Episode 7 | Inventory, Demand, Interest Rates & Predictions

00:00

You’re listening to Real Investor Radio with Craig Fuhr and Jack BeVier, where we cover advanced real estate investing topics to help you stay ahead of the curve in your real estate investing business. Hey everybody, it’s Real Investor Radio. I’m Craig Fuhr. This is Jack BeVier, my partner in crime. We’re here today for episode seven of the podcast. Hope you guys have been enjoying it so far. Today, we’re just gonna kind of go around the horn, talk about sort of market trends, what we’re seeing in inventory, demand, interest rates, and maybe even give some predictions. You ready to go here?

Jack

00:32

Absolutely. Let’s do

Craig

00:33

It. Let’s rock and roll. Hey, so great article came out. realtor.com just came out with their June, 2023 monthly housing market trends report, and I saw some really interesting facts in there. By the way, if you guys want to go check out any of the links in the podcast today, as always, we’ll set up a Google Drive where you can download it@realinvestorradio.com slash notes. But let’s go ahead and jump into this report, man. So just a few facts here on sort of what’s going on in the market, and obviously this is nationwide data here. So it says the number of homes actively for sale increased by 7.1% compared to last year home sellers were less active. However, with 25% fewer homes newly listed for sale compared to this time last year. Yeah. So one quarter less homes.

Jack

01:24

Yeah. And the, and I recall that the contracts were down, but not as much as listings are down, which suggests that, you know, the inventory, if you’re a buyer out there right now, either there’s less to choose from if you’re a real estate agent right now, especially on the listing side. Well, I really on both sides, right? Like you’re really feeling it right now. Yeah, we thought that like inventory levels were down a year ago and they’re still coming down. So I think a lot of pain on the real estate agent side just from a transaction volume point of view. Right. That dynamic though, between more listings down than contracts means that inventory remains super tight and that’s kept housing prices up. That’s the, and frankly, almost like the only thing buoying prices up, because in the past 30 days we saw mortgage rates spike up and back to the high sixes almost to the 7% level for conventional loans. Yep. Well, into the sevens. If you’re an investor borrowing D S C R money right now, I’ve seen

Craig

02:19

’em as high as eight.

Jack

02:20

Yeah. And, and unless you’re buying in like the toughest of spots, you know, $80,000 houses, which also then become hard to get a loan on, it’s really hard to make 8% interest rates work on a current basis. Why with net cash flow on a rental property just ’cause the ca the cap rate that you’re buying houses at is typically, you know, in good income producing markets kind of between six and 8% in, you know, houses that are above $200,000 tend not to be 8% cap rate markets though. So if you’re buying like the, the the $95,000 house, yeah, maybe you can find an eight or a nine or even a 10 cap. And that’s accretive that, that that eight borrowing money at eight, 8% is, is still, you know, you can make that work. There’s enough money left over at the end of the month to make your mortgage payment. Sure. But as I said, those a hundred thousand dollars houses are the harder ones to get financed in the first place just because of lender concerns about being in the low end of the market. They tend to have tougher guidelines there. Do you have

Craig

03:15

Data on, because you’re, you lend all over the country. Do you have data on sort of like the top cities that you lend in? What’s sort of the average purchase price of a city home these days? It’s been a long time since I purchased a house in a city. Yeah. I mean,

Jack

03:29

We buy a lot of houses in Baltimore and where the ARVs are like, you know, one 40 to 200 typical

Craig

03:35

Row house.

Jack

03:36

Yeah. Yeah. That’s a sweet spot for investor activity. And I also, I’d say that that kind of extrapolates across the country as well, like kind of the, the a hundred thousand dollars to $300,000 rv. I, you know, that’s, that’s the sweet spot for cap rates. As you go up in values though, those cap rates come down, right? So the nicer properties, the, you know, the, the the $250,000 house right now, it’s, you know, next to impossible to get that in an eight cap and then the debt’s being offered to you at 8% or, you know, seven and a half percent. Like, that’s, that’s, it’s really tough to make those numbers work.

Craig

04:06

I remember a conversation you and I had a long time ago about sort of the, and this is going a little bit off topic, but we had a conversation a long time ago about the headache factor versus the return, right? Yeah. And so, yeah, I can go buy houses for 80 grand in the city right now, but my headache factor is gonna be through the roof. And so, but my cap rate will obviously be a much higher

Jack

04:26

Yeah. On, on paper they look like really attractive deals, right? And you get a lot of new investors who say like, Hey, yeah, I’m, I’m buying this house because like I can, you know, I I did the, I I’ve got my Excel spreadsheet and I did the math, right? And this is a 10 cap and like that’s phenomenal. It’s, it, it kills the 1% rule. Like this is a phenomenal, this is like almost two, right?

Craig

04:45

What’s the line item for for bad tenant? Yeah. Perpetual bad tenant. Yeah.

Jack

04:50

And, and yeah, what what gets underappreciated is the short tenancy duration, cost of frequent turnovers, cost of frequent vacancy and leasing. The credit quality tends not to be great and or as, as good. So your credit loss should be, is higher typically than what you put on that spreadsheet and then Yeah, just the, just the, frankly the emotional,

Craig

05:11

The

Jack

05:11

Toll toll that the, the dealing with that drama of the volatility of those, if you get a great tenant, it’s ACEs, right? Like it’s the best thing ever. You’re like clipping a 10 and like thrill thrilled with life, but that 10 can come crashing down to a zero with a couple ba with a string of bad tenants. And so it’s really hard to scale that.

