You Could Have More Equity Than You Think! (How to Use It)

Dave:
Did you know that it’s possible for your property to appraise for even more than you expected? Well, it can. And if that happens, you’re going to have some great options on your hand that you need to think through today. We’ll break down what to do if you find yourself in that fortunate scenario and much more. Hey everyone, Dave here. It’s BiggerPockets forms question and answer time once again Today I have James Dainard here with me and we’re going to tackle a few of the most burning questions we could find from investors and aspiring investors in the BiggerPockets community. James and I are going to talk about how to approach interior design if you’re doing a renovation, whether the 1% rule is really truly dead, how to pivot if your house is suddenly worth more than you expected. And a few other great topics. James, you ready to help the people?

James:
This is my favorite type of episode. If anyone has met me at PP Con, they know I just sit there and we’ll talk and answer questions all day long.

Dave:
We picked some questions that are right up your alley, so I think you’re going to like these ones. Should we jump in?

James:
Let’s jump in. Let’s see what the needs are.

Dave:
The first one comes from Katie Enrichment, who has a very good problem on her hands. She says, I found a duplex and negotiated with the seller to purchase under asking at three 40. Awesome. I can rent it out for $3,000 a month total and project positive cashflow plan was to use A-D-S-C-R, which is a debt service coverage ratio loan to finance at 25% loan to value. I just received the appraisal back and the house appraised much higher than I expected at 4 0 7. So she’s got under contract three 40 prays for 4 0 7. She asks, for those of you that are more experienced, would you change your financing or business model based on this new information? James, what would you do? I’m sure this has happened to you in your career where you found yourself a great deal appraise for over asking. Does it change your approach?

James:
It does. You want to use leverage correctly though. The beautiful thing about that for her is the bank will lend her more now and you can get your cash back. As investors, we use cash as our gunpowder. How do we go buy another deal? And so I think the question would be if I refinance out more, I don’t want to take it past the cashflow. I want it to break even.

Dave:
Right? You don’t want to take out such a big loan just because you don’t want to take on so much debt that you’re now not going to be earning a return every month.

James:
Yeah, that’s where everyone got in trouble. In 2008, everyone was doing that.

Dave:
Too much debt,

James:
Too much debt, and then it was like, well, I can take this money and go make more with it, which is true, but then once the wheels come off, you’re in bad shape. And so I would say, look at your monthly payment now. Talk to your mortgage professional. See how much can you pull out to where you still cash flow just a little bit. Then you know what that number is. Let’s say you can get an extra 30 grand out of that loan, but the thing you want to think about as an investor is do I have a plan for that money? Can I go get another duplex and buy that or am I doing one for the year? If I’m going to do one for the year, I’m actually not going to lever up because why borrow money at a higher rate right now at 7.5% with A-D-S-C-R, if not higher.

James:
So in that case, you just sit on your equity, right? I just sit on my equity. It’s like don’t take the money just because you can take it if you can then reinvest it and make more than 8.5% whatever the interest rate is. That’s always my question. What’s my interest rate today? Well, if I can borrow from a bank of 8% and refinance, get that money back out or have it, but then I can go invest it and lend money at 10 to 11% with hard money, that doesn’t make a whole lot of sense after tax. And so if you have a purpose that will grow higher than your interest rate and you feel good about it and then you can deploy it quickly, then I would look at doing it. If not, leave it alone. You don’t need the money. Don’t pay interest on money you don’t need.

Dave:
Right? Absolutely. I totally agree. And if you wind up not having something else lined up that you’re excited to go buy, you can always refinance and take the equity out. You can get a line of credit against the property to go borrow against all this equity that you have sitting in this property. So you have options. And it’s not like you have to stick with that forever, but I totally agree with James. There’s no reason just because you can shouldn’t do it. It could be to your actual detriment instead of that as a benefit.

James:
And if I’m in growth phase where I’m like, I really want to take myself to the next level, get more rentals, really invest, especially when I was a newer investor, I would always do it. It was like, alright, break even. I need that money back to go buy another house. And so as long as you have a purpose, it works out.

