2024’s Cheaper, Better, Cash-Flowing “Sleeper” Investment

Dave:
We all know that housing inventory is super low, and it’s super frustrating. Even when you’re ready to buy, there often isn’t anything in your buy box in the market you want to invest in. But I think there’s a sleeper category of inventory that most investors are overlooking. And I know this sounds crazy, but hear me out. It’s new construction. And listen, I get it. Investors often say new construction is a bad investment. It’s not the cool thing to do. And typically that’s true. But listen to this before you judge. Right now, the median newly constructed home is cheaper than existing homes. Yeah, you heard that, right? New builds right now are cheaper than used homes, and this is a pretty unusual situation that I think investors should probably think about taking advantage of. I think it’s time that we all ask ourselves, is new construction actually a good investment right

Dave:
Now?

Dave:
Hey everyone, it’s Dave and welcome to Bigger News. I’m really excited to talk about new construction because as a data analyst, the numbers just make sense to me right now there’s a lot of things to like, and the deals kind of seem to be there, but I admit I have never bought new construction and never really considered it seriously until the last couple of months. So I’m gonna bring on some backup. We’re bringing on BiggerPockets on the market podcast host Kathy Fettke, and we’re bringing her on because Kathy has been investing in new construction for many years. She also builds new construction, so I figured she’d be the perfect guest for us on this show. And on today’s episode with Kathy, we’re gonna talk about how new construction stacks up in overall housing inventory. We’ll talk about why negotiated with a builder is different than negotiating with a typical seller. And we’ll also talk about how Kathy thinks about appreciation when underwriting new construction deals. So let’s bring Kathy on. Kathy, welcome to the BiggerPockets Real Estate podcast. Thanks for being here.

Kathy:
So happy to be

Dave:
Here. I know you, I say this every time you come on, but you started Bigger News and the On the Market podcast, you were the first guest we ever had to come talk about recent current events, data, new trends, and look where we’ve come in the last three years. So thank you for helping us kick this off.

Kathy:
You know, I love news, especially housing news, , . It’s my thing.

Dave:
Absolutely. And I know you love our topic today, which is new construction. This is something we don’t really cover a lot on this podcast. So let’s just start with the basics. And I’m just curious, actually, before we get into the basics of new construction, how long have you been investing in new construction? Hmm.

Kathy:
You’re trying to age me. Are you now Dave . .

Dave:
Let’s, you could say you’re very experienced, you’re medium experience. You don’t have to gimme a number of

Kathy:
Years, like over 25 years. Yeah. New construction’s my thing. I mean, who doesn’t love a brand new property that is up to new standards and doesn’t, you know, hopefully doesn’t break down as much. Uh, I, I really, I I kind of entered the real estate investment business through new homes.

Dave:
Why it, you know, it just seems like most investors are almost entirely focused on either existing homes, fixer uppers. Why did you choose, or why do you, and why do you still choose to be a new construction?

Kathy:
Well, back in 2004, 2005, I was a mortgage broker. That’s when I first started the Real Wealth Show. There weren’t podcasts. I was just trying to learn how to invest. And I lived in, in California. I still live in California. And as a mortgage broker, I’d, I’d be doing loans for people and looking at the numbers, and it just, I, I didn’t understand how it made sense for them because most of the investments they had were in California and they were negative cash flow. So the idea of positive cash flow at the time, it just didn’t exist for Californians . So I was kind of forced to learn how to invest outside of California, and it just seemed like too much work to try to figure out how to find and build a team, how to oversee that team. When I live in California, I have, I had small kids at the time.

Kathy:
I couldn’t spend too much time away. And, um, and so I, I actually met with probably eight property managers in the Dallas area at the time, and it was my favorite property manager, the one I picked. She actually just, that was her thing. And she lived in Dallas and she was still buying new properties. So it was like, Hey, if it’s good for a local, it’s good for me. I came from an area where, you know, the median price at the time, you know, I don’t really remember, but it was well over half a million in California. Mm-Hmm. , of course, it’s over a million now. Um, and I was going to just really beautiful a class neighborhoods outside of Dallas, Rockwall, Texas, beautiful on a lake. And we were, we were getting homes for between 120 and 145,000. Wow. They were very close to retail price, but I didn’t care because they also rented for more than, you know, at least 1% of purchase price, but in some cases, more so it, the numbers worked, it cash flowed.