Craig

05:30

I don’t wanna go down a rabbit hole too far here, but what is a good average tenancy for you or for a landlord who really wants to have better tenants? You know, what, what would you say? Yeah,

Jack

05:41

So the, the public REIT data gets published on this because it’s, you know, ’cause they’re public companies, so they publish that kind of data and in their quarterly and annual reports. So the public REITs are that that own single family properties are seeing roughly high 3, 4, 4 years of tenancy duration on average versus multifamily, which has been historically in the two and a half to three years of tenancy duration. Now, given the higher costs of turning over a single family property, I think that having four years of tenancy duration is kind of necessary. Yeah. Because the cost of turnover for a house are higher than for an apartment. Our portfolio in Baltimore is actually, we’re getting up to close to seven years of average duration.

Craig

06:17

Wow. That’s much higher than when you and I talked about it. Yeah.

Jack

06:20

And that is the, an interesting thing that we’ve seen over time is that as you own a portfolio over time, it calms down over time, right? Like, because the, the, the more transitory people, some people are there to stay, some people are there for a short period of time, the people who are there for a short period of time leave eventually, and then you have a higher probability or you have a probability of getting someone who’s gonna stay longer on average. So just over time we’ve seen our tenancy duration increase you seven years ago I was bragging about, you know, five and a half years. Yeah. And now we’re actually closer to seven on average on an 800 property portfolio. So that’s been an interesting dynamic that we’ve seen over time. That’s

Craig

06:57

Very cool. One other data point here that I thought, or a couple more that I thought were really interesting from this realtor.com report was that the median price of homes for sale decreased by about 1% annually in June, which is the first decline they’ve seen in their data since 2017. Yeah,

Jack

07:16

I saw that.

Craig

07:17

Slight contraction, obviously. Yeah. And it’s probably very localized and probably more in certain cities, right?

Jack

07:22

Yeah, yeah, yeah. The, the case Schiller and the Black Knight data on the on home prices, they, they publish month over month data, which is great. ’cause you know, year over year data is, it’s too long. Like a year ago was freaking forever ago. Yeah. And so what happened a year ago versus what happened? This, this month is not a, or sorry, this time this year is not that interesting, but watching the month over month data, you have like the, some higher variability obviously and maybe just data collection issues, but it’s like, but it’s data in real time, right? So I prefer to look at the month over month stuff, and we saw decreases in the fourth quarter last year, month over month for three or four consecutive months. But then as we came into the new year, we started to see, you know, modest price increases month over month and then right now. But, but the, that data point that you mentioned is differs a little from the Black Knight and CoreLogic data, or I’m sorry, black Knight and Case Schiller data, where were they?

Craig

08:17

It’s

Jack

08:17

National data, but, but yeah, I I think that, you know, there’s this I tension right now that seems to be really thematic playing out between, you know, it’s affordability versus housing inventory and though affordability and, you know, affordability is moving with, with mortgage prices or with mortgage rates generally speaking. And so when we got 7% conventional mortgage rates in the third quarter last year, that re that, that caused nominal house prices to decline as we would’ve

Craig

08:48

Expected.

Jack

08:49

Yeah. And then this, but in the first quarter, you know, those rates came down a little bit and inventory stayed low. And so we started to see nominal price increases even in generally an unaffordable market. And so, but it’s such a low volume market right now that I think that the, the, the tension between those two is like volatile, right? Like depending on what mortgage rates do on a particular month can have a significant impact on on demand. Sure. And so, and with such low levels of inventory, we’re, we’re seeing a lot of volatility in housing prices on a very regional basis on within short periods of time. So like, it’s not this steady 2% increase in the market is is stable, like Right. It’s really the dynamics are changing a lot every 30 days and you really have to keep close tabs on the data in the market to, you know, to understand what’s going on in your backyard.

Craig

09:41

Absolutely. We’ll get to interest rates in a second, but speaking of inventory, it was down about 4.6% compared to the same week in 2022 and down 51% compared with 2019. And yeah, I get that those, you know, we’re a universal way in terms of time, but inventory is really constrained right now, man. Yeah. Talk about that locally here as well.

Jack

10:04

Yeah, we’ve, I mean that’s absolutely the case. We have in our fix and flip lending business, we have sustained volumes, but we’re working really hard to sustain volumes. The amount of deals that are being done per investor I think is down generally speaking. And just anecdotally for us, for example, in the first quarter of 2023, we bought, we bought 29 houses in the kind of the Baltimore Metro area. That’s where we’re, that’s where our properties business is located. So 29 houses in the first quarter, which was good for us, we were very happy with that in the second quarter it was down to 14, which is very concerning. Now, some of that might, you know, might’ve been tied to spike in the mortgage rates at that same time. And so sellers just kind of pulled back. It was also, you know, we were going into the spring, so maybe they were like, Hey, it’s, you know, it’s the spring selling season, I’m gonna list with a realtor. Sure. It’s very difficult to unpack the psychology, the seller psychology and the as is market. Right. Because it’s, it’s pretty varied. But, and then so far in July, so coming in here to the third week of the third quarter, I’ve got no contracts so far in the past three weeks, my acquisition guys are freaking out. I’m freaking out a little bit. Trying to figure, figure

Craig

11:15

Out, you’ve been business for 15 years. Have you ever seen anything like it? You’ve ridden some cycles obviously. Yeah,

Jack

11:19

We, we, we have from time to time, so I’m not like shutting down shop or anything like that, but it’s a painful, it’s a painful wave to ride. Right.

