hacking. There’s some new rules for FHA mortgages that allow you now to put as little as 5% down for small multi-families. So that’s any property that has two to four units. Previously you had to put at least 20% down if you wanted an FHA mortgage on those types of properties. Now you’ll be able to get into some of these small multi-families for a lot less cash down.
There’s also some rules that allow you to now count rental property from an ADU, which is an accessory dwelling unit. People call it a mother-in-law suite or basically you have a shed in your backyard that’s hopefully up to code and safe and everything. You can now count that towards your mortgage so you can now qualify for more when you’re looking for that type of property. So those are two different new mortgage rules that make house hacking more affordable and more accessible than ever before.
The second one is a little less conventional and that is to look at new construction. And I know during normal times for investors, it is not typically worth the premium to pay for new construction because you don’t get enough rent out of it. It’s similar to buying a new car. You buy something that’s brand new, there’s a premium on that and for investors, it’s not usually worth it. But right now we are seeing really good deals on new construction because builders, their business model is different than a homeowner who’s trying to sell or an investor who might just wait something out. They have to move inventory. They’re building and they got to sell those things quickly, get that stuff off their balance sheet. So what they’re doing to move inventory right now is doing rate buy downs. We’re regularly seeing home builders get buy down your rate 1%, 2%. So rather than buying something in existing home that is used for a 7.5% rate, you could buy something new for 5.5%.
And it’s worth noting that buy downs are not permanent. Those are for a year or two or three depending on the particular product, but it is a really good option for people depending on your particular market and what they’re offering. But I think new construction is more attractive now than it has been anytime in my investing career and it’s at least worth looking at right now. In the era of super low inventory, now new construction accounts for 30% of the deals on the market. Normally it’s like 10. So if you want to get in the market, this could be a good option for you.

David:
So if it’s hard to find a deal, maybe you build a deal. James, what are you seeing in this space?

James:
I love what Dave said because I mean it works in all different aspects. Like a home buyer, you get to work with these builders, they’ll buyer rate down and you can get your payment more affordable and it’s all built in the pricing. But on the investment side, we love development right now and there’s a couple main reasons why. DIRT was at its all time high price wise 18 months ago. It has fallen, at least in our local market and I’ve seen it pretty consistent through any of the major metro cities, is DIRT pricing’s down nearly 25 to 30% on cost. Not only that, the structure has changed because as debt has gotten more expensive on us builders across the market, all of the builders have switched their mindset to going, “Hey, I need capital, I need gunpowder right now and I do not want to sit on these projects for 24 month times.”
The good thing about the building community, it’s a lot more logical and they move in waves over the smaller investors. Smaller investors have so many different plans, but builders are all on the same plan, buy a piece of land, develop it, build it for a certain cost, sell it per profit, it’s all the same and they’re all going for very, very similar margins. So now what it’s done is we’ve had to buy these properties in cash or with hard money and lever as you’re waiting for permits.
Almost every deal we’re doing now is a close on permit, job. So we don’t have to be in that deal that long because it takes us 9 to 12 months to build the product. We’re closing on permit, cost of DIRT is down 30%. And also the cost to build. If you look at the renovating versus new construction, new construction costs are down below renovation and that’s because the trades that are working. The volume has slowed down, the amount of land has gone down the trades, there’s a lot more gaps in their schedule than there is for that mom and pops contractor that’s working for the smaller investor. They are constantly busy, they’re using their own hands and they’re busy and their pricing hasn’t given. So it’s gotten cheaper across the board.
And the last thing I really love about, and this is something that everyone wants to think about, we were talking about with the risk and Flips is that cash suck. Where you got to make that 12% hard money payment now on your deal for the next 9 to 12 months as you’re stabilizing it, with new construction, the debt’s better. It’s cheaper by one to two points and a lot of times they’re going to give you an interest reserves, which helps with your cashflow in times where things are just getting eroded right now.
And the interest reserve is when we buy these deals and we structure them with close on permits is we don’t need to make a payment on that for 12 months. They have built our payments into our loan balance, which helps us maximize our cash returns. It helps us with our liquidity and the overall investments more stable than it is in the fix and flip market. So we love dev right now and we didn’t really like it 24 months ago. So the opportunities are here.

David:
Yeah. It’d be wonderful if we could step up the construction of more products. If the pressure that was put on builders and the deals making more sense actually led to us building more homes. It’s always been in the investing community as long as I’ve been a part of it, look for something that’s already there because you’re going to get a better deal on a used car rather than a new car. But if the car inventory is down or in this case the home inventory is down, we need to make more of them. So that would be a huge blessing. If it could be more profitable for builders to build more homes, we could build more homes and we could actually get the affordability of homes lower as well as the price of homes lower so more people could get into the market.
A big fear I have going into 2024 is that deals won’t make sense for the average American who doesn’t have a ton of cash and is spending $100 on lunch, but it will make sense for BlackRock and other institutional funds that are strapped with cash and have access to cheaper capital than the people like us that are listening to this podcast do. So my fingers are crossed that builder step up and start building. All right. James, I want to ask you, what does success look like in 2024 and is it different than what it’s looked like in the previous five to eight years?

