How to Find Great Deals in YOUR Market (Rookie Reply)

Ashley:
Welcome to another episode of Rookie Reply. Today we’re diving into the nitty gritty of real estate investing dilemmas that can keep you up at night from weighing in complicated property decisions to what the heck it means when real estate prices start dropping to navigating electrical issues that could literally burn your investment down.

Tony:
Today’s questions highlight the real world challenges investors face when textbook strategies meet the actual real world. So we’ll walk you through how to understand market dynamics when prices are dropping, and how to know when it’s time to bail out on an investment.

Ashley:
Welcome to the Real Estate Rookie podcast. I’m Ashley Kehr.

Tony:
And I’m Tony j Robinson.

Ashley:
Okay, so today on rookie reply, our first question is from Ken in the BiggerPockets forums. His question is, what does it mean when your market sees price reductions? Is it time to buy, time to sell, or time to hold? So he actually shared some data with us, and it’s a share of listings with price reductions and Phoenix, Arizona has seen 32% of its listings with a decrease in price. Then we have Tampa with 28% Jackson, Florida, 27%, and the list goes on from there. So Tony, looking at this information, what are your initial thoughts of seeing price reductions and maybe even before that, have you seen significant price reductions in any of the markets that you are investing

Tony:
In? First? I think that price reductions are very specific to certain markets. While we’re seeing Phoenix with 32% of its listing, seeing price reductions, actually, I remember it was Buffalo, right? We were talking about this on a podcast not too long ago where Buffalo was still seeing strong pricing. You’re not seeing as many price reductions.

Ashley:
It was days on market very short. It was Rochester, New York was like 13 days, and I think Buffalo was like 16 days on market, and those were the top two with the lowest days on market.

Tony:
And typically low days on market means sellers aren’t needing to reduce their prices. So longer days on market means sellers are having to reduce their prices. So just first for Ricky’s to understand that, just because there are a subset of cities that we’re discussing here where price reductions seem to be eating up or constituting a large majority of the listings, it doesn’t mean that it’s happening everywhere. But yeah, I mean even for us, we have a flip right now that we bought in a little mountain town, and we’re basically at the point right now where we’re selling to break even and we’ve reduced the price. I think we initially listed at four 80 and we’re about to drop it down to four 40. It’s like it was like a short six week flip, quick 40 k, and that 40 K is now non-existent, right? So now we just want to get it off the book.
So even for us in some of the markets that we’re in here in SoCal, we’re seeing something. I think the driver behind some of these price reductions is just like what we typically see when it comes to basic economics. It’s supply versus demand. And maybe in some of these markets there’s a large influx of supply coming online at the same time. And when that happens, buyers have a lot more options to choose from, which means they can be pickier, which means they may not pick your property at all. So yeah, it is I think a challenge that a lot of investors are facing today.

Ashley:
So I actually went and looked at the responses to this question in the forums, and there was actually a little heated debate going on in the forums regarding this data. So actually Melissa from Rent to Retirement, she was commenting how, just exactly what you said, Tony, this can lead into a shift that the market is starting to cool and that supply and demand is changing. Then we had someone else, and I can’t remember his name specifically, but he just said, this is nonsense. This means nothing because you don’t have enough data to really say what this means. So for example, he stated, how much are these price reductions? So that can give you a little more information, or is it just someone decreasing it by a thousand bucks so it gets brought back up to the top of the listings? Are they huge price reductions, hundreds of thousands of dollars in reductions? And there was a couple other things that he mentioned too, as far as he does not think this can mean anything unless you see the surrounding data too,

Tony:
And there’s probably some truth to that. But I guess just to play devil’s advocate to that person’s point, even if we don’t have, I think the context of the size of the price reductions, we can probably all agree that in a very strong seller’s market, we’re not seeing a large percentage of price reductions regardless of the size and scope of those reductions. If we go back to interest rates being 3% and everything going over asking, we’re probably, we’re seeing very, very few price reductions in a very strong seller’s market. So I get what this person’s saying, there’s probably some additional context that we need to take in, and that’s why I started my answer by saying, Hey, it is very much market dependent and you’re going to see different things in different markets. But for the markets where it is true, I think it is saying something about buyer demand and the amount of supply in that market.