Craig

11:29

I mean, one of the things you mentioned before we started the taping here was that, you know, same advertising. Yeah, same. Everything. Haven’t changed the message. Haven’t changed a thing. Yeah. And zero, you’re, you’re a blank for third quarter.

Jack

11:42

Yeah. So far it’s only been three weeks, but, but, but yeah. But a blank is, you know, we’re like, it should be six and it’s zero. That’s statistically significant. And yeah, like you said, we, we didn’t change anything there. Like the direct mail marketing that we’ve been doing has been the same the entire time. Same pieces, same consistency, same folks answering the phones. The call rate for us is down 50% year over year. When you say

Craig

12:04

Call rate, this is sellers, it’s the number of call calling in. Yeah, it’s

Jack

12:07

Number of call. Yeah. The number of potential sellers. Yeah. The number of times the phone rings. And so that’s been, you know, that is remarkable. It’s, you know, it’s, it’s, it’s a concerning statistic. We also do some television advertising that stayed the same the whole time. So calls are definitely down. Our conversions on those calls are down, you know, we’re gonna watch it to, to keep tabs on, on what’s going there. But, you know, and that may be now, now I don’t see the same correlation in our fix and flip lending business. Right? Like, it’s not like those deals have fallen off the cliff now, but, but with there, we’re lending nationally, so we’ve got the benefit of scale. You know, those curves across markets are, are gonna be different. And so lending nationally is nice because we get some, you know, diversification of markets. You’re

Craig

12:48

Not seeing any decrease in, in lending at all.

Jack

12:51

It’s been flat. No, it’s been, it’s been fine. No, it’s been fine. Yeah. It’s been, it’s been steady so far. I’m a little concerned, right? Like if I’m going goose eggs right now, does that mean 30 days from now they’re gonna be like, yep, we don’t need a loan. Like there’s no closings coming up. It’s

Craig

13:04

Scary to think that Baltimore would be a leading indicator, but, you know, we’ll see how it goes for you. Yeah,

Jack

13:10

I think it’s just a data point, but it’s one that we’re keeping an eye on.

Craig

13:13

Hey, one other thing that I saw in that report, last thing would be time on market. And while it’s still typically low in the 50 largest metropolitan areas around the country, homes were generally on the market for about 37 days. Still quite low. However, that’s 11 more days than last, last June. And the trend is actually, again, it’s sort of location specific. So in the south they’ve seen an increase of about 15 days. West is about nine. South is obviously the, the seeing the highest in increase of days on market. Any any concerns, comments there? Yeah,

Jack

13:49

Something I think you mentioned pre-show as well, the, the mix of inventory is shifting more towards, more towards new construction. Oh yeah.

Craig

13:56

I’ve got a lot of stuff on that.

Jack

13:57

We’re seeing that flipped inventory is moving quickly. Hmm. And so, you know, the days on market is up, but I think that that, I think my, my sense of that is that quality inventory is still moving. Can I ask

Craig

14:10

You, can I ask you about that quickly? We’ve always seen that, like, nicely done inventory, right? Like I didn’t go in in there and do like a patch and paint lipstick on a pig type thing. Now I went in and I really did a nice rehab on it. Is the p is the lipstick on a pig sitting?

Jack

14:25

Yeah. The lipstick on the pig is sitting. Yeah. It’s the, the stuff that, that needs, the stuff that needs work, the, you know, the buyer’s stretching themselves from an affordability point of view to hit your price point anyway. And so like the idea of buying that house and then also doing 20 grand of projects, like they don’t got it. You know, like they’re, they’re, they’re maxed out on affordability here. So, and

Craig

14:43

If the guy down the street’s offering the same thing for a couple dollars more

Jack

14:46

Yeah, exactly. And you, and from a, from a cash out of pocket point of view and from a a, you know, using, using up your income point of view, buying that turnkey generally, you know, fix and flip inventory or a new construction, I think it’s just generally more appealing right now. And the old, so the, the lipstick on the pig and the well-maintained that stuff is elongating that, that that stuff’s sitting on the market and that that inventory is starting to build up

Craig

15:09

A word to you young rehabbers out there, do a nice rehab and your houses will always sell quickly. I’ll, I’ll never forget in that 2000, you know, I kind of call the 2008 to 2012 sort of that no man’s land period of where everyone thought that the market was sucking wind. But we were selling houses like in record time. You know, all of my houses always sell within like 14, 21 days back then. Yeah. And I believe it’s because while others were languishing on the market forever there, people were taking price drops, we’re selling houses at full price. And the reason why is because I always did an above average rehab going beyond Yeah. You know, buy the house better. If you’ve gotta put more money into it, just buy it for a better price. Right? Yeah.