James:
So as the market changes, there’s always a different definition of success. I think the last 24 months or 24 months ago when the rates were low, definition of success was buy any asset, slap cheap debt on it and let it grow. And that was the strategy because the cheap money was growing everything and the definition of success when you go into a transitionary market, it’s no different than it was when it was 2009, ’10 and ’11 where there wasn’t a lot of that instant gratification of like, I just bought this property and I’m getting rewarded today. And the instant gratification needs to go away. It’s about that long-term growth and long-term plan.
And for me it’s the year of making big equity gains to use for big purposes in 12 to 24, 36 months down the road. I like loading my vault up in markets like this today, and that’s getting into the game, finding the property, strategizing behind it, and then letting that asset grow or walking into that instant forced equity with the right construction plan. And because the market has slowed down so much right now and the transactions are down, sellers are down, buyers are down, there is some massive opportunities going on. So it’s all about finding those huge equity pop big growth plans for the future, not for today. Again, going back to 2009 and ’10, we didn’t have a whole lot of success on paper during those years, but those years were huge for us for growth than the last 20. It was getting that inventory in that would help us move forward.

David:
So give me a practical example of what a good deal would’ve looked like in 2023 and maybe what a good deal will look like going into 2024?

James:
I mean, a good deal of 2023 was just finding any margin. It depends on what asset class it is too. In 2023, I think for a BRRRR property, my goal was a good deal was to break even. And if I could break even on my interest rate or cover with the rents after all expenses and get a huge maybe six figure equity spread or even a 50,000, a massive equity spread, that was a win for me in 2023, especially if it had any other extra investment kickers in there, like development density plays, path of progress, and if I could buy something break even, I know that there’s upside in 2025 to 2026 once rates come down.
Some other good, I think definitions of deals in 2023 was you didn’t have to work as hard, which sounds weird, but because the transactions were down from ’20 to ’22, we were having to BRRRR properties and buy properties that were heavy, heavy fixers to get that deep discount to be under that 75% loan to value to make it cashflow. Now we can buy a lot simpler projects because they’re breaking even and most investors are staying clear from them and we just have to ride out the interest rates and not do as much construction, but just ride those ways of rates.
So for me, if I can get into an asset break even with some additional upside, that is 100% a win. In 2024, I think that the definition is going to be, there’s a lot more instant gratification this year because as the investors have pulled out, we’ve been able to acquire some very good inventory on some very good discounts that are going into dispo. And just because the market is slowing down does not mean we’re not selling that property. Things are still selling, still moving, there’s not a lot of inventory. So I think 2024, the profitability of in the now is going to be a lot bigger than it was in 2023. And we’re already seeing that in our P&Ls in our cashflow forecasting.

David:
Dave, anything to add on James points there?

Dave:
I just really like what James was saying about trying to break even, and I know that’s not the sexiest or coolest thing to say, but I generally agree that right now, particularly in this type of market, my personal goal is to try and do better than break even when I look across different profit drivers. So I understand that prices next year are probably going to be flat in some markets they might go down a little bit. In some markets they might go up a little bit. But if I have cashflow and amortization and tax benefits, as long as those things can carry me through any short-term volatility in the market, I’m still going to buy anything that has long-term potential. Like James said, I’m looking to see what this deal is going to do in 2025, ’26, ’27, even further out. And as long as I have enough cashflow and short-term benefits to carry me through personally, I don’t need to hit a home run in the next year. I just want to do something 3, 5, 7 years down the line.

David:
That’s interesting because I believe that’s how real estate has typically operated in most markets that didn’t have massive amounts of quantitative easing. Usually when people were buying real estate, they were taking a long-term approach and they want to know about the location, that demographics of the area. If businesses were moving in where rents were headed. It wasn’t always just about what is it right now in this moment and how big of a chunk of equity or how much cashflow can I get when I first buy it? So while this sounds like a change, it’s almost like a return to what real estate has been for the majority of time it’s been around. Would you two agree?

Dave:
Yeah. In my experience, yeah. I mean real estate is a long-term industry. Getting back to the point where appreciation is two or 3% is normal. In normal times over the last 50 years, real estate has appreciated a little bit more than inflation, like 1% more than inflation. So this idea that we need 5, 10, 15% year-over-year price growth to make it a return is not true. It was nice for a little bit, it was super easy, but that’s why everyone got into it. And this is just getting back to understanding the full suite of different ways you can make money in real estate and applying them over a long period of time. And when you do that, it’s a very relatively low risk way to invest.

