Month: March 2022

With more and more Canadians working from home, there has never been as much flexibility to live wherever you want. No longer shackled to a desk in a big (and expensive) city, millennials are moving to a small town in search of greater housing affordability. Every decision has its pros and cons. Here are some key factors to consider when deciding to leave a big city for a smaller community.

Upside: (More) Affordable Homes

If you are looking for value, you are more likely to find it in a smaller city or rural area. Just look at the average home prices in Toronto, and you can see the allure of a smaller town. For many, home-ownership in larger urban centres is simply out of reach.

The pandemic prompted many to leave their 450-sq.-ft. condo behind in favour of a home with more space and a yard in a smaller town.

Another upside: Because your home is often less expensive than one in a large city, it allows you to put more money toward other things, such as renovations, kids or saving for retirement.

Upside: Getting More Out of Your Home

With a larger home comes the ability to do more with the space, with room to start a family, add a home office or gym, and have a yard to enjoy more time outside.

Upside: Access to Nature

Suburbs, small towns and rural areas are typically less dense, with more access to forests, provincial parks and conservation areas. You’ll also have greater accessibility to properties with larger yards where you can enjoy outdoor living space, including a deck, mature trees and maybe even a pool.

In a city, you have more entertainment options but typically have to travel to experience nature. In a rural area, the opposite is true. You are immersed in nature but will have to travel to a more urban area to take in a night of theatre, a sporting event or concert, or experience some global cuisine.

If being surrounded by nature sounds more appealing, a small town could be a good option for you.

Upside: Less traffic

If you have experienced rush hour in a major city such as Vancouver, Toronto or Montreal, you likely dream of ditching the commute and traffic congestion. A small town may offer the chance to get some of that time back. Fewer people means less traffic. Imagine if having to wait at a traffic light was the worst part of your commute. Many small towns offer just that.

Upside: Lower Auto Insurance Rates

The reality is that driving in a busier urban centre is more dangerous. Car insurance rates reflect that. For example, you’ll find all of Ontario’s highest car insurance rates in the GTA. Meanwhile, smaller towns such as Port Hope and Brockville have some of the lowest rates. Moving to a smaller town can potentially save on car insurance costs.

Downside: Rising Housing Prices

The popularity of rural areas has recently led to rising prices in some suburban and rural areas. In fact, in many areas, prices are rising more sharply in suburbs and small towns than in urban centres.

A typical home in Canada now costs $780,400, up 34 per cent ($200,000) since March 2020. So, if you are looking for a small-town deal, you will probably not find the bargain you could have pre-pandemic.

Downside: You are Going to Need a Car (or Two)

One significant upside of an urban centre is its walkability and public transit options. You can walk to your local cafe, hop on the subway, and be at work. If you want to head out to a restaurant or go for drinks with friends, there’s an Uber or taxi practically at your door at any given moment.

Small towns do not offer the same walkability and transit that big cities do. If you plan to move to a smaller town, especially a rural one, plan to also buy a car. An average Canadian spends $11,433 on their car, including the costs of financing and maintenance, plus an additional $2,142 on gasoline (although with recent spikes in gas prices, that number is likely much higher now). If you are car-free in the city, you must factor those costs into your move.

If you have a family, you may need to add a second car to the equation, upping the costs.

Downside: Less Entertainment & Service Options

You have to ask yourself what is important to you. If frequenting the hottest new restaurants, going to the big hockey game, or checking out your favourite artist at a cool concert venue are on the list, rural life may not be for you.

If you live near a larger city, you can always travel into town to get your entertainment fix. But, if you want it to be part of a typical weekend, you may want to look into a medium-sized city that offers concerts, restaurants and nightlife, albeit on a smaller scale.

On top of this, some rural areas have fewer services such as medical facilities, grocery stores, gyms and banks. Be sure to examine the rural area you are considering, to see how long it will take to travel to get groceries, personal services like hair appointments, and to see your doctor.

Downside: Internet Connectivity

Internet speed isn’t something that you worry about in the city. In rural areas, high-speed Internet connectivity is less available, slower and more expensive. Be sure to ask your real estate agent if the homes you are looking at have a high-speed Internet connection.

Weighing the Pros and Cons

Moving out of the city isn’t an easy decision. If you are looking for a more affordable option that is a little quieter and closer to nature, then moving to a smaller town is an excellent option for you. You may have to say goodbye to your favourite tapas place and that great spot for a late-night burrito, but if that’s okay with you, then talk to a real estate agent about making a move.

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Among the different types of homes on the market, single-family properties are decidedly the most popular, owing to the quality of life benefits they offer. However, just because you want to live in one, doesn’t mean they are truly the best properties in terms of investments and growing your money. Investors in the know are turning their sights on the multifamily sector that offers huge potential for returns and cash flow – and it isn’t just for big business and corporate investors. You too can grow your wealth by investing in multifamily real estate and today we will cover some of the appealing reasons why you should.

We spoke to Seth Ferguson, Chair of The Multifamily Conference and an investor with over 13 years of real estate experience. Through his podcast, cable TV show, and investor conferences, he aims to share the many opportunities and benefits of investing in multifamily properties.

Multifamily properties are composed of multiple separate residential living spaces. This category covers a wide range of styles ranging from multiplexes with a few units to high-rise condominium towers with hundreds of units, and everything in between. Generally, these investments work a lot like your standard residential investment: being used to generate rental income and potentially price appreciation over time. However, rather than a single unit and a single source of rental income, multifamily properties offer multiple streams of rental income, which can make a huge difference in your returns and cash flow capabilities.

Though you may face some new challenges when looking to expand your portfolio with multifamily properties, there are also a number of benefits that should be considered. Ferguson highlights three benefits in particular that are most pertinent for investors.

“Number one would be strong cash flow that you don’t find in single-family homes and many other types of real estate assets,” said Ferguson. “Multifamily is incredibly strong when it comes to cash flow.”

“Second, It’s also incredibly stable in economic downturns. We saw that happen during COVID and over the past two recessions when multifamily outperformed all other real estate asset classes. It’s not always about how your investment does in the good times – you also need to focus on how your asset performs in the bad times.”

“Number three would be tax benefits. Through cost segregation and depreciation, multifamily investors can take advantage of a wide range of tax credits to minimize their tax liability and put more money in their pocket to spend or reinvest.”

Another important message that Ferguson emphasizes is that any investor can begin investing in the field of multifamily properties, even with little or no experience with other real estate investments. 