Dave:
All right. Well, I knew you were the guy to answer this question. I’m glad I had you for support. We do have another question that’s right up your alley, James, but first we have to take a quick break. We’ll be right back. How many deals have you lost just because you didn’t follow up in time or maybe you missed a call from a motivated seller while you were on another appointment? That’s where re SIM’s new AI agents come in, they answer your calls, make follow-up calls to leads, score, motivation, and even coach your sales team automatically. It’s like having a virtual team that works 24 7, so you never miss a deal again. Check it out at reim.com/biggerpockets. That’s R-E-S-I-M-P-L i.com/biggerpockets.

Dave:
Welcome back to the BiggerPockets podcast. I’m here with James Dard answering your questions. James, our second question is another one tailor made for you. We cherry picked it just for your expertise. It comes from Tio Sam in Washington DC who said, I recently purchased a property to fix and flip. I’m a contractor. So the renovation aspect, well, within my expertise, however, I’m facing a challenge when it comes to choosing the interior design elements such as bathroom tiles, paint colors, fixtures, et cetera. I would love to hear how you approach this process. Are any apps or tools that you find particularly helpful? Should I consider hiring a professional designer even though my budget is quite limited? How would you answer this question, James?

James:
Hiring a designer and cramming it into a budget that were already tied on can be difficult. I used to do it way back in 2009 because a designer would charge me like 900 bucks because it was so slow in the business. People would just want to work, right? Find the gaps, find when people don’t have work.

Dave:
Like you said, a lot of gaps in 2009

James:
And nowadays, I remember met some designers out in Newport Beach just to get, and it was be like 30, $40,000 if not more. Interior design can get expensive quick. Yes, and they’re very talented. It’s a different thing. I do think they’re worth every penny for what they put out, but we can’t make it work for us as

Dave:
Investors.

James:
And so the best thing that you can do is you guys, when you’re selling a flip property, it’s I’m a firm believer. It’s not about the discount broker that’s going to cut your commission. It’s going to be about finding the broker that you can get to do more things for you. And so first thing is best way to get ideas. Take the comps that you used or actives that are pending or earn the same price point. Go drive them with your broker and then make a spec list for it. You just have to copy whatever is selling at that point. Print out the photos. Worst case scenario, if you have no design, print out the photos of the house that you’re using for your value. What upgrades do they have? What tile do they use? What color cabinets, what countertops, and just do what they do.

James:
If you walk into a house and you see a tile, how do you figure out what tile that is? You have to look at the materials for that and for him being a contractor. But if you’re not a contractor, there’s a lot of difference. It’s important to go walk through these houses, a couple of ’em to go, okay, what kind of floor is here? Is it LVP or is it engineered floors? Are the doors hollow or are they solid? Because the style is easy to copy. It’s about picking the right material quality and you have to touch it to see it. Now I have had, look now my is so trained, I can look at a picture online and go, that’s LVP just based on the shimmer of the floor or how it lays out. But it just go walk through the projects and look through ’em. And then there is a lot of talented brokers throughout the whole US that will do design suggestions. Oh, really? Based on you hire them.

James:
Our team at Heat Indiana Real estate does it, but they’re kind of trained that way. But many, many brokers, like in Arizona, every broker I’ve talked to, they all have a design background here and they’re like, oh, I can help you with this and I can send you these colors. Like what’s on trend down here that’s going to be different than the trend up in Washington. And so those things will really work. And then one other tip is go to your flooring and tile suppliers. Many of them will have a designer that will throw it in if you do your order. Oh really? And they’ll lay the whole thing out. Just make sure you bring them your allowance sheet. That’s the biggest thing. I will not pay more than this for this type of floor or in general. And you can get free design services with a lot of these big companies.

Dave:
So just to recap, you basically start by doing your comps, essentially copy what your competition is doing, right? You say, what is selling at the price point that I’m trying to sell for? What is my business plan? What are my layouts like? And then copy the quality and style that is working because you need to be competitive with what buyers are going to be seeing elsewhere, right? They’re probably going to tour similar houses and you want to make sure that you’re essentially at least matching the quality and probably something relatively similar in style.