Ashley:
Tony, if you are somebody that’s listening that’s maybe in Phoenix ready to list their flip, and what would you do with this information if you are getting ready to sell? And even on the buying side, if you are looking to buy, do you kind of wait and see if there’s reductions on a property, or maybe this is more of an opportunity to make low ball offers?

Tony:
I guess on the buyer side first, I think that’s a little bit easier. But yeah, if I’m in a market where I am seeing a high days on market, a third of the listings, seeing price reductions, that’s a signal for me that maybe I can be a little bit more aggressive with my initial offer and what I’m asking for. So yeah, maybe I’m going in with a much lower starting offer. Maybe I’m asking for better terms or I’m asking for more credits at closing or some sort of concessions from the seller. But yeah, those are all signals to me that as a buyer, I think I have a little bit more leverage than I would have otherwise. On the selling side, and I’m curious what your thoughts are here too, Ashley, but for me on the selling side, if I’m, like you said a flip, for example, say I started this flip six months ago, market was maybe a little bit more healthy.
Now I’m finishing this thing up and I’m seeing these numbers steer me in the face. I guess two things that I would ask myself is one, what is my breakeven point? How low can I go on this deal just to be able to get out of it without getting my face bashed in too much on having to come out of pocket maybe to sell it. It’s like, what’s my breakeven point? How close am I willing to get to that? And let’s say that maybe we’ve already surpassed my break even point, right? Maybe there are seven new comps within a half mile radius that literally have eaten up all of the profits I thought that I was going to get on this deal. Okay, well now it’s like, well, what are my other exit strategies here? Can I convert this into a rental or otherwise, right? Gosh, I don’t know. What are your other exit strategies you have here as opposed to just getting washed on the sale? So those are the two things I’d be looking at.

Ashley:
I actually did a flip in Seattle, I dunno, three years ago, and the market shifted completely during the middle of this flip and we ended up having to, it had a carport and we ended up adding a garage to the property to increase the value of it just to be able to break even. So we added that money in or added more money capital into the project, added the garage, and we were able to get all of our money back out of the deal because we did that other added value. But that was also still a risk to take. It wasn’t guaranteed that we’d be able to make back that money that we put into the deal, let alone the garage putting in extra money. So maybe also too, there’s ways that you could look at the comms and see what are the houses that are selling that aren’t sitting, that aren’t having price reductions? Is there something unique about them that you could add to your property that’s adding that extra value that people are willing to pay more for? And I think that’s a big thing too, is looking at what are the properties that are sitting on market? What are the properties that have price reductions? Is it luxury high-end homes? Are they starter homes that are not remodeled? Any similarities or comparison into what kind of properties are sitting on the market and not actually moving to

Tony:
You make a really, really great point about reinvesting back into a property that might lose you money. And I think we’ve done that. We did that with one of our short-term rentals where we bought it, same thing, we had renovated it and then by the time we finished renovation, we just weren’t super happy with where it landed. We’re like, we don’t think this is going to do as well as we thought. So we reinvested more money back into it. But I think there is something to be said about saying like, man, we didn’t quite execute this game plan, this business plan for this property in the way that we wanted it to, or we’re not getting the end result that we want and we’re going to potentially lose money on this deal. And I think it’s very counterintuitive and it’s a tough pill to swallow to say, well, maybe the only way that we save this bad deal is by putting more money into it. And it sounds like the wrong idea, but I’ve seen it in my own portfolio and you’ve seen it on your side as well. But sometimes that is the saving grace for a bad deal is identifying what are the leverage points that we can focus on? What are the levers we can pull to try and extract more value from this? And sometimes it does mean investing more capital.