“It is 100% possible, and I would even highly suggest it from past experience,” said Ferguson.

“I think a lot of people get into single-family investing because a lot of people live in homes and it just seems to be a natural progression. But, people need to actually sit down and think about what they want their life to look like in a decade and map that out.”

“When I got started investing, for example, I started acquiring single-family properties, because that’s what I thought I knew best. But, I quickly ran into issues: the cash flow was not strong, financing was incredibly challenging, and scaling that portfolio felt like I was banging my head against the wall. I was investing in something that was taking me away from my goal, not closer to it. Multifamily avoids all of those issues.”

Another common concern that investors have before beginning in multifamily properties is the property management needs of larger properties being prohibitive and requiring a lot of work and money. Ferguson explains how, in some cases, the opposite may be true with increased management for multifamily properties actually serving as a net benefit for investors and consumers.

“With a single-family home, you’re going to be paying 10-12% of your gross rent just for management. Your property manager is going to visit the property a couple of times a month or less, so you don’t have a lot of hands-on control,” Ferguson explained.

“When you get into larger multifamily properties, you can have on-site staff, you can have full-time leasing agents, you can have full-time maintenance staff. This means, not only do your residents get a better product and better customer service, you end up with better cost controls because you are on top of every issue as soon as it comes up.”

For those looking to get started in multifamily investing, there is no shortage of opportunities. For one, properties in the multifamily segment come in a variety of different styles offering numerous price points. And, when it comes time to financing, it can often be even easier to secure a loan than with a single-family home. This is due to the increased cash flow potential of multifamily properties.

Furthermore, the multifamily segment is increasingly popular as cities grow and become more densely populated. Investors can find multifamily properties in nearly any market, adding even more depth to the range of options and strategies available to multifamily investors.

“There are so many different strategies and there are so many different ways to participate in multifamily investing,” says Ferguson. “Whether on the active side or on the passive side, it’s all about getting the word out. The truth is, big players like Wall Street and the banks will never talk to you about alternative investments because they want to keep your money in their products. But most of the time, alternative investments like multifamily actually produce stronger returns and better cash flow than their options. So, we’re all about educating people and getting the word out there because most people just don’t know.”

Visit sethferguson.org to learn more about getting started in multifamily investing and to sign up for the Multifamily Conference, an in-person investor event coming to Toronto in May.

For the first time in decades, the Maritime provinces are booming in every key performance indicator.

While the coronavirus pandemic lockdowns and restrictions were a hit to the economy, Atlantic Canada benefited from changing consumer patterns that led to a significant population boom. With more people working remotely and young families seeing an opportunity to achieve their dream of home ownership at a lower cost relative to other regions, there was a substantial inter-provincial migration movement to Nova Scotia, Prince Edward Island (PEI), Newfoundland and Labrador, and New Brunswick.

As more capital flowed to this region of Canada, it seeped into multiple industries, particularly the real estate market, which experienced gains, from sales activity to prices that had not been seen in decades.

Let’s peek at recent Statistics Canada data to see where households relocated.

Maritime Provinces Leading Canada’s Population Growth

For years, Canada’s East Coast had endured a population exodus, as young graduates and professionals seeking employment opportunities headed to major urban centres such as Toronto, Montreal and Vancouver. Over the last two years, this trend turned around.

In fact, the Maritime population expanded at a faster pace than the Prairies for the first time since the 1940s.

Here is a look at the population numbers from 2016 to 2021:

• Prince Edward Island: +8%
• Nova Scotia: +5%
• New Brunswick: +3.8%

It’s notable that much of this population growth took place in 2020 and 2021. For example, Nova Scotia witnessed the second-highest population increase in the country thanks to inter-provincial migration in the second quarter of last year, totalling 4,678 people. As another example, StatsCan confirmed that the Maritimes recorded a cumulative gain of 13,470 people in the third quarter.

So, what is behind the population boom in the Maritimes?

“First, New Brunswick, Nova Scotia and Prince Edward Island welcomed a record number of immigrants from 2016 to 2021, the vast majority arriving prior to the pandemic. Although approximately one-third to one-half of those who immigrate to the Maritimes move to another province within five years of arrival, higher levels of immigration were still mainly responsible for the rebound in population growth since 2016,” the statistics agency noted.

Moreover, for the first time since the period of 1981 to 1986, “more people moved to the Maritimes from other parts of Canada (134,841) than moved away (98,086). The positive influx of people into these provinces from elsewhere in Canada started prior to the pandemic but has intensified thereafter.”

British Columbia was the other province to witness a massive jump in population.

The Maritimes Real Estate Market in 2022

The developments have also had an incredible effect on the local housing market. Industry insiders note that many homebuyers came from Ontario and purchased residential properties without even seeing the homes. But inventories were unable to keep up with the influx of demand.

Nova Scotia

According to the Nova Scotia Association of REALTORS® (NSAR), home sales tumbled 16.2 per  cent in January year-over-year, totalling 704 units. But residential property transactions were 5.8 per cent above the five-year average.

Despite the drop in home sales, the average price of properties sold in January increased 23.2 per cent year-over-year, to a record high of $392,828.

Active residential listings declined 37.4 per cent, while new listings plunged 16.6 per cent. Months of inventory, which tracks the time it would take to exhaust the current supply at the present rate of sales activity, slid to start the year.

Prince Edward Island

The Prince Edward Island real estate market witnessed a four-per-cent increase in year-over-year sales in February, marking a high point for the month of February. The Prince Edward Island Real Estate Association noted that home sales were also 22.5 per cent above the five-year average. The average price of homes sold in February increased at an annualized rate of 8.5 per cent to $354,280.

New residential listings were up 28.4 per cent year-over-year, while active listings were up a modest 3.3 per cent year-over-year. Active listings were 29.3 per cent below the five-year average, and 59.1 per cent below the 10-year average. Months of inventory held steady year-over-year, at 2.8.

New Brunswick

According to the New Brunswick Real Estate Association, residential property sales declined 6.3 per cent year-over-year in January, with 621 units exchanging hands. But home sales were still 4.8 per cent above the five-year average.

The MLS® Home Price Index (HPI), considered more accurate than average or median price measurements, swelled 32 per cent to $275,000 in January. Also, the benchmark price for single-family homes soared 32 per cent to $277,200.

New listings decreased 20.8 per cent, and active listings slumped 42 per cent. On a historical basis, new and active listings were 28.3 per cent and 59.6 per cent below the five-year average, respectively.

Can the Maritimes Sustain This Growth?