James:
And I will say a lot of buyers, it depends on the market that you’re in. I think Newport Beach, the buyers really understand product and quality almost too much. But I will say I’ve sold a lot of houses where I’m like, this is a much nicer house. I have one right now where the quality of build is phenomenal with what we started with. I would never put this stuff in this house if we flipped it. Buyers really look at the cosmetics more than anything else, and it’s about picking the right design. They don’t really know if it’s a dollar tile or $3 tile and a lot of flips. That’s in a lot of price points, especially under a couple million. It’s more about the design and look and how you pull that off. You don’t always have to spend the most on your materials. You just got to implement it the right way.

Dave:
Great. Well very good advice here again on flipping houses from James. Let’s move on to our third question, which comes from a BiggerPockets forum poster named Jonathan who says, I’ve researched private lending and decided that’s how I’d like to enter the real estate space. I have enough capital that I can make a few loans while still maintaining a healthy stock portfolio. How do I get the ball rolling? Do I begin by getting a solid contract from an attorney? Do I contact appraisers and title insurance agencies to find one that I could use since they only want to lend locally? How do I get my name out there and start my search for borrowers? I don’t want to come across as not serious and waste time for agents or borrowers. James, you do some private lending. So tell us a little bit about your recommendations for getting started in what I think is a great business. Really interesting lucrative niche of real estate investing to be in

James:
Private money lending is one of my favorite investment engines that I do. I buy rental properties for assets to grow. I use private money lending for my passive income, and honestly, I keep probably 50% of my capital now in that because it does so well. And just

Dave:
Before you do that, James, let me just describe for people what that is. They might not know what private money lending is, but basically at least for you, you’re lending to flippers to developers, people who need relatively short term loans to do a renovation or do a big project. It’s sort of a shorter term loan. At a higher interest rate, somewhere between 10 and 15%. You charge a couple points at the beginning of the loan, and so you can make double digit cash on cash return relatively easily. That’s what you would expect as a hard money lender or as a private lender, right?

James:
Yeah. Depending on who the operator is, what position I’m in in the loan, I’ll charge more and more interest. If I’m in a second position loan, I’m going to charge a lot more. If it’s an experienced operator, I might charge more for security because there’s risk with every type of deal. And that is the one thing about private money lending. It is great for passive income until it goes wrong and if it goes wrong, I’ve seen people lose millions of dollars in bad loans, especially when I remember in 2008 when there was a lot of seconds and thirds floating around, we saw just flat lines on big companies. And so you have to be careful. And so how you protect yourself, the first thing that you want to do if you want to become a private money lender is to go talk to a securities attorney and a real estate attorney because the documents that you’re going to create as your loan docs are what protects your money against that asset.

James:
You can take a template but bring it to someone local in your market that really understands the lending laws, what you can do, what you can’t do, and then have those documents tweaked and corrected, make sure your documents are good. The second thing is don’t worry about finding the loans yet. Build the team that can underwrite your loan correctly for you. In every market that I lend in, I have one broker because if I don’t know that market that well, I have to understand if a flipper’s sending me a package, I got to verify those numbers. And so you have to be able to look at the asset and find out where you are at as far as a loan to value because the loan to value is what protects you on your money. If something goes wrong as a lender, if we have to take it back, we want to know that we can sell that and either get our balance back or even maybe make some money.

James:
And so those are the first two people finding the operators. There’s some really cool different data providers out there. They will pull you flippers in your market that have been buying and selling. You can also see how many deals that they’ve done. Those are the best operators to talk to because they’ve been in the market a while. They know what they’re doing and if something goes wrong, they know how to kind of mitigate that risk. And so I would start going that way. Look for the bigger guys, because the first people you’re going to find, and there’s nothing wrong with this, but they’re going to be a lot newer. They need the money, they need to get into the game and they’re going to do whatever they can to get that money and the operator’s really what’s going to protect you. And so start with experience. And I lend money to new investors all the time, but I can look at the deal, I can look at the person, I can take their answers, I can gauge it a little bit better. So start with the experience ones in your market, reaching out to brokers that you see selling a lot of flips in your market. Call them, talk to them. Who are their clients? Who are their bigger clients? Do they need capital that helps the broker get a deal done? Those are great ways to get started.