Ashley:
And I mean, think about it, that goes with any business as to sometimes you need to invest more capital into your business. And a lot of times getting money to put into your real estate is a lot easier than getting financing to buy equipment for your business or just a cash infusion to hire more people. I think as real estate investors, that can be easier to do. You can find private money, you can use a line of credit, whatever it may be. But think about it, any business that is having some kind of pain point, one of their options is how do we make this more successful? And maybe it’s purchasing a piece of equipment that’s going to grow your business. So you’re not going into this as like, oh, this is a bad deal. I need to put this in. This is how business works. Sometimes it’s not. You have to have that mindset that going forward, you may have to infuse capital into the property and that’s a normal thing to do. It’s not a sign of failure, it’s a sign of business. I guess we’re going to take a quick add break, but we’ll be right back after this with another question.
Okay. Welcome back. This question is from Lauren Taylor from the BiggerPockets forums. We bought two houses for too much now we don’t know what to do. We are a couple who have recently been educating ourselves on real estate investing through resources like BiggerPockets. However, we’ve realized we’re in a tough spot and we are not sure of our next steps. Here’s the situation. We own one rental property, which we purchased in 2021 for 390,000. We have a low interest mortgage of about 1500 and rent it for 1875. It’s a 900 square foot, three bed, one bath house. It was our primary home for two years. In the fall of 2023, we bought a primary home for 550,000 in a highly desirable neighborhood where homes typically sell for 700 to a million. Our house is 1600 square feet but is smaller and not as desirable compared to others.
So it’s worth less than that. We are paying 3,900 in mortgage payments on this home, which is a lot for us. Combined, our salaries are approximately 170,000 per year, not tons of room for growth as we work for the state and city, we absolutely love this neighborhood and it would be very hard to leave. Last summer, we rented a room in our larger house on Airbnb bringing in 500 to $900 per month. The market hasn’t appreciated enough to make a significant profit. If we sell, maybe we’d make 60 to 80 k on each home. At best, we are considering several options, rent out our primary home and move to a cheaper rental. We think we could get 2,700 to 3,100 in rent. And just as a reminder, their mortgage payment is 3,900 on this, so wouldn’t cover the mortgage payment, rent out the larger home on Airbnb during the summer while we live in a camper to help offset the mortgage, move back to our smaller rental and sell the larger home, sell both homes and start the investing process over again. Sell the smaller home and use the cash to invest elsewhere.

Tony:
Not to unpack here,

Ashley:
And I think the positive is they have options that you have to be optimistic where some people aren’t in the situation where they even have the options of being able to rent out a property, being able to sell property. So it’s okay, we got a good start here.

Tony:
Yeah, I think maybe let’s just kind of quickly identify the, I guess maybe the pros or the things they have going in their favor and some of the challenges. So the pros here are that they’ve got decent income, almost $200,000 a year between the both of them. That’s a good amount of take home pay. They’ve got a profitable three bedroom, one bath mortgage is 1500, they’re renting it for 1875, so it’s profitable. And they have a house, although not as large as some of their other neighbors, but they have a primary home in a desirable neighborhood that this seems to be some sort of demand for short-term or midterm stay. So those are the things they have working for them. The challenges here is that it seems like that mortgage payment of $3,900, which is once a 4,000 mortgage payment is a lot, is stretching them a little bit thin. And then it also seems like even if they were to rent out that entire place, they wouldn’t be able to necessarily cover all of that mortgage. So they would still be short a thousand to 800 bucks on that mortgage. So those are kind of what the assets they have and some of the challenges that they’re facing.

Ashley:
I guess we could go over their different options they’re considering. So they could sell both properties. They could sell one property, they can rent some out. So like their first one here, Tony, rent out our primary home and move to a cheaper rental. We think we could get 2,730 $100 in rent, and their mortgage payment is 3,900. So they’d be paying that excess and the rent in their new place, I would say eliminate this option.

Tony:
Totally agree hard no on that one for me,

Ashley:
Especially if they don’t see much growth in their income, they stated that there’s not a lot of room for opportunity for their income to grow. I could see if maybe they think they’ll be making more money within the next two or three years and then move back to that property that they love. But if they don’t see their income growing that much within the next several years to actually move back to that property, I don’t see the point in keeping it right now and dumping more money into it and paying for yourself to live in a rental. The next thing is to rent out the larger home on Airbnb during the summer while we live in a camper to help offset the mortgage. So I do like this one better.

Tony:
I like the idea of leveraging the asset to try and generate some more income because they said in the question here that they rented out that room bringing in between 500 to $900 per month for renting one room. They don’t say how many bedrooms are in this new primary residence, but I think the question I would ask is, could you rent out more rooms? It’s 1600 square feet, so a three, maybe a four bedroom at that square footage,

Ashley:
But that still would be less than what they said they could get in monthly rent. They said they could probably get 2,700 to 3,100 and if they rent out by the rooms and it’s only 500.

Tony:
The difference there though is that they wouldn’t have that additional rent of wherever they’re going. So here they’d be able to decrease if they just use this like a true house hack.