Many housing experts and public policymakers have debated if the Maritimes can sustain this growth and retain folks who have immigrated to the region. This was a once-in-a-lifetime opportunity for the eastern region, and many officials in places like Halifax have been proposing new economic developments.

The 2022 Canadian Housing Market Outlook Report from RE/MAX projected that many major Atlantic Canada real estate markets would experience notable price growth.

Here is a snapshot:

• Moncton: +20% to $332,734.80
• Halifax: +17% to $543,890.88
• Fredericton: +5% to $268,722.30
• Charlottetown: +8.5% to $409,207.75
• John’s: +5% to $338,114.70
• Saint John: +7.5% to $276,885.60

At the same time, housing affordability has become a ubiquitous discussion in the Maritimes. Prices are still below the national average, especially compared to many cities from which people are coming, such as Toronto and Ottawa. But ultra-low borrowing costs, limited inventories, and strong demand could exacerbate the affordability question.

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Question: What would you say is the latest craze in real estate investing?  The thing that everyone is talking about and wanting to learn more about?

If you ask me, the term “short-term rentals” comes to mind. At the most recent BPCon, the short-term rental breakout session was not just a full house. It was standing room only. People were packed wall to wall, even with investors standing outside the conference room listening in. 

So why are so many people interested in short-term rentals? Well, odds are that even if you do not own a short-term rental, you have likely stayed at one before. Whether listed through Airbnb, VRBO, or other similar sites, many investors see significantly higher cash flow by turning a traditional property into a short-term rental.  Also, there can be an added perk if the investor can get some personal enjoyment out of the short-term rental property as well.  

It is not uncommon for us to see a property make two to three times the cash flow when changing from a long-term rental to a short-term rental. With the higher cash flow comes the need for good tax planning. Why? Because how much of it you get to keep is more important than how much money you make! So let’s go over how to minimize taxes from your short-term rental investments. 

Short-term rentals and taxes

To start, we need to first define what a short-term rental is when it comes to taxes.  Many investors are under the impression that just because they list their properties on a platform like VRBO or Airbnb, they are considered short-term rentals. That is a mistake.

For tax purposes, a rental is not defined by where it is listed but by the number of days that a property is available for rent, as well as what type of services are offered alongside the rental. Generally speaking, if the average number of rental days per guest is seven days or less for the year, then the property is considered a short-term rental for tax purposes.

If the average guest stay is longer than seven days, that property will still likely be treated the same way as a long-term rental even though it might be advertised as a short-term property. Rentals, where hotel-type services are offered (like a bed & breakfast), are generally treated as short-term rentals. 

One important thing to remember is that short-term rentals, like long-term rentals, are typically taxed at the investor’s highest ordinary income tax rate. So if you are an investor who is in the 35% tax bracket for your W-2 and other income, any taxable rental income is added on top and also subject to this tax rate.

Strategies for reducing taxes on short term rentals

Since short-term rentals often create high cash flow, it is essential to make sure that you are using the appropriate short-term rental strategies throughout the year to reduce taxes on this source of income.

Maximize your tax deductions

 Maximizing your tax deductions is the first step in reducing your taxes on your short-term rentals. As an investor, you may have frequent trips to your short-term rental to set up, stage, or even manage the properties. Make sure to document your trips so that you can write those off against your rental income at tax time. Travel to short-term rentals is tax deductible against rental income, just like travel for any other type of real estate investing. The key is to make sure you have documentation to prove the reason for those trips. Let’s go over an example of just how powerful this can be.

Let’s say James owns a few short-term rentals in a lakefront community just two hours away from his home. He purchased a large truck that he used primarily to rehab, stage, and manage the short-term rentals. 

Since the car was primarily for business use and weighed more than 6, 000 lbs, James was able to deduct the entire purchase price of the truck. By writing off close to $30k on that truck, James was able to lower the taxes on his short-term rentals and save close to $10k in taxes. Depreciation is based on the truck’s purchase price, so James was able to create a significant write-off even though he financed part of that truck purchase.

Shift your income

Income shifting is another way to maximize tax savings on short-term rental income. Consider paying family or friends who are helping you out with your short-term rentals to shift income and save on taxes.

James had a nephew who was still in college that was interested in getting into real estate. James hired his nephew to help with the rehab and repairs to get the short-term rentals ready. The $8,000 James paid his nephew was tax deductible and saved James another $2,400 in taxes.  Most of the tax-saving short-term rental strategies traditionally used for long-term rentals are the same ones available to short-term rental investors. 

Take advantage of depreciation

An investor may often have higher start-up costs with short-term rentals. Sometimes you may need to purchase furniture, fixtures, and appliances. Whether buying these as brand-new items or buying used items, most of these items may currently be eligible for bonus depreciation. This means that instead of depreciating the cost of these items over multiple years, you may be able to take the full depreciation in the first year.

For example, if James spent $6,000 on appliances, furniture, and a kayak for his short-term rental on the lake, that can result in a $6,000 deduction immediately in the first year.  It is important to keep itemized listings of the items you spend money on. Supplies like towels, bedding, and toilet paper are all tax-deductible expenses. Those small amounts can add up to some substantial tax savings.

Track your expenses

Tracking expenses for short-term rentals is just like any other rental property. If you have multiple short-term rentals, track the income and expenses by property. We have already touched on travel, furnishings, and income shifting.

Don’t forget the other potential tax deductions such as business meals, eligible home office, or related educational expenses. Since short-term rentals can be very profitable, it is extremely important to make sure you capture all of your expenses to offset the taxes associated with that income.  

Know the tax benefits

Investing in short-term rentals can also come with some great tax benefits. Some of those tax benefits may even be better than those from investments in regular long-term rental properties. 

For those in the long-term rental space, you probably already know some of the restrictions concerning the passive activity loss rules for higher-income investors. In short, if your adjusted gross income is over $150,000, then any rental losses from long-term rental properties typically can only offset income from other passive activities. When there is an excess loss, those losses are not used to offset taxes from your W-2 income. The losses are instead carried forward into future years to offset future passive income.

However, an investor who can claim real estate professional status would then be able to use the net losses from the long-term rentals to reduce taxes from W-2 and other income. For investors who work full-time, obtaining real estate professional status is often tough to achieve. One of the main hurdles is that the investor must spend more time in real estate than their job.

So for someone working 2,000 hours a year at a job, they would need to spend more than 2,000 hours that year in real estate as well. Real estate professional status is often difficult for investors who are still working full time. This means the excess rental losses are not as helpful to offset taxes from W-2 or other non-passive income. When it comes to short-term rentals, though, the good news is that it is treated differently than long-term rentals for tax purposes.