Dave:
Awesome. Great. So just to recap, James said, first thing that you should do is talk to a relevant attorney, either securities or real estate or both types of attorneys to make sure that you’re getting your documents in a row and that you’re properly protected. And I want to talk just in a minute about how to protect yourself and the mechanisms for that. But the second thing James said was finding someone to help you underwrite that deal. James gave the example working with a local agent who can help pull comps for you to understand what the true value of the property is today, what the after repair value is going to be after the work is all done to make sure that as a private lender, if the operator does not perform, you have to take that property back and you don’t want to be paying full price for that.

Dave:
That’s going to put you in a bad position. You should be able to retake that property at a 70% LTV or an 80% LTV or whatever it is you deem appropriate. So that was step number two. And then the third step was going to find operators and James, I think rightfully recommended, trying to focus at first on experienced operators who have a very high chance of performing before moving on to perhaps some of the riskier types of assets where you could maybe earn a stronger profit, but that’s going to be just a more complicated procedure. Did I get that right, James?

James:
You nailed all three.

Dave:
Good. But you mentioned something a little bit earlier about first seconds and thirds and sort of getting your ducks in a row, getting your documents in a row. So just so everyone knows, when you take out a loan against a property, there are different positions. So your first position loan, like if you go to buy a regular house, your mortgage is going to be a first position loan, which means that if you default on your loan, that bank has the first claim to the asset. And then if there’s a second loan, like say you take out a second loan to pay for your down payment, that might be a second lien or a second position loan and they can only get paid back once the first position is paid back and so forth. So the first position loan usually has the lower interest rate but has less risk, second position loan, higher interest rate, but higher risk and so on. You talked a little bit about how you adjust your own rates, James, based on whether your first or second position, but as a new investor, would you even recommend people go into second position loans or should they try and do first position loans?

James:
First position loans are the safest ones. That’s where you want to be, and I would recommend that people go that way. The one issue with a first position loans a lot of times is some private money lenders that are lending 50 grand at a time or a hundred grand at a time, they don’t have enough to cover that whole loan first can be big.

James:
Yeah, they just don’t have the liquidity, but they want to keep their money working. And so if you can be in a first position loan, that’s where you want to be. But if you can’t, that’s where a lot of people have to go into those seconds. And that’s also where the biggest demand and need are from investors because they want more liquidity. They can get a first position, hard money loan from an institutional company a lot easier. They need that gap funding in there. And so I just don’t want to promise sunshine and bunnies that you’re going to get all these loans. You have to have enough capital to cover too. For sure. And so then it comes down to if you have to go into a junior lien position, a second or third, don’t recommend thirds for people, try to stay in a second position making sure you understand what that first position loan is. You need to know what the terms of that loan are. What if it balloon payments in three months and you’re promising to give bi a loan for 12 months? So to reduce the risk, you got to understand what’s the terms, how long is it good for, what’s the interest rate, what’s the total loan balance out of that? And I like to know if it’s on a construction loan because the loan balance could be less if the operator doesn’t finish the project out.

James:
And so I want to know all those things. And then also what is their default clause? Because some hard money lenders will charge 24% on the way out the door if they fall behind, which will you have to look at that if that compounds on your balance, you can go from a 70% loan to value to 85% really fast.

Dave:
Yeah. All right. Well that’s good advice. Thank you, James. I’ve started dabbling a little bit into private money lending and it’s a great business. You can earn really solid returns, but I do them sort of in funds or I buy notes. I don’t underwrite them myself, at least at this point in my career, but if you have the capital and you are looking for cashflow, I really recommend people learn more about it. There’s actually a great BiggerPockets book called Lend to Live. It teaches you all about the basics of private money lending and if you are looking for cashflow, really, really good business to consider. I think it’s something that a lot of people later in your investing career get into and just realize that it can be a really good business and definitely recommend you check it out.

James:
Private money lending’s great if you don’t want to deal with tenant headaches because you actually make more on your return as far as cashflow goes, but it is high tax, so you got to watch that too.