David:
So James, in order for somebody to jump on a good deal, they have to know what a good deal looks like. What are some factors or metrics that you think people should be keyed in on 2024 that scream, I’m a good deal, buy me?

James:
I think it comes down to always setting your buy box and in knowing what your expectations for return are and every year you got to change it. My 2023 buy box is different than it is going into 2024. It’s actually dramatically different. The definition of a good deal, it’s going to change for Dave, it’s going change for you and change for me. We all have it. We’re in different markets with different goals, but how you get through these and you work through those math is you use, it’s all in the underwriting. Establish your buy box and then go through that in-depth underwriting and working through the calculations, does this get me in my goal on a two year period? And I think it’s very important for today to set your buy box that has 2 and 3 year goals on it, not six and 12 month goals.
There always will be the 6 and 12 month flip deals, the wholesaling deals, those instant cash creation types of properties, but you really got to establish those and that’s about working through the underwriting, working through the calculators, utilizing tools like the BiggerPockets calculators to go through and go, “Hey, in 2024, if my cash on cash return for rentals is at 10% or to have at least a two X factor on equity gain for the cash I’m investing at that point, I know what I want to buy.”
Then it’s about underwriting. Pulling the right analysis with the right team, using the calculators and BiggerPockets is great for that. You can do the buy and hold calculator, go through your BRRRR strategy, how do you maximize your cash, and then is it hitting that true return? But I think the biggest thing is make sure that your goals are defined over a longer period. Then set your buy box, work through the calculations, does the deal work or not? Move on to the next one if it doesn’t work.

David:
So do you have a hypothetical set of criteria that you would recommend people look for in an average market? Like a cash on cash return or some equity that you’d like to see in a deal?

James:
Yeah. Typically, with the BRRRR strategy or even Flips, I’m a heavy value add guy. If I’m not walking into a 25% equity position, whether it’s a Flip, a BRRRR property, a development piece, all in with my purchase price, my rehab, or my bill cost and my soft cost, I’m not that into it. We own a lot of property in Seattle and we have great cashflow. We cashflow around 10%, but that is not what I’m looking for today. That’s the long-term approach. It’s about building those huge equity spreads. So if I’m not getting 25% out of it, I’m not interested because at the end of the day, it’s not going to cashflow that well with the rates. But the equity is what you’re building. If you can put $25,000 down on a cheaper property and create $25,000 in equity, that’s 100% return that you can make in a 12 month period. That is Huge.

David:
Great point. And James, you’ve always had a different way of looking at real estate. I remember the first time I heard you saying, “Hey, I can buy a property and I can hold it as a rental and I can get a 5% cash on cash return or I can flip it and I can get a 45% return on my money or something like that.” I just remember thinking, you don’t hear people mention it like that very often, but if you’re looking at capital growth as opposed to passive income, it does make sense. Dave, what are some things that you’re looking for in deals going into 2024 from a metric position?

Dave:
For me, I consider myself an IRR investor because I think it is the best way to, and for anyone who doesn’t know what that means, it’s internal rate of return and it’s a metric that you can use to evaluate deals that uses the time value of money to combine both equity and cashflow into one metric. So you can see how the big picture is impacted. To me, I just look at that because I am in a position in my career, I work full-time and I don’t need the same level as cashflow right now as someone who might be approaching retirement or wants to retire early.
So for me, I’m just looking at how I can maximize my IRR at all times. And to me that’s typically a combination. Trying to find deals and I mostly invest passively, but trying to find deals where there is some element of value add and then there’s a cashflow hold. But getting your money out in five to seven years instead of keeping it into a property for 20 or 30 years, because typically your IRR, your time weighted returns tend to decline over time if you do that. So for me, I look for five to seven year holds and places where I can maximize my total return. And that really hasn’t changed much over the last couple of years and I doubt it will for me anytime soon.

David:
Guys, this has been fantastic. Dave, any last words you want to leave the audience with moving out of here? Where can they find your report?

Dave:
No, thank you for having me. Hopefully everyone learn something. And if you want to learn more, just check out biggerpockets.com/report24.

David:
James, how about you? Any last words for the audience?

James:
Don’t get spooked by the media. Build your buy box. Go find some good opportunities out there and read Dave’s report. BiggerPockets, they do such a great job giving you that information. That’s how you build your buy box. Read through it, then build your buy box. Don’t build your buy box first.

David:
All right. So head over to biggerpockets.com/report24 for deeper analysis and more suggestions for what you could do to empower yourself in 2024. We’ve also mentioned several strategies on the show. If you want to learn more about any of those, head over to biggerpockets.com/store. And there are books that BiggerPockets has published that will teach you just about everything you need to know about those topics. Please, if you haven’t already done so, subscribe to the podcast, leave us a review, let us know what you thought about today’s show and keep listening to further BiggerPockets episodes so you can stay up to date with what’s going on in this ever-changing market. I am David Greene. For Dave Meyer and James Dainard, signing off.