Kathy:
I wasn’t finding cash flow, it was negative cash flow in California on old properties and in kind of high crime areas. It was just impossible to make the numbers work. And here I’m going to Texas and the one of the fastest growing areas, a class schools buying cashflow properties that were brand new. It just made sense. People laughed at me, Dave, I mean Oh, I’m sure. Yeah. They were like, oh, you don’t know how to invest. Even the locals were like, come on, you’re buying new properties, you know, with no equity . I’m like, I’m too naive to know that this is maybe not cool, but it made sense because I had kids, you know? Right. I had a family, I just needed an investment I didn’t have to worry about.

Dave:
Totally. Yeah. It, it eliminates so much of the management and it just depends on your, on your strategy, because knowing you, and a little bit of your, your history as an investor, but you were probably thinking, what’s this gonna do for me 20 years from now? Not, what’s this gonna do for me five years from now? Yes. And if you really want the property to perform long term, I can see the appeal of buying something that’s brand new and is going to have a lot of, you know, the built up to current code, a lot of the amenities that renters would want and will attract good renters. And obviously the lower CapEx and repair costs is, is hugely attractive as well.

Kathy:
Yeah. Yeah. It, it was, they were so easy to rent. Um, and, and you know, tenants like it too. They love a new property. And it’s also important to understand that oftentimes, not all, all the time, but oftentimes builders are building new construction in the path of progress. And as long as you’re understand that and like, where is, where are the demographics moving, where are the jobs going, usually new construction has to keep up with that. So you’re automatically, unless some guy just bought some land out in the middle of nowhere, , you know, and tries to sell it, generally it’s in the path of progress and you probably will see growth.

Dave:
That is one thing I was curious about because it’s always sort of, uh, that’s worried me a little bit. I’ve gone and looked at new construction in the past and it was sort of in the areas that you were describing where it was kind of just like a subdivision in the middle of nowhere, and I didn’t really see what would attract people to that area. But that’s obviously not everywhere. And I think there is probably some wisdom that, you know, I’m, I’m a single analyst, I talk about housing markets, but I’m sure these big building companies have a hundred of me figuring out where to buy properties and where they’re gonna be in the most demand. So just sort of piggybacking off their research, I’m sure can be beneficial as long as you’re sort of picking the right developer and then trusting that they know what they’re doing.

Kathy:
Yeah. The national builders are they, you know, they’ve got site selection people, they spend a lot of money on that. Um, you can follow them to kind of get an idea, but it’s the smaller builders where you do need to be more careful because maybe they just bought a piece of land because it was cheap, but it’s just literally in the middle of nowhere. We, we have turned, we, we, we don’t just buy new homes. We look for where the migration patterns are. And back then, as I was learning again over 20 years ago, um, to me, the best person to get this information from was a property manager because they could tell me, where’s the demand? And you are absolutely right. The first property we bought outta State brand new was in the middle of cornfields . It was miles from anything. And, and yet the property manager, and it, it, you know, it a lot of times real estate investing, you could do all your due diligence, but there’s still an element of gut, right?

Kathy:
Like, um, there’s, if there’s a, a master plan for companies to move out to certain areas, they might not do it. It’s not, oftentimes it’s not there yet. So you do have to be a little speculative sometimes and, and especially with new construction because it’s new and maybe the commercial buildings aren’t there yet and they’re just planned to be there, but there’s always the risk they won’t. In this case, we knew that Texas was, um, offering tax incentives for businesses to move there. We could see the GR growth, but most importantly, the property manager I end up choosing to work with said, we’re getting just bombarded with phone calls of people who wanna live in this area. And you will be rent, you’ll, you’ll have your place rented right away, plus if, if you’re in early in, in this case, it was stage one. I mean, there was nothing there. It was dirt. It took a lot of my husband thought I was nuts. Um, it took a lot of trust to be like, okay, we’re gonna be first, but when you’re first in phase one, they keep raising prices after that. So we, we saw tremendous equity.

Dave:
Oh, okay. So you got a little bit of a risk premium. Yes. You know, like there’s, like, you took a little bit of a risk and you, you get some benefit for that.