Dave:
I knew these questions were right up your alley. You’re just knocking these down one at a time. We got two more for you, but first we have to take a quick break. We’ll be right back. We’re back with the BiggerPockets podcast. James Dard is just crushing, flipping and private lending questions right now. We got two more questions for him. So first question is from an investor named Deborah in Colorado. She says, one of the trickiest parts of flipping houses for me has always been figuring out how to accurately estimate rehab costs. There’s always a surprise that eats into the budget and profits, whether it’s skyrocketing material prices or finding something unexpected during the demo. So I’m curious, how do you approach rehab budgeting? Are there any tools or strategies you swear by and what’s one mistake you’d tell someone new to avoid? There are a couple of questions in there. Let’s start with the first one here, James, which is just how do you approach rehab budgeting? That’s a big question, but do you have a framework you can help Debra and our audience use to understand how to approach this?

James:
Yeah, this is probably the hardest thing to do as an investor is really judging the budget, especially if you don’t have a general contractor going out there. How we’ve done it, and we have two different tools that we built internally where we have a spreadsheet that really breaks down standardized install rates throughout our market. A lot of things that you can break down into install rates that are fairly simple and easy to get for information wise. For example, if I want to install engineered hardwoods, I know in my market it costs me $2 and 25 cents to $2 and 50 cents a square foot from there. As long as I know what things are installed for, it’s up to me as the investor to select the right materials and then that will give me the budgeting for my whole flooring throughout my project. And so what I always suggest is kind of start with the framework is always find out what the cosmetic install rates are, like a cabinet box in a kitchen, $25, the simpler items, and then start working backwards into the mechanicals. But what we use a lot for budgeting, just for a simple fashion is we do a price per square foot where we just allocate a price per square foot for cosmetics. We know in Seattle we can do a house if it’s just the cosmetics, that’s paint millwork, doors trim, we can do that for about $20 a square foot.

Dave:
That’s not bad actually even for Seattle.

James:
And that’s just though for millwork paint, trim out door handles. And so it’s fairly affordable at that point. But then from there we just kind of go with standard blocks like a kitchen $10,000 and we look at for the averages and for new investors, the best thing you can do is go to your meetup groups, go to the BiggerPockets forums, talk to investors in your area. My pricing is different than it is in California or my pricing is different than it is in Ohio and cost and labor cost different. But talk to your local investors that have done projects and many of ’em will even send over a quote to you if you ask and you can start working a quote backwards on a price per square foot and then allocate it per year bill errors because the older the house, the more varis you’re going to have.

Dave:
Oh, interesting. So if you got a quote for the same kind of work on a 1950s era house versus a 1920s era house, the twenties house is obviously going to be more expensive.

James:
So for us, when we run our price per square foot based on the averages of collected data from our projects or other investors on a 1920s house, we run that at $110 a square foot to take it to studs and renovate the whole thing. For 1950s, we run at $80 a square foot for 1970s, we actually run it at $70 a square foot and the newer the house, the less major changes. And so that’s what brings that square footage down. So we actually do it in blocks of a by about 20 years give or take.

Dave:
Are there other things that you would recommend for newbie flippers to avoid to reduce that variance? Because you said that earlier about variance and I think that’s super important. You can come up with this general rule of thumb for how much it’s going to cost per square foot and you’re probably relatively close, but there are all sorts of things per the question that are going to throw that off. So the age of the house is one. Are there other things that perhaps new investors should avoid because it carries some risk that it’s going to take you off your budget

James:
And to avoid that variance, always add a contingency in. If it’s a project I’ve never done before or it’s a little bit newer for me, I throw a 10 to 15% contingency on if it’s a newer house that we’ve done a lot of, I throw a 5% contingency on, and so always have that padding on there. That is probably the biggest thing. But the thing that crushes investors the most on their budgets is when they misjudge floor plants where they may be looking at a house that’s a three bed, one bath and their comp’s a three bed, one bath, but the square footage is weird. The kitchen’s in small spots, the bedrooms are weird size, they’re unbalanced. The cost of the framing and manipulating a building is what really blows up a budget, and I hear it all the time from investors, they’ll be like, how did you do the house for a hundred grand? I’m like, well, I only moved one wall. That’s the key. And so if you want to stay away from the headache projects, the less manipulating you have to do of a footprint, the much more seamless your projects is going to go.