Ashley:
Oh, you’re saying they stay in it. Okay, I’m following that.

Tony:
Yeah. So if they do it like a true house hack where they, and they stay in it and they rent out, say it’s a three bedroom and they’re able to get between a thousand to $2,000 per month from those extra bedrooms, well now you’ve eaten up 50% or more of your mortgage payment and you get to stay in this house that you love the neighborhood while also subsidizing the cost. So that’s one thing that comes to mind for me. And then for the original rental, it seems like it’s doing well at that 1875, but again, also wonder, could you switch this up? If you’re getting a thousand bucks per month for this other property, at most could you do that on the smaller property? And now you’re getting up to maybe $3,000 per month if you’re renting that one by the room and you’ve almost doubled, not quite doubled, but 1.5 x call it the revenue that you’re getting on that first rental. So imagine if you do that, you rent out the first one, buy the room, you rent out the extra bedrooms in your primary, buy the room. Now you get to keep both of those assets, keep building your equity, saving up for that next house, and you’re decreasing the amount of money you’re spending on your actual living expenses. So that’s kind of the game plan that I feel makes the most sense.

Ashley:
And I like your idea of going with how to maximize income from their primary. And they mentioned the camper. Well, what if they rented out the camper?

Tony:
There you go, right

Ashley:
Instead. So they stayed in the house. It’s like what is their RV share outdoorsy, all these different websites that you can rent out your camper and maybe that is a way that they could subsidize that. This would definitely depend on your HOA and things like that. But I have seen people that park the camper in their driveway and rent it out. There’s actually a property near me where they keep this huge coach motor home in a big huge Morton building. And you can rent that out and stay there. And you go into the Morton building and the big RV is in there and you stay the night in the RV inside this big building. So you’d obviously have to look at what kind of income you could generate off of that, but I think if you have the camper instead of you moving into the camper, there’s opportunity for you to rent the camper out too.

Tony:
And I think the last piece too, and this line stood out to me, but they said not tons of room for growth as we both work for the state and the city. I actually just met one of my neighbors and we were chatting. He worked in sales throughout college. He went to college to become a teacher. He gets his job teaching, he enjoys it. But most teachers realizes that the income of being a teacher isn’t always the best. So he recently left teaching to go back into sales. He had just done sales as like a job to get by in college, but he said, Hey, I was actually pretty good at it. The money was really, really good in comparison to teaching. So he made that leap. And sometimes I think we as people can get locked in a certain career path and it becomes comfortable for us and it becomes easy for us and it becomes a thing that we do, not even necessarily because we’re fulfilled with that work, but because it’s the work that we just happened to fall into.
But I think there’s a lot of value in sometimes taking a moment to say, what are my actual goals in life, personally, financially, and beyond? And is the job that I currently have, the best job that I can get to actually serve those goals? So maybe if it’s not both of you, right? Maybe if one of you leaves the public sector and goes private and finds a job where you can even increase your income by 20%, that extra 20% can now help offset the cost of this home that you guys love so much. It can help you build more capital to buy that next deal. But I know that there are a lot of people listening right now who have been on the same job for 5, 10, 15, 20 years complaining about how this job isn’t serving its purposes and helping them achieve the goals they have, but they’re not doing anything about it. So maybe this is the motivation for at least one of you to go out and explore an alternative career path where you can accelerate your earnings and solve some of these problems by just simply having more income to throw at it.

Ashley:
Actually, I was thinking of another idea that they could do while you were talking about that as to we keep bringing up using your primary residence to generate income. And in our last question we talked about how to sometimes you need to invest more money back into your property. So I wonder, they had said if they sold each property they could get, was it like 60 to 80 k out of each home? So they have some equity in each property. What if they went and got a home equity line of credit on one of the properties and they renovated if there’s a basement into another unit or into two bedrooms or something to add more people that could house hack with them. What if they converted the garage into a unit? What if they built an a DU on the property? So I also wonder what kind of opportunities would be there also if they used the line of credit to purchase or to build or to remodel in some sense that they could add more bedrooms or another unit to the property too.
Then to kind of wrap up this question here, I think this is also an emotional decision as I think you need to weigh out what is more important to you, this home that you love or financial peace and financial freedom. And yes, they phrased it. Do we sell both? And start over. It’s not starting over. It’s you’re continuing on your path, you’re continuing on your journey. You’re going to put the 60 to 80 K for each property into your pocket. But I think you also need to look at if you do sell both homes, how much will it cost for you to purchase another home? And is that basically putting you back at where you were before just to get into a home that you want to live in? So I think look down the road at the financial piece for each. Run the numbers.
If you keep these properties for another five years, run the numbers. If you sell these properties, what will your financial picture look like for the next five years? Or even if you just sell one, does that alleviate some financial strain where even though maybe you are selling the big house and you’re not in that anymore, will that create some kind of happiness and peace because you don’t have that financial burden anymore? And is that actually more of what you want than actually the house that you’re into? So I think the emotional piece does have a factor in this question