Jack

15:50

We, I think that that takes a lot of the, doing the nice rehab takes a lot of the volatility, a lot of the risk, frankly, out of the flipping business itself because it sells quickly regardless. Right.

Craig

15:59

It’s something I learned from your partner, by the way. Yeah.

Jack

16:01

You, you don’t have those 120 days on market, you know, hard money lenders like calling you up busting, you know, busting you over going into an extension. Like if it, you know, if it’s under contract within a 30 day period, you, you know, if you make a little less and move on, but always put the right money into the rehab and the volatility or the, the stress of the business over time is down the significant amount you make a little bit, you might make a little bit less money Yep. Not cutting those corners, but it’s just the right way to go. Yeah.

Craig

16:26

But you’ll pay, you’ll pay less on the loan because you’ll have the house for a shorter time. Your, your contractors will be happy, you can move ’em on to the next gig. I mean, there’s all, there’s all the benefits and I see little downside to doing a much better rehab. I agree.

Jack

16:39

Right.

Craig

16:39

Hey, new homes, some data points on new homes right now around the country. So there’s about 4.1 months of new homes under construction right here. It’s sort of well above the normal level, but a slightly declining new home inventory is at a record percentage of total inventory available. 23% of existing inventory. I was, I was telling a, a bunch of my investor friends sort of sending out the warning call back in March with guys in my mastermind and people that I coach. But it was this, I saw a report, I think it was a guy at First American, if I’m not mistaken. He was really sounding the alarm like, Hey man, come summer we’re gonna be a serious inventory issue of existing homes. And he really saw the, the boon coming for buyers, sort of the better route for buyers going into new homes. And so he was right. It’s, they’re at 23% of inventory where before it was about 15% where of of total inventory were, where the experts were saying, wow, that’s a lot. You know, that’s way too many new homes as a par as a portion. Now we’re at 23%. So Yeah.

Jack

17:48

On, on on a con for the contracts. Absolutely. So yeah, the, of all the houses that are selling that new construction, you know, it’s the only source of new inventory, right? Like the, the folks who have the, the 3.5% mortgage, mortgage rates are not abating, have not been ab been abating. So like the, that the, the, the value in your existing three point half percent mortgage is just as high as it ever was. And so until we start to see mortgage rates coming back down and that gap start to close, we’re gonna continue to see exist. You know, the existing home coming for sale on market that doesn’t need work is gonna be the rarity, it’s gonna be the flip. I the only sources of new inventory are distress situations, which lead to flip inventory. Yep. And, and new construction and then the forced moves, you know, the divorces and the new jobs and the, you know, surprise babies.

Craig

18:37

Absolutely. So, moving on to our good buddy over there at calculated risk. He just came out with the current state of the housing market overview. This is in part two. I believe he’s doing a three part series on that. I interest rates, I’ve really found some of these statistics sort of amazing. It’s currently there are 23% of the loans, existing loans out there are under 3%. 61% are under 4% and 81% are under 5%. Yeah. And we wonder why no one’s selling. Yeah.

Jack

19:09

It’s an amazing, we’ll definitely put that in the show notes. That graph that Bill McBride published is, it’s, it’s striking regarding in in that how, how much of the existing mortgages are well in the money right now. Yeah. And you start to see it tick, you know, the, the, the, the above 6% is like starting to slowly gain market share just because attrition and, and you know Sure. And new home purchases. But we’ve got a long, like, you look at that graph and you’re like, oh my gosh, this, we got a long way to go. We’re a long way to come down in mortgage rates until we start to see that existing home inventory come to the market as a, as part of the competitive set.

Craig

19:48

Sure. So I’m gonna see if I can make it through this. I wasn’t so well versed in these facts when, when before the show we were talking about, it’s sort of this, it’s the difference between the bust in 2008 versus the one in 80. And lemme just give you a quick couple quick facts here. Maybe you can speak to it. McBride was saying this is very different from the housing bust of 1980 versus 2008, whereas in, in 2008, there were a lot of homeowners that were forced to sell their t as their teaser rates expired. They, they couldn’t afford the, the fully amortized mortgage, whereas in 1980 rates increased very quickly, but we also had high inflation back then. We had high energy prices much like we are seeing today. Right. And so yeah, I would just, for those folks out there who are saying, oh, we’ll we’re, we’re not going to see any sort of bust in the market. I’m not, I’m not so sure if I, if I agree that we’re gonna have a soft landing like, like some people are saying. But my, my theory has always been that, that whatever we see is not like 2008. That the, that the facts are completely different here. And they are much more aligned with what we were seeing in the early eighties when Volcker and Reagan came in. High interest rates, high energy prices, high inflation. That’s precisely what we’re going through today that’s really affecting the market.

Jack

21:11

Yeah. Yeah. I get the, I think the, the T B D on that is, will this fed be able to get inflation down faster than Volcker did than, than that Fed did? You know, will Powell be more effective now and get us back to a sustained two? It’s challenging, right? Because like

Craig

21:31

When you say a sustained two, you’re talking G D P,

Jack

21:33

No inflation sustained 2% inflation. I think it’s interesting the, the idea that because of the low interest rate environment that we had everyone refinanced and as a result, there’s not much inventory in the market. He can’t affect housing inventory. Right. There’s al there’s really nothing he can do to touch housing inventory. But the super loose monetary policy of the past several years led to all those refinances. And because in the American mortgage market, we have this 30 year fixed rate mortgage, which is only callable on the borrower’s side. That doesn’t exist elsewhere in the world. That’s only an American thing. And so he has to deal with that feature in our mortgage market. And that means that he’s stuck with this idea that he, he can’t actually have a truly functioning housing market. Yeah. So he has to like factor, you know, Powell has to factor that idea into what housing prices are gonna do.