Dave:
That’s very good advice. Yeah. I’m learning a little bit about flipping from James and this seems to be a key thing that he is always hammering on is try and limit how much big structural work you have are doing. It limits your permits times and the cost and complexity of the project, so that’s great advice. Any other last mistakes that you think our audience should avoid if they’re new to flipping?

James:
Don’t just go off of what people said that should cost to renovate a house. Go off of the people that you know that you’re working with pricing, because I hear this all the time like, oh, well you can do this for 80 grand. I’m like, well, my team’s can do it for one 20, so I have to go with one 20, but if I went with the 80,000, I’m going to be in deep trouble. And so one of the best things that a newer investor or any investor can do is act as if don’t go out and say, Hey, I’m a brand new investor. Can I talk to you about quoting a house? Call a listing broker. If it’s sitting on market forever and it’s a fixer and they want a tour, ask if you can bring some contractors through to get some quotes to practice. Tell the contractors you bought the house or you’re secured under contract. Get three quotes and then look at each quote and then go, how much does this cost to me on a per foot basis like electrical? If it’s 10 grand, you got a 2000 square foot house, then you can go, okay, 10,000 divided by 2000 square feet. This is my average price per square foot for electrical. And then you can put that by line item and it make it very simple, but just always get the numbers for yourself. Then work it backwards.

Dave:
Just out of curiosity, when you get quotes from three different subs on a Let’s stick with electrical, how big of a variance do you see sometimes how far apart can some of the quotes be

James:
Massively like double or triple? And these are people I know too, so I know they’re valued. The biggest mistake people make is they think that once they find a good electrician that they’re going to stay, their pricing’s going to always the same, but for us as investors, we want to find the people with the gaps who does not have a lot of work right now, who’s going to be competitive. I mean, my furnace guy and I love the guy, he doubled his pricing on us over the last two years. We stopped using him, now he’s got gaps in his schedule. He called us up and he goes, okay, I can hit those numbers. And we said, well, now we found a cheaper guy, and now he’s eating that guy’s pricing because he has to be competitive. So always look for the gaps. If your electrician’s pricing you high call another electrician who does not have work going on, that’s the key.

Dave:
That’s great and really good advice there to get as many quotes. It seems time consuming though. If you’re just getting three quotes from electrician, then you need to do that for every sub that you’re going to work. This could take a long time, but that’s kind of the whole business, right? That’s what you got to do it

James:
And break it down to an hourly rate. If I’m going to spend 10 hours quoting a bunch of items out, but I can save $10,000, that’s a thousand bucks an hour I’m saving. And so it’s worth it every time to get that cost down.

Dave:
Alright, well you’re mowing these down quickly. We have one more for you, James. It comes from Anthony and this one is an investor in Phoenix that can really only be answered by someone like you currently looking at deals in Arizona, so hopefully you can help ’em out. Anthony says, we are all aware of the 1% rule that’s a property’s rent should be at least 1% of the purchase price, and that’s monthly rent, just so everyone knows, should be 1% of the purchase price. This is a rule that came about in 20 12, 20 13, and Anthony is asking, does this hold true for Arizona? It just seems to me that buying at sub 1% is almost not worth it because the cash on cash return is much lower. I can make offers at the 1% rule, but these would often be at around 60% of asking price. I know deals like this get done all the time, but I have a little luck targeting sellers that are motivated enough if not 1%. What metric do you use? I have a lot of thoughts about this, but you take this one first,

James:
I use the 70% rule. The 1% rule. Those are just gauges for me to investigate more on that property. And if it hits above 1%, I’m going, okay, this is probably a pretty good cashflow deal I need to really dig into. If it doesn’t, but it’s close, let’s say it’s hitting 0.8% instead of one. It still tells me to dig in deeper because a lot of times with rental properties, it’s not just about the 1% cashflow because when I buy a rental and I keep it, I’m keeping this for at least five to 10 years or at least trading it out. And so it gives me the gauge of cashflow, but I’m going to really research more appreciation, zoning upside on the property and to see if I can really hit that accelerator. And if you’re looking at deals with the 1%, just you’re 60% of asking you want to go into a different neighborhood because it is just not working. There’s definitely more affordable neighborhoods, markets where you can still get really close if not get it. And so if it’s not working, you got to go out. Like 1% in Seattle is not going to work for me.