Kathy:
It’s a builder strategy to have phase one. You know, you need to have some confident buyers in that phase one ’cause there’s literally nothing there. , this was a big national builder, so I wasn’t worried that it wouldn’t get built a small builder. You you should worry, you know, you should really know that they are capable of pulling it off. Uh, but in this case, uh, it was KB Homes or something, it was a big builder and we weren’t worried that it wouldn’t get built. Uh, we were just worried that, hey, it’s in the middle of the corn fields. But the, the strategy generally for builders is those first units, they just need to sell. The bank wants to see that, their construction lender wants to see that. And then people know, okay, they’re gonna raise it by a few thousand dollars every month. And if I don’t, I need to get in now. ’cause it’s gonna be more expensive every month. That is just a sales technique. But if you get in early, it’s a wonderful sales technique. You know, really it’s kind of like buying at a discount.

Dave:
This is why we brought you on, Kathy, because this is a very actionable, practical tip for anyone who at the end of this episode, if you’re considering new construction, obviously there’s a bit more risk. But if you’re confident and feel good about it, that that seems like a great tip for getting a good deal on new construction. And before we move on, I do wanna talk about the current conditions. ’cause my whole hypothesis and reason we’re doing this show is ’cause I feel like there’s this like, kind of unique time to buy new construction right now. But before we get to that, you mentioned something earlier that developers, uh, don’t tend to sell to investors. Why is that?

Kathy:
Um, generally it’s believed that if you have too many renters in a neighborhood, that they will bring down the value of the neighborhood. Mm-Hmm. , that’s, that’s kind of traditional. And that could be because back then when I was, um, first investing, you didn’t have, uh, really strong property management in place. It was mom and pops, you know, people that didn’t have technology, didn’t , I’m aging myself again, but like, they didn’t have these portals that you could log in and you, you didn’t have Google Maps to see what the area was like. So it was ter it was pretty terrible. Property management was bad. It has improved a lot, but still, uh, you know, you have a renter versus an owner and a renter might not take care of the property the way an owner would. Of course, today with great property managers, that shouldn’t be the case.

Kathy:
You know, hopefully you’ve got a property manager who’s making sure that everything’s taken care of. And especially if there’s an HOA, the HOA, believe me, they will make sure that, you know, your grass is cut. They , we’ve gotten so many notices you haven’t mowed your lawn. Um, and that there’s not old cars in, in the driveway that, you know, that they, they’re very militant. Also, it used to be that lenders wouldn’t lend if there was too many rentals in one area or one subdivision. Mm-Hmm. , I think a lot of that has changed, but still, uh, i, it it does seem that, that the national builders, they have a limit to how many investors they want in their subdivisions when they’re in the process of selling.

Dave:
Okay. That, that makes sense to me. I could see why builders and developers probably wanna differentiate from like a build to rent community. Yes. Right. It’s just a different value proposition. It’s a different type of thing. And if you’re trying to sell to families or people who are buying a starter home, whatever it is, you want them to feel like it’s gonna be probably more of a community less transient, you know, less, you know, renters coming in and out, you’re gonna know your neighbor’s kind of vibe. That’s probably part of the sales pitch. So having a lot of investors come in, uh, would be tough. But I imagine if that sort of the flip side of that is if you could be an investor where there’s limited other investors in a desirable neighborhood and there’s not a ton of rental inventory in that neighborhood that could be good for vacancy rates and for rent growth over the long term.

Kathy:
Absolutely. Yeah. The build to rent, as you know, one of the headline articles is that, uh, build to Rent has been pretty prolific. There’s been a lot of new communities, a lot of the institutional investors are, are kind of leaning towards a build to rent that is riskier. If you are buying one new one home in a totally rental neighborhood and everybody has access to their own property manager, or they’re self-managing, there’s a lot more risk there. I do it. Um, but that’s because I’ll, I’ll know that this one property manager is managing all these properties and I know that I trust this property manager, but you are, you have more competition, right, for rentals. If, if you’ve got a hundred units and one subdivision and they’re all rentals and maybe there’s a job loss in the area, or there’s an economic slowdown in that area, and now everybody’s got their sign out to either sell or to rent their property, that can be that, that’s a risk. So be careful. We do build to rent at, uh, in my company and we keep it under one property management and is kind of more treated like a horizontal apartment. So that’s, that’s a little bit different.

Dave:
Okay. We gotta take a quick ad break. But if you’re enjoying this conversation about new construction and you’re thinking, where do I find a great market to buy a newly built property? Make sure to check out the BiggerPockets market finder. You can go to biggerpockets.com/markets and you can get all sorts of macroeconomic and housing market data that can help you find the perfect market to invest in. We’ll be right back.