Tony:
Too. Alright guys, we’re going to take a quick break before our last question, but while we’re gone, please be sure to subscribe to the real estate Rookie YouTube channel. We just crossed over 100,000 amazing subscribers. So thanks to each and every one of you that have subscribed to the channel. Again, if you haven’t yet, you can find us at realestate Rookie. We’ll be back with more right after this. Alright, let’s jump back in our third and final question for today. This question is from Kyler Tar in the BiggerPockets form. And Kyle’s question is, I’m on contract to purchase an investment property in Ohio, and the inspection showed that the house has knob and tube wiring, even though it was built in 1959. I had an electrician go out to inspect and give me a quote to fix and should receive that report tomorrow. I’ve talked to several insurance brokers and they both said that the majority of insurance companies do not provide coverage on homes with knob and tube wiring due to potential fire hazard. There are some that provide coverage, but of course the premiums are much higher. I wanted to see if anyone has experienced with or owns any properties with knob and tube wiring. And what I should do, I’ll ask the seller for a concession to replace the wiring, which could be $10,230,000, but have a filling they will reject. So my question is, do I go forward with purchasing the property and deal with the higher insurance and potential hazard, or is it smarter to walk away knob and tube, good old knob and tube.

Ashley:
Have you bought a property?

Tony:
I was just about to say, I’ve never bought anything with knob and tube. I think the oldest property that we have in our portfolio was built in the early two thousands. One of my long-term rentals was built in the fifties but didn’t have knob and tube. But yeah, we don’t really own anything that wasn’t built in this millennium. So Ashley, you got to educate us knob and tube wiring. Is it as big of a red flag as investors think, or it’s just something that you actually can navigate and own?

Ashley:
Yeah, I mean you definitely can replace all of your wiring. There is a fix. It can be an expensive fix to do. I bought a four unit that had all knob and tube wiring and we rewired the whole place. I can’t remember what the cost.

Tony:
Let me ask too, just from the purpose of visually. So Ricky’s understand when you say that you replaced the wires, does that your electricians literally had to open up all of the drywall to be able to rip out all of the wiring? Or are they able to kind of do it without breaking down all the drywall?

Ashley:
It really depends on the property and how clean the wiring is. So there was another single family home that we did and we didn’t have to take down all the drywall. They would feed it through where the, so when you have the studs for the property, there’s the holes drilled through the studs behind the drywall where the wires would run through and if there was clean lines, they could feed it through that. So if you’re going through a house where the electrical is just so messed up, it may be worth it to take down and see what kind of electrical hazards are behind the wall, redo it. But you don’t have to, in most cases you don’t have to completely rip down all the drywall. If anything, they will cut little holes where they need to feed things and then you can just drywall patch it.
So that’s what we did for the single family home. We ripped out the downstairs walls anyways, but for the upstairs we didn’t take down any walls and we were able to, the electrician was able to work around that for the four unit property we did that one, we were gutting the whole thing anyways. And a lot of the electric ran through the ceilings. It was a drop ceiling, so a lot of the electric ran through the ceiling and then would drop down to an outlet too. So I think just the way it’s ran, but electrical is definitely one of the things I am least knowledgeable about.

Tony:
So for that single family, how long does it take for them to rewire? Is it something they can knock out in a few days or was it a multiple week project to rewire the entire house?