Dave:
No, no, no way. In a lot of expensive markets it’s really just not going to work.

James:
No, but if I go and I want that, then I can go over to Eastern Washington where it’s a lot more affordable and look at that, but there’s going to be less growth, and so take it as an underwriting tool then look for the additional upside.

Dave:
I don’t think the 1% rule is dead. I’ve said this before and I’ll say it again. I think that at this point it does more harm than good. I think a lot of people get sort of anchored to this idea that 1%, they have to have 1%. They’re only offering deals 1%. I am not surprised sellers aren’t taking your 60% of asking price offer. That’s probably not going to happen unless it’s a really mispriced house or it’s a place that needs a lot of work. Generally speaking, I’ll just give you a little bit of context here. The average rent to price ratio right now in the United States is 0.55, so you’re not even close to 1%. If you’re in more expensive markets like Phoenix or Seattle, you’re probably at 0.4. So you have to remember that we’re just in a different era of real estate investing and 1% ruled deals.

Dave:
Unless you’re in a lower growth kind of market or a property that needs a lot of work, you’re probably not getting 1% unless you’re maybe in the Midwest, Midwest. Some parts of Western New York, Ashley, Kara, friend, she probably can find 1% rule. Sometimes if you’re not, there are two options. One, you just either have to put more money down or you need to just accept a little bit lower cashflow or you need to do a renovation. I do think it is possible to hit the 1% rule, but you have to buy it and then bring up the rents through value add to get it even close to the 1% rule, or at least that’s what I’m saying. I don’t know if you agree, James.

James:
I do believe you have to earn it a little bit more. Every market has the seasons, right? 2008, it was a season of leverage. It was about levering buy more, 2008 to 10. It was about buying very secure investments and being okay with making very few money on each deal too. It was just like it was an income, and then the era of low rates, go buy assets, they hit the 1% rule. Now this is why it’s so important for investors to put their goals down. What are my goals? What assets will get me there? With real estate, you’re just choosing real estate as your engine to get you there. There’s no magical engine that’s going to just get you to your goals. You have to prepare for it. And so buying fixers, you’re always going to buy a lot deeper because cost of money’s really high, construction’s high, it’s harder to control, and so when there’s more risk and it’s harder, there’s way more opportunities. And so you have to buy more fixtures, you have to get more creative, or you just have to do more work like run a short-term rental or a midterm rental and just operate at a little bit more work. But that doesn’t mean that it’s not a good engine. It just means you just have to pivot for this era and who knows how long this era will be. It could just be three years, it could be one year, it could be 10 years, but you have to build the plan around what you have today.

Dave:
That’s very good advice, and I totally agree. I think, look at the time, this 1% rule came into place. It was over 10 years ago. Investing conditions were completely different. They can be useful, but really just look at the best deal that you can find right now. Think critically. Listen to this podcast. Think about what deals make sense in today’s day and age, and oftentimes trying to maximize cashflow through the 1% rule is not the best unless you’re in a certain market, certain type of asset class, certain property class, it probably doesn’t make that much sense. So I would encourage you to just think a little bit more broadly or consider a different market. If getting a 1% rule deal is really important to you, that might be a different neighborhood in Phoenix or in Arizona or going completely out of state. Alright, well, that’s what we got for you all today. James. Thank you so much for answering these questions for us. We really appreciate you being here.

James:
We can go all day. I love this.

Dave:
We only brought five for you. You just did them so efficiently, but it made a great episode, so thanks. We’ll have to have you back again to do another episode just like this in the near future.

James:
Ready? Anytime. The important thing for listeners to know, the reason I can answer half these questions is because I already made the mistakes.

Dave:
Thank you for doing that on our behalf. We appreciate it.

James:
Yeah,

Dave:
And thank you all so much for listening. As a reminder, if you have your own real estate questions, head over to the BiggerPockets forums. It’s at biggerpockets.com/forums, and you can post your own questions there. Get in-depth, thoughtful answers from thousands of experienced investors, or you can connect with like-minded community members in your area. Thank you all so much for listening. We’ll see you next time.