Dave:
Welcome back to the BiggerPockets Real Estate podcast. Let’s jump back in. Let’s turn to what’s going on today in new construction. And just a reminder for everyone, historically, during more normal times in the housing market, new construction is usually and probably rightfully more expensive than existing homes. But what’s going on right now in the, sort of the impetus for this whole show is that the median home price for new construction right now in 2024 is $7,000 less than the median home price for existing homes. It doesn’t really make a lot of sense unless you dig into the numbers. So Kathy, can you just tell us a little bit about why you think this is happening?

Kathy:
Yeah, I, I mean, we’ve been saying this for a while that, um, new construction is really a great opportunity right now because there’s such a limited supply of housing. There’s just not a lot of existing homes out there. So when that’s the case, prices bid up, but builders can bring on new supply and they can control their expenses if they get the land at the right price. And if they can, if they’ve got, you know, investors behind them that are in it for the long term, they can bring on new supply and keep those prices down. It was really tough to keep prices down. Um, you know, about 18 months ago when we had the supply shortages and lumber just skyrocketed, I, there was just no way to keep cost down. But inflation is getting a bit more under control and a lot of those construction prices have come down.

Kathy:
Labor’s still high. Uh, but, but builders are able to bring on new supply. Uh, in many cases in our, in our situation we’re, we’re kind of doing higher density and um, like three stories on a smaller lot so people can have the space they need. They can have that office, that home office of the playroom for the kids and all the things that people learned that they want after covid. Um, and so still have all that square footage, but it’s vertical. It’s going up so smaller, it’s easier to build that. Um, it’s when you have a small lot, um, it’s just easier to put the utilities in water, roads, all, all the things when you’ve got smaller lots and you can just build vertical, it’s, like I said, it’s more like a horizontal apartment, but people still get their yards and they want that, they want their garages right under their house. So I, I would say that the, the style has changed a little bit. Not for everybody, but definitely for us in our construction projects.

Dave:
Yeah, that efficiency is, is super important. And honestly, I think this inventory influx from new construction is just good for the housing market in general. We need more homes in the US We talk about this all the time. And so seeing more of these new construction at an attractive price, I think is really, really valuable. The other thing I feel is important for people to understand is that the business model of builders is just different from sellers of existing homes. Mm-Hmm. . And they just have a different calculus. We’ve talked a lot on this show about why the housing market is the way it is, and so much of it can be traced back to this lock in effect where people have low mortgages and so they don’t wanna sell their home only to go on to buy a new home at a more expensive price that’s keeping a lot of inventory off the market.

Dave:
That just doesn’t happen in, in new construction, right? Because builders build and their, their objective is to sell as quickly as possible. They have cash flow, they have a very complicated cash flow situation. They’re constantly building and putting more things online, so they aren’t gonna just hold onto inventory like existing homes are. And so we’re actually seeing this big influx of new construction, just as an example. Normally like, you know, pre pandemic only about 11% of home transactions were new construction. Right now it’s 30%. And that’s not because there’s just so many more new construction being sold, but it’s just so, so much fewer. What am I saying, ? It’s because there’s way fewer existing homes being, being sold right now. So I, I think that’s, that’s really important to know is that builders are incentivized to move inventory and not hold out for the highest price. So Kathy, like in your experience, does that make developers more willing to negotiate on price?

Kathy:
Yeah, I mean, everything you said is so true and why I’ve been screaming to the out to the public, whether they’re listening or not. Actually we’ve been, we’ve never been busier. So I guess people are listening. But I, I’ve been saying like builders don’t want to lower their comps. They’re not in the business of competing against themselves and lowering the, the value of their properties and, and creating big discounts. They don’t wanna do that. So they, they kind of lower the price in a different way. They’ll give upgrades. One of the things that they’ve been doing is instead of discounting a property, they pay down your rate and that helps them with comps, right? So over the past year when builders were having a bit more difficulty selling properties, the way that they’ve been able to do it is make the interest rates so low.