One of the perks of investing in short-term rentals is that the investor’s ability to use excess rental losses from the short-term rentals to offset taxes from W-2 and other income is a little easier to achieve. This means that if you’re operating in the short-term rental space, you do not need to be a real estate professional to be able to potentially use rental losses from those properties to offset taxes from W-2 and other income. 

However, you will still need to show that you are materially participating in your short-term rentals. So what exactly does it mean to materially participate in your short-term rentals? There are seven tests, and you only need to meet one of them.

Tax benefit qualifications to know

Out of the seven possible qualifications, here are the top three that are most commonly used:

1. Participate for more than 500 hours during the year on the short-term rentals
2. Participate for more than 100 hours in the short-term rentals, and no one else incurred more time than you
3. Participate in substantially all of the activities in the short-term rentals where your participation exceeds the combined time of all other individuals

Material participation time can include tasks such as staging and managing the property, dealing with guests, repairing, cleaning, restocking the property, to name a few. 

Once you meet one of the material participation tests for your short-term rental, then any net tax losses may be deductible in the current tax year and thus help offset taxes from W-2 income. If you are an investor who owns multiple short-term rentals, you may be able to combine your hours across all of your short-term rentals as well. 

Let’s go over a quick example of how this strategy works: Ashley works full-time at a tech company. She decides to buy a property in a nearby ski area and rent it out as a short-term rental. Even though she had to pay a slight premium for the property and incur some start-up costs to get the property ready, it had phenomenal cash flow in the first year.

Ashley loves connecting with her guests and sharing her insights to make their stay a memorable experience. By working proactively with her tax advisor, she decided to be very involved in managing her short-term rentals. She documents her hours during the year to ensure she meets one of the material participation tests. Her tax advisors assisted her with maximizing her tax deductions by writing off the business use of her car, computer, and home office.

The first year she owned the property, she decided to obtain a cost segregation study to accelerate the depreciation deduction for her short-term rental. With proactive tax planning, not only did Ashley not have to pay taxes on all of that cash flow she received from the property, but she also created a significant net loss of $20,000 for tax purposes.

Since she worked during the year to ensure that she met the martial participation hours with respect to this property, Ashley was able to use the $20,000 loss from the short-term rental to reduce some of her taxes from her W-2 income at the tech company. Not only did Ashley receive significant cash flow from the property, but she also paid no current taxes on that cash flow and instead used additional losses to reduce taxes from her W-2 income.  

Final thoughts on tax benefits for short-term rental investors

As you can see, there can be some significant tax benefits to investing in short-term rentals. It is important to remember that rules and regulations can change quickly regarding short-term real estate investing.

Before investing in a short-term rental, it can make sense to analyze the deal to see how it would otherwise perform as a long-term or mid-term rental. If the city were to enact new short-term rental restrictions or changes, you want to ensure that you have alternative investment strategies to keep the property performing well. 

Once you have decided that short-term rental investing is for you, make sure to work with your tax advisor and plan proactively during the year so that you can keep more of that excellent cash flow! 

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Q: Do you trust “The market” for your real estate profits?

A: Those who trust “The market” are at the mercy of the market. 

I think this is folly. Hopefully, many of you agree. 

Here’s what I’m talking about… 

The real estate syndication realm is awash with new operators showing their investors dazzling returns. Profits that would astound investors from Wall Street to Main Street. 

And these syndicators are raking in massive profits along the way as well. I know many operators who were in high school during the Great Financial Crisis and working W-2 jobs just a few years ago who have joined the multi-millionaire club in this current rush to riches. 

But this scares me to death.

You see, the same “Market” that made them and their investors rich could also destroy them. The streets of history are littered with such casualties. 

Here’s how it looks in the real estate world…

The value of a commercial real estate asset is based on two variables: 

1. Cap rate
2. Net operating income

Value = Net Operating Income ÷ Cap Rate

If this formula is unfamiliar, check out this post. 

The cap rate is the market’s evaluation of the value of an asset. It is based on the interest rate, a risk premium, the desirability of that asset type, the location, and more. Factors outside the operator’s control. 

And of course, the net operating income is the gross operating revenues minus expenses. And this is largely in the control of the operator. 

As you can imagine, a seasoned operator focuses on the latter. They see intrinsic value hidden in an asset. They acquire the asset and do their magic. They put their team and technology to work to raise the income and create value for investors. 

Seasoned syndicators don’t count on “The Market” to do the heavy lifting.

(If The Market cooperates, their investors get a double win. But their “hope” lies elsewhere as we’ll see.) 

But rookie syndicators trust the market to do the heavy lifting. They hope for various circumstances to line up perfectly to turn a profit. Factors like: 

• Continually compressing cap rates
• Continuous low interest rates
• The end of eviction moratoriums and other pandemic fallout
• The continuing rise of inflation

Take away one or two of these factors, and their house of cards comes tumbling down. Because trees don’t grow to the sky. And hope isn’t a sound investment strategy. 

Newbies trust the uncontrollable market for their profits. 

Pros trust the market, too. They trust the market to lower their profits. 

Seasoned pros assume the uncontrollable market will lower their property values. Pros focus instead on the more controllable acquisition process and Net Operating Income. 

They trust their talent, team, and technology to create profits in any market. And they plan to hold assets through market ups and downs to provide investors a more stable and predictable source of true wealth. 

Warren Buffett’s folly?

Do you remember the late ‘90s tech bubble? Investors made billions in this runup in tech values. I can see some similarities between what is happening today, though the excesses were even more extreme then. 

Buffett seemed out of touch. He and his Berkshire Hathaway investors missed out on stupendous profits as the dot-com bubble ballooned to staggering heights. 

Buffett was only in his late ‘60s, but he was called senile. At his annual billionaire’s retreat in Sun Valley, Idaho, his colleagues wondered if he’d lost his touch. 

Buffett addressed the group, assuring them he was well aware of the differences between investing and speculating. He was happy staying on the course that had served him so well over many decades.  

In his 2000 letter to shareholders, Buffett stated this: 

“By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates) … Speculation is most dangerous when it looks easiest.” 

Of course, we all know what happened. The bubble burst…and Buffett emerged as the hero…yet again. 

Check out this graph showing the NASDAQ’s rise and fall. 