Jack

22:26

I mean, housing prices, you know, shelter is a third of C P I and so if he’s targeting 2% inflation and a third of that is housing prices, well right now home prices are increasing even in a, in a, you know, terribly unaffordable market because of the lack of inventory situation that the monetary policy created with everybody refinancing. He’s stuck with this like super weak and probably very probably volatile housing price component of his 2% target as that was not a part of the, the eighties whatsoever. Right. That, that dynamic. And he’s gonna have to deal with that dynamic for a decade, you know, a decade or more. So I think that he’s got his work cut out for him in terms of, in terms of managing monetary monetary policy in a super low inventory environment with a still increasing population. Like how do you, how do you keep inflation below two when we’re not building houses and the population’s still increasing and no one wants to sell their house? Like Yeah.

Craig

23:30

I I mean I think I, I’d like to spend an entire episode talking about sort of this what this mad rush to affordable housing that we’re obviously going to need to have in this country as we have, you know, 40 to 50 million of the world’s poorest people crossing the border. So, and that’s obviously not this year, but over the course of the last 25, and I just don’t see that. I was actually just reading just quickly, I was reading a quick article before I came today about, there’s, there’s a company called Zippy and it’s, it’s been traditionally not a very easy thing to get financing for mobile homes. Mm. Yeah. This, this company is a massively funded company now, still not Fannie and Freddy backed mortgages for chattel loans, but you know, for, for a asset class that most people would have a pretty bad stigma on, this company has got billions of dollars to lend to a, for affordable homes right now. So obviously seeing the trend there.

Jack

24:28

Yeah. Yeah. I think with and with the, the increase in quality of manufactured and, you know, mobile homes and manufactured homes over time, I think that that stigma is gonna change over time. It’s not only a solution, but it’s actually an excellent solution Yeah. To this affordability issue. It is one

Craig

24:42

Of the most affordable asset

Jack

24:43

Classes. Yeah. And given the quality of the, the, the product that’s being produced right now, like the stigma is undeserved.

Craig

24:48

Absolutely. If you’ve ever been to a, to an a class mobile home park, I guarantee you anyone watching this would live in one of those. Yeah. Super

Jack

24:55

Nice. There

Craig

24:55

Are quite nice. So multifamily housing starts, which have been obviously pretty robust over the last few years. Bill McBride at Calculated risk is predicting that they’re going, that we’re going to see some fairly significant decline soon. Yeah. As lending has really tightened on that, on that asset class. So anything to add there?

Jack

25:20

Yeah, that’s definitely been the case. We talked about it a little bit in previous episodes about how commercial banks are getting smoked right now with the, in the wake of the banking crisis, regulators are clamping down. Risk committees are trying to get their heads around with the embedded losses on bank balance sheets are, and deposit rates have gone up and stayed up for most banks. And so what has suffered, and we’re really seeing this play out, we talked about like, hey, this is probably coming. It’s definitely been the case the past 30 days. We’ve seen this, that loan commitments from banks are getting fewer and farb further between the advance rates, the, the, the amount that they’ll lend you, you know, before they’d lend you 80%. Now it’s 75, 70, 60 5%,

Jack

26:05

Like the, the, the advance rates decreasing and the cost of that, the cost of that loan is increasing and even worse than that. So, you know, so you need more equity to do a deal at a time where equity is feeling like very, you know, the world’s very risk on right now. We keep being told we’re about to have a recession anytime now we’re gonna have a recession. And so, you know, we should, you know, stack our dry powder for that recession and the opportunities that are gonna come for that. Yep. So equity is reluctant right now. Banks are requiring more of it and the cost of the debt that you can get has gone up. So it makes harder, it makes it harder for those projects to pencil. And maybe you just wanna mothball those a little, little bit for a year until maybe, you know, hopefully a a a better, more advantageous capital markets environment. And you talk

Craig

26:51

To guys all over the country, is that what you’re saying? Yeah. Guys just saying, Hey man, I’m gonna pull back pencils down. I’m just gonna wait on this project. Maybe not go after that one that I I was thinking about. Yeah,

Jack

27:01

Absolutely. And and the ones that are in the ground already, right? Like they’ve,

Craig

27:05

They’re pregnant.

Jack

27:06

Yeah. They’re pregnant. Like, they’re like, well we can’t, we, we, we, but we put the roads in, you know, like, or or we’ve, we’ve put all the infrastructure in like, you know, it’s, it’s not a, it’s not a million dollars of dirt, it’s not $6 million of land ready to go vertical on. And the idea of carrying that for a year and hoping that the world gets better versus just sucking it up and paying a higher, paying those higher interest rates going and raising equity. Yeah. Those developers have less options right now. And what’s even more concerning for if you’re for a lot of those folks right now is that the, the, the banks that they’ve been borrowing from for, you know, years and years and years, decades, even through no fault of the loan officer, right? Like, just because of what’s happening on the bank’s balance sheet from a bank balance sheet management point of view, those banks can’t lend, can’t make that loan anymore. And so the guy that you, the loan officer that you used to be able to count on to fund your deals right now is gonna give you different terms or is out. Right. And that, and, and that’s, you know, and he’s not calling you necessarily to tell you he’s out. He’s just hoping you don’t call him. So like, so call him. So call him and make sure that the guy you think is there for you is, is still there. He’s still in

Craig

28:11

The game.