Kathy:
We, we have rates as low as three and 4% over this past year that really, really make the deal work. Now the developers paying that instead of discounting the house by 20 or $30,000, they’re paying for that discount in rates so that it cash flows. And, and it does. I mean our brand new duplex in Florida that we bought, I don’t know 18 months ago, has been one of our highest cash flowing products because of a few things. It’s in Florida, right? We know in insurance rates have gone up, but not on new property because they’re built a hurricane standard. So we actually have really low interest. We have a low CapEx, right? There’s not a lot to fix. They’re brand new tenants, love them, you rent ’em right away and they don’t leave ’cause it’s new. So there’s a whole lot of reasons why it cash flows over the long term better. And like I said, it’s in a path of progress. So it’s an area that’s growing and, and so we’ve already seen appreciation. There’s a lot of reasons why builders can be a little more flexible. You’re not gonna find a homeowner who’s like, yeah, they’ll spend $30,000 to pay down your rate. They should, right? That would be a great strategy. But builders, they’re bus, they’re in the business of selling homes. So they need to sell them without discounting ’em too much. So they find creative ways.

Dave:
I wanna make sure everyone understands what Kathy’s saying ’cause this is so, so important. But when a developer builds a lot of homes that are similar to one another, and that’s usually how they do it, that’s how they achieve the efficiency that Kathy was talking about is by replicating, you know, building plans and by getting crews to, you know, work in sort of this assembly line fashion. But that means that most of their homes are gonna sell for relatively close to the same value or that’s what they want. And so they don’t want to lower their comps. And if you know what that means, basically they don’t wanna sell Kathy a home for $250,000 and then sell me a home for $230,000 because then when the next buyer comes along and looks at recently sold properties or comps, they’re gonna see my $230,000 and that’s gonna make every subsequent sale that the developer has to make harder.

Dave:
’cause everyone’s gonna want $230,000. And so developers, although they’re incentivized to move this product, they find ways to give money to you without lowering the sale price, as Kathy was just saying. So those are the things like rate, buy downs, and that was sort of the other sort of special sauce here, Kathy, that makes new construction so attractive to me right now is one, it’s cheaper than existing homes, but I heard people, you a lot talking about these rate buy downs and that you’re getting these low interest rates. Is that something that was just happening last year or is that still going on?

Kathy:
It’s still going on, but I do think things are gonna change pretty soon because as rates come down, you’re gonna see more people buying new homes. Most people, first time buyers or um, people looking for their primary residents don’t know the tricks of the trade, right? They’re just, they go into a new builder and, uh, want a new home and they don’t know to ask for a rate buydown. So, uh, now that rates will just be coming down and these new homes will be more affordable. It’s going to be a little bit more difficult to negotiate with builders is, is my guess. That’s fair. Um, so you might have a, a window right now of a month or so to, to kind of get in, but, um, I mean already rates are, are lower. So the data that we’ve been looking at is data that was when rates pretty high and, and home prices pretty high. So it’s been, it just kind of stalled the market, but that’s all. It’s about to rev up is all I can say. Yeah. Um, so you still have a window? I could see that , right?

Dave:
It’s time for our last break, but after Kathy is gonna give us some practical advice on how to actually do this, go out and buy newly constructed homes. So stick with us. Thanks for sticking around. We’re back with Kathy Fettke. I’d love to know what type of markets are good for new construction. ’cause I imagine there are hotspot within the country where mm-Hmm. builders are building a lot and maybe too much and maybe there’s places where new construction just isn’t even feasible. So how do you find that sweet spot area for new construction?

Kathy:
Yeah, I mean, I’ll tell you a couple things not to do and, and one is, like I said, if it, if it’s a property that’s really out in the middle of nowhere and there’s no real reason for that, there’s not a new factory coming in or you know, more businesses moving in. It’s probably a situation where a smaller builder found some cheap land, built some homes, and now is stuck. doesn’t know what to do with them, can’t sell them. Um, and so they’re willing to sell it to investors at discounts. You know, price isn’t everything. You wanna make sure you can rent that. So first and foremost, like I said at the beginning of this, make sure you understand the rental market before you buy anything. I don’t care if it’s existing or new. Um, you need to know your rental market. And the way I do that, because I’m an out-of-state investor, is I find a great team.

Kathy:
I find a great property manager who’s in that market, who knows it well and will tell me they are my safety guard. They will say, oh no Kathy, no one lives out there. And we, we looked at some pretty beautiful online, they were beautiful homes in, in Alabama and, and like just outside of Birmingham and we liked Birmingham, but little did I know it was like an hour out and nobody is living there. So a deal is a deal, you know, not just ’cause the price is low, but because of cash flow. Is it because it’s going to increase in value over time, not just ’cause you got a good deal and now you’re stuck with that deal and can’t get it to rent. Uh, so that’s what not to do. What to do is to really again, speak with, make sure you’ve got a wonderful boots on the ground team who’s going to take care of this for you.