Wikipedia described it this way: 

The dot-com bubble, also known as the dot-com boom, the tech bubble, and the Internet bubble, was a stock market bubble caused by excessive speculation of Internet-related companies in the late 1990s, a period of massive growth in the use and adoption of the Internet. 

Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble. 

During the crash, many online shopping companies, such as Pets.com, Webvan, and Boo.com, as well as several communication companies, such as Worldcom, NorthPoint Communications, and Global Crossing, failed and shut down. Some companies that survived, such as Amazon.com and Qualcomm, lost large portions of their market capitalization, with Cisco Systems alone losing 86% of its stock value. 

So, are you saying we’re in a bubble, Paul? And what can we learn from Mr. Buffett? 

I am not saying we are in a bubble. 

But I am saying that we need to learn from Mr. Buffett here. Buffett didn’t care about the price of NASDAQ or the billions his pals were making speculating. He didn’t care that his portfolio had underperformed the market for years or that people were calling him senile. 

Buffett cared about sound investing fundamentals. He cared about the same thing he had since he acquired Berkshire Hathaway in the mid- ‘60s. 

His goal was to invest in undervalued companies with sustainable businesses and products managed by competent management teams. That didn’t change because the market changed. 

Buffett wasn’t relying on THE MARKET to tell him how and where to invest. 

And I don’t think we should either. 

We can count on the market for one thing: to be the market. Just like the wind blows wherever it wishes. It is not in our control. 

Good sailors reach their destination in any weather. They are not dependent on wind or waves or temperature. 

A dozen recommendations for investors who believe this post 

If you are a Syndicator… 

Don’t overpay for assets. 

Don’t count on the market to make a profit. 

Don’t believe “it’s different this time.” 

Don’t count on the next decade to be like the last. 

Don’t overleverage with the belief that you can be just like the last guy who did it and repeat their success. 

If you want to speculate, do it with your own cash. Don’t drag investors in and call this speculation an investment.  

If you are a passive investor… 

Don’t invest with any syndicator until you’re sure they’re not a speculator. 

Don’t put all your eggs in that one basket. Diversify. 

Don’t swing for the fences. Slow and steady wins the race. 

Don’t invest before conducting careful due diligence on the syndicator and the opportunity.  

Don’t invest in overheated deals in overheated asset classes in overheated markets. (Remember, hope isn’t a sound investment strategy.) 

Don’t trust the market to generate your returns. Do trust a great operator with an excellent track record, a veteran team, and proven processes. 

Final thoughts

It’s possible to trust the market as a commercial or residential real estate investor or in any other asset type. Did you hear about the great Dutch tulip bubble of 1634 to 1637? 

Trusting your acquisition and operating skills will serve you well in any market. But please don’t count on the market to do the heavy lifting for you. 

BiggerPockets exists to help you grow in your analysis capabilities and make wise investment decisions, so you won’t have to rely on the unpredictable market. This includes bolstering your skills to navigate good markets and bad, plus connecting you to great investment managers and opportunities. Has this post helped you clarify these issues?

Just when you thought the price of Canadian real estate couldn’t get any higher, the latest data show the market continues to defy expectations – and gravity. Industry experts see no end to rising prices, in the face of growing demand and the ongoing housing supply shortage. Many young Canadians have been priced out, while older ones are increasingly dipping into their own savings to help their children get a foot in the door. Industry experts maintain that adding more housing supply into the mix is the only way to easy runaway prices.

Canadian Real Estate Prices Break Records in February 2022

February was a record-breaking month, according to the Canadian Real Estate Association (CREA), when the average home price in Canada rose 20.6 per cent year-over-year to $816,720 – the highest national average price on record. It’s no surprise that Toronto and Vancouver came in much higher, averaging $1,334,544 and $1,313,400 respectively across all property types, per Toronto Regional Real Estate Board and Real Estate Board of Greater Vancouver data. These pricey cities are skewing the national average up by almost $178,000, but even so, there’s no denying that Canadian housing prices are on a significant and sustained rise.

Meanwhile, February home sales were also up 4.6 per cent month-over-month, a trend that CREA attributes to a surge in homes hitting the market. February saw new listings increase 23.7 per cent month-over-month, following a 10.8-per-cent decline in January. It’s expected that March home sales will also trend higher, as this influx of February listings gets scooped up.

Could the tides be starting to turn? Shaun Cathcart, CREA’s Senior Economist, hopes so. “Ideally, listings will continue to come out in big numbers in the months ahead,” Cathcart commented in CREA’s February market report. “Combined with higher interest rates and higher prices, we could be at a turning point where price growth begins to slow down and inventories finally begin to recover after seven years of declines. Still, in order to turn this market back towards balance long-term, building more new homes across the spectrum remains the key.”

It seems the industry has reached a consensus on that one.

Addressing the Supply Shortage in Canadian Housing Market

Canada’s growing population continues to put pressure on existing housing supply. Canadian real estate industry insiders have been calling on the federal, provincial and municipal governments to collaborate on ways to increase the supply of homes, thereby easing pressure and prices. However, governments seem stuck on policies and taxes as a market cooling measure. Policies and proposals have run the gamut, from the mortgage stress test and higher interest rates, to a foreign buyer’s tax, a speculation tax, a home equity tax, calls to end blind bidding, and a “cooling off” period that’s currently on the table in BC.

But RE/MAX executives have voiced concerns that these measures miss the mark, attempting to ease demand or penalizing sellers, as opposed to addressing the root of the affordability crisis.

“Market conditions throughout the course of the pandemic have highlighted the increasing difficulties faced by prospective homeowners in BC. A greater imbalance between supply and demand has resulted in heated market conditions,” wrote Elton Ash, Executive Vice President of RE/MAX Canada, to BC Minister of Finance Selina Robinson in response to the proposed cooling-off legislation. “While the government should be looking at all options to ensure the public is best served, steps to increase housing supply should be at the top of this list.”

This has been the conversation in Ontario as well. The province recently formed a Housing Affordability Task Force, to address the critical housing supply shortage and resulting un-affordability. Christopher Alexander, President at RE/MAX Canada, agrees that the supply shortage needs to be addressed, or affordability will continue to decline—not just in Ontario but nation-wide.

“We have a critical housing supply issue that’s crept its way into almost every community across the country,” he said. “With the amount of developable land in Ontario dwindling, it’s high time the province explores options, such as increasing building height and density in certain neighbourhoods, making it easier for property owners to add secondary suites, converting vacant commercial units for residential use, and waiving infill development charges.”