Jack

28:12

And we’re seeing as, as a result of that, there’s opportunism opportunism in the private lending space coming in where private lender, you know, wall Street money, we talked about this on last episode, wall Street money is coming in because they see that opportunity to charge, you know, three, 400 basis points higher than bank rates and give you that loan so that you can move forward and build that building. But there’s a lot of headwinds. The point is that there’s lot, there’s headwinds kind of from all directions right now on multifamily and multifamily starts. Yeah. So coming outta the ground right now is, if you’re looking at a 10 year proforma, it’s fine. Right. It’s just a, you’re just getting banged a little bit more in the first two years in your pro proforma, you’re, your costs are higher than you had hoped they might

Craig

28:54

Be. You know what I find remarkable? I’ve, I’ve done some traveling this summer. I was just in Atlanta last week, softball, dead. Any of you out there? Daughters who play softball? It’s a thing. It’s a thing. Oh, it’s definitely a thing. So I was in Atlanta for the week, got a chance to really see quite a bit. Atlanta’s a beautiful city. It’s first time I really spent any appreciable time there. But the thing that blew me away was the amount of luxury multi-family going, going up there. And I take it, and we were talking prior to the show here about the luxury housing that’s being built here in Baltimore City. It seems like no lack of it. What are your thoughts on the leasing of the, of that, of those space right now? Yeah,

Jack

29:32

So we’ve been seeing a lot of headlines about concerns over rents, particularly because of all the multi-family new construction inventory that’s hitting the market. And I think that that’s, you know, in the affordable segment of, you know, in the affordable space, I, I’m, I don’t, I don’t see any concern about rents. I don’t hear any concerns about rents. Sure. Like 1500 bucks for a three bedroom house is fine. Let me

Craig

29:50

Ask you something. If, if we’re talking luxury, like say down there at the, the major project that’s down there on the peninsula in Baltimore, what’s an average rent there? Do you have any idea for a

Jack

30:00

Yeah, they’re like $2,000 plus one bedrooms.

Craig

30:02

That’s a start. Yeah. A one bedroom starter is two grand. Yeah.

Jack

30:06

Yeah. I mean they’re, they’re beautiful. They’re wonder, you know, it’s very nice. Yes

Craig

30:09

It is. But

Jack

30:10

Should be. And, but there’s a lot of that inventory hitting the market. I see.

Craig

30:13

I I’ve seen it in Austin, I’ve seen it in Atlanta. Where else was I? Houston, you know, any, pretty much any major city right now. It feels like there’re there’s, there’s this flight to luxury rather than affordability.

Jack

30:27

Yeah. And, and I think that that’s a function of how long it takes to get a project out of the ground. Hmm. In 2019. That, that was a phenomenal idea that played itself out. If you hit market in 20, you know, in 19 20, 21. Yeah. Early part of 22. Killing it every Yeah. Killing it. It’s the, and so you did the next one and you started, you decided to go into the ground in 2021 and now it’s coming, now you’re starting to build today. ’cause that’s how long it takes to, to get outta the ground on a a hundred unit mul multifamily building. And now this is typical, right? Like this, this, this happens in, in commercial real estate and is that, we will put too, you know, some people will be making money in a space, put too much too many projects into the ground and then they all hit at the wrong time. And then you start to make concessions on free rent and to, to get le and, and rents, to get units leased up. I think that that’s most the rent softness is mostly gonna be a function of those high per square foot Yep. Areas, particularly in markets where there’s lots of new construction hitting the market at the same time.

Craig

31:26

Are you seeing any significant multi-family affordable, like, you know, call it subsidized, whatever, so affordable, multifamily, new construction being built here in Baltimore?

Jack

31:40

Yes.

Craig

31:41

I mean, I know one project in particular Yeah. Up there on below. You know, I, I don’t mean to get too local here for you guys, but I’m sure the saying could be said in most other counties around or, or states around the country. There’s that project up below North Avenue that we had talked about previously.

Jack

31:54

Yeah. Low-income housing is still, you know, because of the affordability issues, you know, the low-income housing tax credit is still the primary way that we’re financing that in the country. I was gonna

Craig

32:03

Say, it has to be some sort of subsidy to make it work, right? Yeah.

Jack

32:05

Now when you can find a particular location, which is like, you know, a little bit transitional, you can get the land for cheap and, and still make the proforma work. I, we, we have two projects like that, which I’m, which I really like because I’m not relying on

Craig

32:18

As a lender or as a developer.