Kathy:
If it’s you and you are the property manager, then you better understand that rental market. Um, that’s first and foremost. Second, uh, really understand, well, it kind of ties together what are the jobs in the area and who are these people that are living there? What do they want? Are these high tech jobs? They might want something a little different than say if it’s an automobile factory or, or something more, uh, blue collar. Are they white collar jobs or blue collar? And, um, you don’t wanna like overbuy or overpay in an area where people maybe aren’t used to a certain amenities or don’t really need those amenities or in an area where they are expecting those amenities. And you don’t wanna buy like a starter home in an area where mm-hmm, , everyone’s making over a hundred grand. So really understand the market, the jobs, the area.

Kathy:
Is there job growth, are these jobs here to stay? Because for me, for buy and hold, I am buying to hold. And I wanna know that this isn’t an industry that could just disappear overnight. Um, medical is great, right? We know we have an aging baby boomer population, so anything that has a medical business climate is really good. Uh, if it’s tech, you know, tech can be a little volatile, but say chip manufacturing north Texas, you know, I’ve talked about that before. Mm-Hmm. , you’ve got a lot of chip manufacturing coming to North Texas, those are high paying tech jobs. So your, your finishes, your product better be nicer. Texas in general, Texas has just moved to second place. Um, California’s still got the highest population, but now Texas and then Florida, these areas, um, continue to grow. The difference is California is expensive and people, a lot of people are leaving.

Kathy:
So Texas and Florida, two of my favorite markets, you’ve gotta be careful, uh, where you buy because there is a lot of new construction. Uh, so you don’t wanna be in an area where it’s just gotten overgrown. Mm-Hmm. . Um, so an example in Dallas, we know that there’s been a lot of new multifamily that’s come online, so I wouldn’t wanna buy next to that. I, I don’t want that competition. I, I wanna be like we talked about earlier in the show, I wanna network and get to know the, the builders in such a way that now maybe they’ll sell me, uh, something that’s really meant for residential, but I get to have a maybe 10 to 20% of the inventory they’ll allow to be rental in an area, not too close to apartments, like lots of apartments.

Dave:
Wow. There’s a, a great primer. Thank you for, for sharing all that insight. Well, if people find this, if they find the sweet spot, they figure out where there’s gonna be an appropriate risk reward, trade off. Any tips on negotiating with, uh, with developers right now?

Kathy:
Yeah, one of the biggest mistakes I made early on was just thinking, you know, I had bought existing, so like, oh, well all the things are gonna be in this property that my tenant’s gonna need. Like a dishwasher, like a washer dryer, like a refrigerator, like blinds. I, I didn’t know to negotiate that. So when we bought a bunch of homes and, and then, you know, the property manager’s like, oh yeah, okay, now you need the appliances. I was like, what? I thought it came with the house . Yeah. I had no idea. And that cost thousands of dollars to put all of that in. Oh yeah. Including just the blinds alone. Blinds are ridiculous.

Dave:
Blinds are stupidly expensive. I hate blinds. I mean, you need ’em, but they’re so stupid. How expensive they are

Kathy:
So expensive. And I, I don’t know, I think there’s some municipalities that don’t require the landlord to provide them, but you kind of have to. So it, it was shocking. We ended up having to come out of pocket, uh, you know, six to $7,000 we weren’t expecting. So that’s a great thing to negotiate. Um, right up front is like, hey, instead of a discount, put these in that, that’s one thing. Let’s see, what else? Uh, it never hurts to just throw out there right. You know, throw out the number and see if they’ll accept. If they like you, you know, that builders need to get rid of inventory and there’s a couple of months where they have to, especially the national builders, they have to meet that they are showing their earnings reports. So I have heard that September and December are times when they tend to discount ’cause they gotta move these things off their books. Oh,

Dave:
Oh, that’s good to know. Publicly traded companies, they’re just working for that quarterly earnings call.

Kathy:
Exactly.