Densification Can Be a Beautiful Thing

Alongside calls for more affordable housing in urban centres, are concerns from existing residents, community groups and politicians who fear the character and liveability of their neighbourhoods hang in the balance. But densification doesn’t have to be a four-letter word.

“It can have positive impacts on our mental and physical health, not to mention the environmental benefits of having more walkable neighbourhoods. We just need to be open to new ideas for densification and expansion of residential development, both within our urban centres and in our suburban and rural communities,” says Alexander.

“Densification can’t happen hastily. It must be a thoughtful, coordinated effort across all levels of government, that is considerate of the character of our communities, their existing residents, and those who hope to call them “home.” If done right, densification can be a beautiful thing, refreshing and revitalizing aging neighbourhoods, both in their aesthetic and in the fabric of their make-up.”

Are laneway suites in Toronto a solution to the housing affordability crisis? From the length of time it takes to save a down payment, to the housing supply shortage driving up prices, many prospective homebuyers are being priced out of North America’s fourth-largest city.

In recent years, many public policymakers, industry professionals and community activists have proposed a series of measures to address housing affordability in this major urban centre.

Real estate experts contend that the best answer to Toronto’s housing woes is to create more supply, by removing exclusionary zoning bylaws and supporting the construction of new homes. One concept that has garnered support from city hall is the development of laneway suites.

So, what are these residential units anyway, and can they help alleviate the sky-high housing market? Let’s explore!

Building Laneway Suites in Toronto: What Homeowners Need to Know

A laneway suite is a type of property that is a detached secondary unit, typically located in the backyard or back alley of densely populated cities.

While some will describe it as a newly designed mid-block property big enough for a couple of bedrooms and space for a family, others view it as a small, detached apartment above a garage that belongs to the primary house.

The laneway suite shares the main home’s water, sewer, gas, electric and waste collection services. Also known as “infill houses” or “garden suites,” these units can never be standalone, commonly likened to a basement apartment. The difference, of course, is that you enjoy more light, windows, fresh air, and the myriad of benefits that a typical above-grade apartment offers.

Experts argue that laneway suites tackle under-utilized spaces, make communities more sustainable, and create equity for the population. Moreover, there are other perceived advantages, such as respect for the character of a neighbourhood, addressing multi-generational living needs, and slowing the pace of development. Others also see it as a rental income opportunity, allowing the homeowner to generate revenue or support retirement plans.

Toronto officials got on board with the idea, launching the Laneway Suites Initiative in June 2018. This program incentivizes homeowners to produce secondary laneway suites.

“This is one of the ways we can get more housing options built and part of the City’s Expanding Housing Options in Neighbourhoods plan. We want to help people grow more housing options in neighbourhoods across Toronto,” said Mayor John Tory in a statement.

Are you interested? Here is what you need to know before you take advantage of the program:

• You can receive up to $50,000 in the form of a forgivable loan.
• You must own a single-family home on a public lane.
• You must conform with applicable zoning and other by-laws.
• You must apply for building permits.
• You must join the Affordable Laneway Suites Contribution Agreement.
• You must receive approval for Development Charges Deferral Program for Ancillary Secondary Dwelling Units.

In addition, rent cannot exceed Toronto’s average market rent, and work must begin within 120 days of receiving the confirmation letter. The maximum household income limit is $63,400 for one person and $96,000 for two or more people.

Are Laneway Suites the Answer to Housing Affordability?

Toronto has been home to laneway suites for a century, and it appears that Canada’s most populous city is leading the push in North America. However, other jurisdictions, such as Vancouver and the state of California, are incorporating laneway suites into their public policymaking efforts.

“In the world of planning and urbanism, these homes are generally known as granny flats or accessory dwelling units (ADU). American municipalities have been embracing them for a decade now. California effectively legalized ADUs at the state level in 2017. In Los Angeles, many are being built, and the city government pre-approved a set of standard plans for such dwellings by talented young architects,” The Globe and Mail reported in January 2022.

The average price of a detached home in Toronto is well north of $1 million, while condominium suites are approaching seven figures. The metropolis is begging for more supply to come online. Construction cranes dot the skyline and residential neighbourhoods, but many agree that more needs to be done. Whether laneway suites will enhance housing affordability in Toronto or not remains to be seen. Still, real estate is at the top of mind for public officials, the housing industry, and consumers – buyers and sellers.

Sources:

Ashley:
This is Real Estate Rookie episode 165.

James:
I always tell people there’s two ways you can learn construction. You’re either going to lose a lot of money and you’re going to buy that thing and you’ll figure it out the hard way. Or you can take baby steps and start interviewing people, talking to people, but also go out and start shadowing with investment companies.

Ashley:
My name is Ashley Care, and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, which is in my opinion, the best podcast on the planet for new real estate investors, because every week, twice a week, we give you the stories, the inspiration and motivation to kickstart your real estate investing career. And if you’re already investing, hopefully we’re giving you the motivation to keep going and build an even bigger, better real estate business for yourself. So what’s going on today Ashley?

Ashley:
Not much. We just got a ton of snow in Buffalo. It was a holiday yesterday, so if it wasn’t a holiday, all the kids probably would’ve had a snow, but all my friends and their kids went out skiing and snowboarding in the fresh powder and I just sat at home and powdered because of my bump knee. So I do, I am having surgery February 10th. So I think this episode will have already aired by then or won’t air or the surgery would’ve already happened by the time in this airs. So I’ll probably hopefully be in rehab and recovering and have a complete ACL and MCL again.

Tony:
There you go. Back to old Ashley. So just no more snowboarding for Ashley, right?. You can just at walk from the side.

Ashley:
AT least not for the next six months, but next season, oh yeah, I’ll be back up there.

Tony:
You’ll be back out there. Okay. Are there like training wheels for boards. Like how can we get you like on a… or we’ll just keep you on like the bunny slopes next season?

Ashley:
No, actually Tony, I’ve been snowboarding since I was like 10 or 12. I’ve snowboarded it for a very long time. I just thought that I was-

Tony:
You were feeling a little gray that day.

Ashley:
It was like my first time on a super big hill and I went way too fast. It was definitely user error. Like me just thinking that I was… my body was still 17.

Tony:
Yeah, you got humbled is what it was.

Ashley:
Yeah. So and then I went into a woods trail and I hit some roots and they just flung me and ping pong me off trees, but…

Tony:
Well, hopefully this is the last time. I don’t have any torn MCLs or ACLs, my life isn’t as exciting, but…

Ashley:
Yeah, you’re actually getting a better shape.