Jack

32:19

As a developer, yeah. Doing our own. Yeah. We have a 45 unit and a 16 unit that we’re doing that is not relying on any subsidy. We’re just getting the land for very cheap. It’s, you know, just like a project like, you know, on the edge

Craig

32:31

It just worked out. You, you were able to get it cheap from the seller or was it a purchase from

Jack

32:35

The, from the, the shell, you know, it was a piece Yeah. We’re, you know, fully gutting it. And so the, those projects I’m a huge fan of because the rents are gonna be affordable and market and I feel really good about being that. Right. Like it’s a lower margin deal because there’s, can we

Craig

32:48

Go into it real quick? Lisa, I guarantee you there’s guys listening to the podcast who sort of might wanna get into that space. You know, like I’m a guy who’s maybe owned a four unit, a 10 unit, a 12 unit, and I’ve graduated. I, you know, and I see the opportunity in my city to purchase a building. So where did you find the building? How did you find it?

Jack

33:07

Yeah. One was talk about

Craig

33:08

What it looked like and Yeah,

Jack

33:10

One, one was, one was just an auction that we bought during Covid actually. So we kind of benefited from just when we bought it, it was the wake of covid still, everyone was still freaked out and we thought that, you know, we thought that it was just a, a good fit for, you know, long term. We were like, you know, affordable rentals are not gonna like fall off the cliff. Like if anything, we’re gonna need more affordable rentals. So for us it was just purely, hey, this is an affordable play. Yeah. Affordable multi-family place. So we were able to get the, the building for like 30 bucks a foot. Is

Craig

33:35

That the 14 or the 45?

Jack

33:36

That’s the 45. Okay. And then the other, so what’s

Craig

33:39

The square footage of the building? It’s

Jack

33:40

30,000 square feet. Oh wow. That’s gonna be 45 units. It was 10 individually deeded parcels that we did a lot consolidation into two parcels. And so we’re basically doing two like 22 unit buildings with bookend commercial on the

Craig

33:54

Ends. Nice. And so what’s the mix of like bedrooms and baths of the 45? Do you

Jack

34:00

Know? Yeah, mostly one. Ones a couple studios, a couple twos.

Craig

34:04

I always thought that like one ones are like the sort of the, you, you, you didn’t like that the, the one bedroom stuff

Jack

34:11

For multifamily. That’s, you know, that’s the standard product, you know? Is

Craig

34:14

That right? Yeah. So what will, so will this be subsidized housing for you guys?

Jack

34:18

Now? We, we might do like 10% vouchers, but it’ll be mostly market rate. Although source of income is a protected class in Maryland, so we will be making ’em available to everybody. Oh yes, of course.

Craig

34:27

Yes. I’m sorry. Thank you for that caveat for those listening. Do you find that that is an exciting space to be in maybe to start looking out for the future?

Jack

34:37

Yeah, we love that. We think that that’s like the, we think that that’s a very safe bet of, you know, any, anything affordable. Frankly we think it’s a very safe bet if you can make the num if the issue is can you make the numbers work from the debt point of view right now? Yeah. And maybe you just say, Hey, I’m, I’m, I’m not gonna make very much money in the next couple years because I just believe that this long term trend is gonna work itself out. And, and I don actually don’t have an argument. I I actually kind of subscribe to that. But particularly with the multifamily projects, the benefit you have there is the lending market there is much more robust. The, you know, the HUD financing that’s available, Freddie Mac refinancing that’s available is cheaper than D S C R loans. And so it’s easier to make the debt service coverage ratio underwriting work on those multifamily projects. Hmm. It’s really hard to find the deals. Yeah. But, but this was a situation where the pro forma showed that and still shows that, that we’ll be able to, to make the, we’ll still be able to make money on the project on a current basis, even in the higher today’s higher interest rate environment. I

Craig

35:36

Don’t, you know, no one would call Dominion a sort of a, you know, a low level construction. You guys obviously have a a a great construction company. How long will a project like this sort of take construction wise start to finish?

Jack

35:49

The 40 fives gonna take us pretty much a year. Yeah. Maybe 10 months, but I’m kind of mentally budgeting a year. And

Craig

35:55

That’s, that’s after permitting and sort of going through all the, the

Jack

35:59

Yeah, that’s once we had permits, right. Permitting was a year. Right. The, the permitting was nine months and then it’s probably 10 months in the project. Yeah.

Craig

36:07

Do you find that Baltimore is tougher permitting wise than other places around the country

Jack

36:13

For a project

Craig

36:14

Like

Jack

36:14

That? Yeah, I would say. Yeah. I mean, but that’s more of just like a blue states, red states generally speaking. Yeah. It’s, it’s still very NIMBY in the, in the Baltimore metro area. Even though there’s a tremendous need for affordable housing, you know, the, the wheels have not really, the wheels of government have not really fully gotten on board with that idea to then make it easy to produce affordable housing. You’ll get more if you pro if you make it easier to do it. Yeah. We’re still trying to connect those two. Yeah. So, so yeah, no it was a frus it’s a frustrating process and one that makes it more difficult to do it and it keeps

Craig

36:48

Our competition as well. So

Jack

36:50

Yeah. It keeps our competition as well. Yeah. I mean it, I think it’s gonna continue to, it, you know, it’ll affect, it’ll hurt those who need affordable housing until there’s enough groundswell that they can make change and, you know, change behavior to realize that like, developers are part of the solution, not part of the problem. But there’s still very much a dynamic that developers are the, the, the reason for the affordable housing problem and no realization or little realization that they’re really the only solution. So yeah. Figure out how to work with as opposed to work work against. Yeah.