Ashley:
Well, we actually had the retired building inspector for electric as our contractor, so he just kind of came and went as he pleased. So really it depends on the contractor, what other jobs they have scheduled, things like that. So I don’t really have a good answer for that, but I would say I would replace this if you have a knob and tube wiring, it doesn’t have to be replaced. It could be working fine, but also like he mentioned, the insurance companies will not insure it. And just if you’re going to be living there, if you’re going to have tenants living there just for the safety of others, it is worth updating. But I would go and I would actually get an estimate from a contractor, like ask the sellers to let you into the property to take a contractor and you could say to them, I want to be fair as to what I would want to hold in escrow to have this repaired or get a seller credit or whatever it may be.
So I’d like to have a contractor come through and estimate how much it will actually cost. And I just did this for a deck repair on a property. I had the property under contract and the septic was actually built under the deck. So if we ended up having to replace the septic, we would have to rip off the deck and replace it. And I said to complete transparency, let me get quotes for everything ahead of time so we can agree on a good amount to put in escrow. And that’s what we did. So instead of guessing, I would do that.

Tony:
And let me ask you, Ashley, because we’ve done it both ways, but there’s definitely one way that we lean more, but as the buyer, you have the option of asking the seller to fix whatever issues you’ve identified or you have the ability to price reduction credit, some sort of financial concession from the seller, which then allows you to go out and get it fixed on your own. The benefit of having the seller fixed is that you don’t have to worry about it once you take over the property and the responsibility becomes theirs. When we bought our hotel, they had to tint the entire hotel for termites because we had noticed some termite damage and they had to show us a certified report saying that all of the damage had been repaired and that all of the presence of the termites was no longer there. And that was fine for us because cool, you guys go handle that. But in a situation like knob and tube wiring, I feel like for me, I might have some hesitation around how good of a job is that electrician that they hired doing? Are they just doing a bandaid fix so that it can get sold? And am I then going to inherit potentially bigger issue? So just what’s your take? Should the buyer, should the person asking this question fix it or should they maybe just put that responsibility on the seller to fix it?

Ashley:
I think the biggest thing is making sure they’re getting a permit and they’re having their electrical inspections done with the permit process. So I think if they’re having the work done, if it’s properly permitted and they’re having the inspection done, then I think you probably could be okay and also ask for that. The person they’re hiring actually has their electrical certificate or whatever you need to be certified as an electrician. I think it would be okay having it done, but you could always say, I would like to vet the contractor that you’re using. But I would say it’s, I would be okay with them taking on the work as to who they’re going to hire as long as it’s being permitted properly, as long as the inspections are in place and as long as it’s a contractor that’s certified.

Tony:
So do you exclude properties with knob and tube from your buy box?

Ashley:
No, because then I’d probably exclude a lot of ’em. No, because especially now, since a lot of my properties that I’m purchasing are full gut rehabs, so we’re ripping apart everything anyways, so it’s not a huge deal for me to have to go and replace all of that. I did make a mistake on a recent flip regarding the electric that I didn’t realize until after I had already closed on the home and it was that it was two-prong wiring. And so that was something my contractor brought up as to when you sell this home, this is something the inspector, the home inspector is going to bring up to the sellers that it’s only. And so we ended up figuring out a fix and it ended up costing me $6,000 to fix that, which ended up not being a huge deal. It could have been like $30,000 to reroute that whole house.
But so I think there’s different things that can come up with electric. One thing that I will recommend is building out your buy box and we actually have a buy box checklist for you guys. So if you’re listening to this episode and knob and two boying is something you don’t want to deal with or even an old breaker box. There’s a couple companies like ones like Federal Pacific where they’re known to start on fire and cause fires. And anytime we find a property with one of those, we are immediately replacing it. But you can go to biggerpockets.com/rookie buy box, and this is a whole checklist. You can add things like, I don’t want to have knob and tube wiring in my property, but it just gives you ideas of things to think about as to what do you actually want to have in a property, things you don’t want in a property, things like that. Kind of a starting point for you guys to build out your own buy box.

Tony:
Alright, so hey Ricky, if you are enjoying our podcast, your support would mean the absolute world to us, right? Just taking 30 seconds to leave a review on Apple Podcast can make a huge, huge difference for the rookie audience finding the ears of new listeners. So your feedback not only motivates our teams, but helps us reach more listeners just like you. So thank you so much for being a part of the amazing real Estate rookie podcast community.

Ashley:
Thank you so much for joining us for this week’s Ricky Reply. I’m Ashley. And he’s Tony. And we’ll see you guys on the next episode.