Tony:
I’m trying to.

Ashley:
You have your fitness competition-

Tony:
Yeah. The fitness competition is coming up.

Ashley:
… you haven’t talked about that in a while.

Tony:
Yeah, it’s actually a little less than 10 weeks away. So it’s nine weeks and like five days away. I’m honestly really excited mostly because I’m kind of over the diet and waking up at the crack of dawn to do cardio and just eating every three hours. Like it’s starting to weigh on me. So I’m praying for the end competition, but it’s always fun. It’s always a good challenge. So I’m looking forward to it.

Ashley:
Yeah. When I went to Tennessee to visit Tony and record a podcast live there, he had all his meals that he had brought with him from California. And it’s like, I don’t know, 11:00 at night, everybody’s having a drink playing pool and there he is sitting at the kitchen table eating one of his meal.

Tony:
Eating some ground Turkey meatballs. Good times. Good times. Well, we got a crazy good episode today. And for the rookies that are listening, this might be my most favorite episode that we’ve done so far are only because our guest goes so deep into flipping and specifically on like how to estimate your rehab costs and there’s so many pieces. But today we have James Dainard on the podcast. So Ashley, you know James pretty well, just give like a really quick why we brought him on for this episode.

Ashley:
Yeah. So James Dainard and I probably met like a year and a half ago. He’s an investor out of Seattle, Washington. And every time I am with him, I’m mentally taking notes or I’m physically taking notes and scribbling down as much information as I can about what he is saying. So I finally found a way to get him onto the Rookie Podcast because he is not a rookie, but Tony and I have decided that we want to kind of incorporate and add into our series, having some experienced investors on where they just go down into a niche.
So today’s niche is going to be construction cost and doing a rehab. So this could be, if you’re doing a flip, this could be, if you’re doing a BRRRR for rental property, we are going to break down exactly how James process works and what his system is for getting a property, estimating the budget, getting contractors, how to find contractors, putting together the contract, putting together the scope of the work. So a ton of great information. And we actually had to, I get into two episodes. So on Saturday, instead of our usual Rookie reply with questions, it will be a part two series with James Dainard. So let’s get to it and let’s bring James onto the show.

Tony:
James, welcome to the Real Estate Rookie Podcast, where they’re super excited to have you on. I’ve heard so many amazing things out you from Ashley. So I’m glad to have you here, glad to share your story with our audience, well, welcome board, man.

James:
Yeah. Thanks for having me on. I’m excited to be here. I had many late night conversations with Ashley, so now we got to do a formal interview.

Ashley:
It’s only taken two years of knowing me to finally get on the podcast.

James:
I know, I’m starting to feel a little rejected at this point.

Tony:
Yeah. So James, for those who or for those that don’t know you, if they want your full backstory and all kind of how you got started in real estate, if they go back to the Real Estate Podcast, episode 338, you were interviewed there, you gave your whole backstory, but if you can just give us like a 30,000 foot view quick snippet of kind of who you are, what you do, what’s your businesses and what you’re going to talk to us about today.

James:
I’m James Dainard, I’m an investor out in the Pacific Northwest. I’ve been an active real estate investor since I was 22 years old, when I was a senior in college. We since kind of starting our company in college, I went from door knocking to buy my first deal. And then since then, we kind of expanded out and created a multilevel real estate investment company to where we own a brokerage, this source is on and off, market properties, we have a lending arm that finances investors in Washington State with hard money, short term construction financing. And then we are very active investors in general. We’ve been involved about 3,000 homes and 3,000 transactions with investors in the last 15 years. So we’re just an active shop.
We’re known for value add construction. A lot of the deals that we do with our clients and ourselves are heavy value add where we’re buying something that where the numbers may not look good on paper at first, but the right construction plan then allows us to kind of maximize it out. So currently right now, we’re working on about 30 flips ourselves, fix and flip. And then we have about 400 apartment doors under construction. So we do a lot of heavy lifting, a lot of construction plans. And then we like to get our hands dirty. We’re not really carpet and paint guys. We want to see the potential in the structure and kind of rip it apart. So done a lot of constructions, seen a lot of different things, probably crazier things than what people can ever imagine, but we’re just very active investors in the Pacific Northwest.

Ashley:
So I’m actually doing one of those flips with James. I’m doing my first flip and we are actually documenting the whole thing. But I flew out there for my first time to look at the property that were flipping and I got to see James process as to, “Okay, this is how we analyze a property that needs rehab. This is how we build the scope of work.” And I wanted to have him on today to kind of talk about the process of doing a rehab.
So kind of, you get a deal, you get a lead in, what do you do with the property to kind of estimate your rehab is? And then once you get to go look at the property, what are the things you should be taking with you? What should you be looking at? What do you need to know when you’re looking at the property? And then lastly, once you get that property, bringing in contractors, scheduling them, how that all works. And then most importantly, like building your budget, what are the construction costs going to be? So James you want to kind of like kick us off here as to what’s the first step when you get a lead that you want to analyze for a rehab.

James:
Yeah. The first step that we do before we bought any property, and we’re active investors so we buy all sorts of different types of things. Some are even new projects for us where we’re maybe buying something that we’ve never done before, we have to build a new process. But it always comes back to before you buy that first rehab, and I did learn this the hard way, is you want to build your team right, because everybody is out there and is chasing the deal right now. There’s no inventory. It’s hard to get that next goodbye. But you know, I hear it all the time, there’s no deals out there. Well, there is deals as long as you can put the right plan together. And the right plan together, it means that you have the right bench and the right resources to kind of make the margin.
A lot of times when you’re, Pacific Northwest, we have a very expensive market, it’s hard to get a deal. What we say is we have to vent the return. The right plan will create the right profit margin. But that comes down to building your bench. And before you jump into your first rehab, you want to make sure, one thing that we always do, is we have three active general contractors that we’re currently working with. The reason why we always have three is because sometimes they’re busy and their pricing might go up at that specific timeframe, so we always want to get three quotes and we also have two to three subcontractor trades for every line item in the house. So we have two to three plumbers, two to three electricians, two to three framers, two to three roofers and on from there, because as the market gets more expensive, it’s more competitive, the margins also get more compressed.
And so you always want to make sure you have that bench to where you’re not getting stuck with the same guy that’s giving you one price that you have to go to that price commitment. So go out there, build your bench, find your contractors, you want to go out and talk to investors, go to meet up groups and start talking to people and then kind of getting qualified from there. Or start talking to them about pricing and find out if they work with investors and kind of build that bench to where, when you go out to that project, you’re bringing out people that are, A, used to working on your type of business plan and then also that you can make a quick decision because if there is a good deal on the table, you can’t sit around and wait for it. You got to pull the trigger quick. The biggest thing is, go out and find those contractors that work with flippers or BRRRR people or investors. They can’t be the contractors that are working on your mom’s house. That’s a different type of contractor.
And so you want to go find those people and then start kind of getting them in the door. And then also at the same time, before you get going and you buy your next project, you want to make sure that you have an understanding of construction. And if you don’t, you want to take baby steps and start looking for different types of projects are smaller ones. I had to get a crash course on… I mean, I always tell people, there’s two ways you can learn construction. You’re either going to lose a lot of money and you’re going to buy that thing and you’ll figure it out the hard way. Or you can take baby steps and start interviewing people, talking to people, but also go out and start shadowing with investment companies, see how you can be of service to other big investors. And they’re going to teach you the ropes for free because you’re being of service to them.