Craig

37:24

So for those, would you be willing to talk about that project and maybe the other one in sort of a case study episode project?

Jack

37:30

Yeah. Yeah, absolutely. Yeah, that’d be fun

Craig

37:32

If anybody be interested in hearing that, drop a comment. I don’t know where you’ll do that, but you could certainly drop a comment or send us an email. I would, I would love to go through the numbers of that and see what else we should do

Jack

37:43

On this. On a, bring me maybe on the same one, talk about the, ’cause we were only ever buy, we, we only ever bought houses. Yeah. Maybe we’d buy a two unit. The

Craig

37:51

Fastball for you guys has always been sort of like any city America, well I would say like any east coast city America, which is that row house, maybe it’s got a porch front on it. These are all sort of brick row houses. There’s thousands of them in the city. Right. That’s always been the fastball.

Jack

38:07

Yeah. Yeah. And so we, we got really, really, really good at houses and construction’s great. And or our con our construction got really good shout out to our construction manager, James Stewart, he’s the man.

Craig

38:18

And we’ll have him on Monday.

Jack

38:19

We should, we started to look at like some larger scale projects, just frankly ’cause we also thought it would be fun to do some larger scale projects. And so we had to get our educated on, alright, how do I evaluate what the zoning code is here? You know, what are the, what are the setback requirements? And I mean, and depending on the municipality, that’s a whole fricking rabbit hole. Like sure. Civil engineers make their living off of just can tell, you know, oh, here’s $5,000. Can I build on this? No. Civil

Craig

38:48

Engineers make their, make their living off of bureaucratic red tape and being able to weigh their way through that. That’s how they make

Jack

38:54

Their money. Absolutely. But there’s also, if you, but if you can also figure that out yourself, you, you can find some really interesting opportunities. Like we bought this shelf for 30 bucks a foot, and I’m dying

Craig

39:03

To know where it is, by

Jack

39:04

The way. Oh, it’s the 200 block of Park Avenue on the west side of downtown. Oh yeah, yeah, yeah. And then we just bought the, we bought a house on the 400 block of North Howard Street also on the west side of downtown. We got that shelf for like 20 bucks a foot. So now it’s a piece, right? Like it needs everything, but they’re both in zoning districts which allow multifamily without big parking requirements. And so, and there’s, you know, those are, that’s unique in a, well a city like Baltimore or any city in America, there’s a, there’s unique zoning codes which allow for this kind of con conversion from office to multifamily. If you’re interested in that idea, you have to dig in and figure out this, you know, how to understand your local zoning code and how to underwrite a property based off of what the dwelling units per lot area are like that’s not stuff that you have to think about when you’re buying houses. Right. And it’s also not brain surgery, but, but, but it’s also not brain surgery.

Craig

39:52

You gotta learn something new though. Yeah.

Jack

39:53

You gotta learn something new. Make sure you don’t trip on yourself and you

Craig

39:57

Get, get outta your comfort zone. Yeah.

Jack

39:58

Get a little outta outside of your comfort zone. But, but it’s not brain surgery. Once you figure it out it becomes like, you know, second nature very quickly. I would think

Craig

40:06

That, look man, I’ve been to a lot of cities in America and I would think that opportunities like that are all over the country right now.

Jack

40:15

I think so. Yeah. I think so. As

Craig

40:17

Cities are increasingly being gentrified, yet still finding ways to keep that affordability, I find that there’s districts in every city in America that are sort of, you know, look, I mean, let’s be honest, they’re a little rundown yet they’re trying, trying really hard, especially in that area that you’re talking about. If anyone knows the area, there’s always going to be those districts in every city in America.

Jack

40:38

Yeah. And I think that on a going forward basis, as we see this kind of like office issue, you know, this office market issue play itself out. Yeah. You know, there’s been lots of articles, very fluffy articles about like Office to Multifamily and like how that might be a solution, but it’s not a silver bullet. Like Yeah, yeah, yeah. But like, alright, so, but I’m a developer and I wanna like go do one. How do I do that? And digging into the zoning code and figuring out how to underwrite that and your local municipality is you, you have to, you have to roll your sleeves up and and figure that out. It’s not that hard though. Like it’s, it, it seems very like, oh, you know, that’s fan, it’s, it’s just, it’s not that hard when you actually break it down. And we’ve been able to find a couple really interesting opportunities based off of that. So you said,

Craig

41:18

And, and we can wrap it up, but you said that there’s also going to be commercial space in these

Jack

41:23

Yeah. Just bookend commercial,

Craig

41:25

Like retail or what? Yeah,

Jack

41:27

Yeah. Retail, you know, coffee shop and smoothie place, that kind of thing.

Craig

41:30

Oh, look at you. Look at you. Well, I guess we can have a place to do the podcast. I mean, I’ll probably be the barista, you know? Right. Yeah, I could see that. Sure. Alright, well listen, I guess we’ll wrap it there. I, I think that would be an awesome podcast to do in the future. Maybe have James on as well. Hope you guys appreciated the show today. Real Investor Radio. I’m Craig Fuhr. Jack BeVier. Yes, you are doing it. All right, we’ll talk to you soon. See ya.