Dave:
Another great tip. Thank you Kathy , you know, we have this debate and different investors treat this differently about how they underwrite deals and appreciation. And I think there’s a lot of investors who say, I don’t underwrite for any appreciation. Uh, like our mutual friend Jay Scott, I know he does, he does that. I personally underwrite for market appreciation at 2%. I think, you know, tying it to the rate of inflation is, is a pretty safe bet. Some people count on hire, but I think the thing that’s missing from new construction is that forced appreciation element that I think a lot of investors crave the ability to go in, renovate, add value, and have some control over your appreciation. The last thing I wanna ask is sort of about forecasting appreciation. Like do you, when, if you were buying a deal, are you sort of relying on market appreciation to make the deal work? And like what happens if you only get average appreciation, say two or 3%, is it still gonna be a good deal for you?

Kathy:
I’ve done those. You know, we, we, everything I just said, I’ve also done, you know, we bought $50,000 older broken down properties, um, you know, in, in 2012 when everything was so cheap and, and you know, they did go up in value that two, 3% over time, but they’ve just been difficult and there were so many repairs needed over time. I don’t know if we made any money on those, even if they’ve now they’re worth a hundred thousand, but it’s still, it costs $24,000 on one of them to, to fix one of the drainage issues. Um, you know, that wiped out years of cashflow. So it’s, it’s not like I haven’t done, um, you know, the, the other model, we do put appreciation in our performance to just get an idea, but it’s, it’s small. Like you said, I, I like to keep it around 3%, but I know that it’s going to be higher than that in certain areas.

Kathy:
I know that in certain areas where there’s a, a shortage of housing, you cannot bring housing on as quickly as it’s needed. And you add to it that the devaluing of money, the situation that our, our country is in, where we’re kind of reliant now on inflation and on creating more money to pay off the debts that we have or to just, you know, survive as a country. I think that’s going to continue. And that does generally drive up asset values. So I don’t necessarily put it in the proforma, but I make sure that we’re investing in areas where I think it’s gonna be closer to five to 10%.

Dave:
I’m sort of with you, I, i I like to deals where it’s like I will look at historical appreciation, probably apply that to my performa and make sure that, you know, low base level of appreciation plus cashflow plus tax benefits makes me whole mm-Hmm. . And if that’s true, then the appreciation is just a great cherry on top. Yeah. And you know, looking at places where you think it’s not gambling because the, the deal would still work, right? Even if you get average appreciation, but you’re saying, Hey, there’s upside to this deal. And I, I think that that makes total sense for new construction or, or regular properties. Right? I I think that that sort of underwriting, uh, applies to, to whatever you’re investing, not for everyone, but I, I sort of personally subscribe to that belief as well.

Kathy:
I wanted to add one more thing that one of the big things we look at is infrastructure growth. Because like we talked about earlier, large companies who are building factories or, you know, new headquarters and are putting billions into that, they are not going to pick up and leave anytime soon. Additionally, when an area a, a state or a local municipality is expanding a freeway or is putting in a new airport or is putting in a new hospital or a new school or a new university, these are signs. They don’t make these decisions overnight. These are big deals. They know where the growth is headed. So there are clues everywhere, as to where that growth is headed. Just because we say an area like Dallas doesn’t mean that all of Dallas is a good place to invest. You gotta look where the growth is headed. There are certain parts of Dallas where it’s just construction everywhere and freeway construction and new airports coming in. Um, same with Florida. In, in one of the areas that we invested in 10 years ago, we knew that the freeway was expanding and there’s so much new development coming in there in Pasco County, just north of Tampa, um, that has come to fruition because like I said, if there’s billions of dollars being invested in an area, that’s a really good sign, . So look for that.

Dave:
Totally. And it, it’s sort of, it’s a chicken of the egg thing because municipalities plan for where there’s growth and then the investment in infrastructure creates more growth. So it creates one of these positive feedback loops because you know, a lot of, not all of it, but if you’ve messed a billion dollars into a highway, a lot of that money’s gonna stay in the community. Yes. And so that just helps the entire area. All right. Well you’ve, you’ve got me pretty convinced, Kathy, I really enjoyed this conversation. I learned a lot. Thank you. And of course, we will link to Kathy’s BiggerPockets profile and all of her contact information in the notes below. Kathy, thanks so much for joining us.

Kathy:
Thanks for having me.

Dave:
And of course, in addition to connecting with Kathy on the BiggerPockets website or on her personal website, you can always find Kathy on our sister podcast on the market where she is a co-host. Thank you so much for listening for BiggerPockets, I am Dave Meyer. We’ll see you next time.