Tony:
James, so much good information. Like my head’s spinning already and we’re like five minutes into this conversation, but I want to circle back about the team building, but before I do, I just want to highlight one thing that you said, you said you have to invent the return. And I’ve never put that way before, but what are great phrase. People, especially in today’s climate, feel that there are no good deals out there, but to your point, if you can find the property and develop the right business plan around the property, that’s how you find a good deal. I didn’t want that to kind of go over peoples head, but what a cool phrase you said there.
I want to go back to the team building James, because I think for of our listeners, these are first time investors, people who are aspiring to do a deal, but really haven’t done them before. So if I’m that new guy or girl that wants to get started, where am I going to find these contractors? Even for me, I was doing a flip out here in Southern California, I was looking for another contractor and no one wants to share who their contractor is because they want to keep their contractor for themselves. So where am I going? Who can I reach out to? What resources do I have as a new investor to find that contractor and start building that team?

James:
Yeah. And that’s a question we’re all having right now because since the pandemic, there’s been all sorts of things that have happened. Material cost has spiked, there’s labor shortages, and it’s harder and harder to find guys. I mean, even for me who’s been doing this for almost 20 years in the Pacific Northwest, I know a lot of people, it can be tough right now. And so the ways that we have found additional contractors, there’s a couple different things that we’ve been doing. We had to, A, we had to invent the return again. We had to create different are types of ways outside the box to find these resources. Our favorite way right now is to find actual contractors that are used to working on our model. There’s two things we do, we track permits. So I go around and I look on the Pacific Northwest, there in general, you can go through and look at what investment properties were sold, whether it was at a foreclosure auction, it could be a bank on property, it could be a fixer.
And then in the Pacific Northwest and almost every different state, you can actually pull in and reverse engineer and find out if that property address, like I can go on City of Seattle Permit Center, put an address and that’s going to give me every permit that’s been pulled on that project. If it’s a flip project and I know an investor bought it, that means most likely those trades are already going to kind of be in my wheelhouse for what I’m trying to accomplish. They’re used to working for fix and flip people, they’re working for investors in general. And so what it does is it actually gives me a call list as to where I’m not going on the internet and searching out plumbers and looking for 100, I’m now looking at 10 and out of the 10, I kind of shrunk my box into people that have already working for people like me. That’s our favorite way to do it.
In addition to, people talk about driving for dollars for deals, I drive for dollars for contractors. If I have an open day, or if I’m out looking at projects and I see a house that’s being flipped, I stop in, I introduce myself to the contractor, I explain who we are and that we need more kind of work and then we start interviewing them right there. In addition to, I can kind of see those people working on site. If I pull up to a flip house and the site is completely messy and there’s doors falling apart, windows, there’s garbage everywhere, I don’t want to hire that guy anyways. And so it’s actually the best kind of interview process because I got to see them working. And then also kind of see what they’re doing, I can ask them what they’re charging the people on site. And so I can visual kind of look at that.
So A, I track permits, I drive for dollars. And then the best thing too is just working with other investors for new people like in the Pacific Northwest, find the right brokerage and the right team, you know it goes back to building your team, for our investors, we have a resource list for them. So when they buy a property through us, we’re not just your traditional real estate brokerage, we’re here to service the client all the way through, not just find them a deal, we want to make sure that they can execute on the deal. Part of executing is giving them resources. So we are constantly filling up our electricians, plumbers, flooring and all our trades to where we know that we can refer them out to our client and that they can be successful. We don’t want them overspending their budget because we want them to maximize out that deal.
So work with maybe a right brokerage. If you find the right broker, there are brokers that focus on just investors. They typically are going to have referrals for you too. Another good way that I’ve been finding tradesmen too is I actually talk to my suppliers. I recently called my cabinet shop who we refer a lot of people to them, well, probably 100 to 200 jobs a year, and I called them and said, “Hey look, we’re giving you all these cabinet orders, you sell flooring. I’ll tell you what, I will buy all of my flooring and refer all of my flooring to you if you can give me six installers.” Because the flooring company I was working with was starting to get busy, they were starting to get expensive. And so I asked my vendor for help. And then he referred me five good contractor or flooring installers that work for investors.
And so just anytime you’re out talking to anybody, just ask the question, “Hey, who do you know that does this?” If you’re giving someone business, ask them for some favors back. If one of my clients calls me and says, “I’m jammed, I need an electrician for my house.” We’re going to go help them find that because as a broker and being a team member, we want to make sure they can get through that project, so then I can list that project down the road too. So as you’re trying to find contractors, drive for dollars, look for permits, work with the right type of team members, the right broker, the right hard money company. We finance people too in the Pacific Northwest. We also would refer them contractors too if they’re in trouble because it’s in our best interest for them to get that house done, because we lent them the money. So really build that good team and that team can give you tons of different types of resources.

Ashley:
James, once you get these referrals or you get these people, a list of contractors to use or vendors, what’s the next step after that? How are you actually vetting them? Or are you’re just taking someone’s word for it that this contractor will work?

James:
That’s a great question, it’s… because that is tough, right? People will tell you whatever you want to hear. Especially in real estate, you have mortgage guys that will always be able to get your loan done when it might be more complex. You have contractors that, “I can do a great job for an amazing price,” but you don’t know who they are. And depending on your state too, like in Washington State, it is not complex to become a contractor. You fill out a form, you send in a check, you get a bond and you are magically able to rip a house apart, which is kind of crazy because construction is complex in general. But the things that you always want to check before you hire those people, so what I do on every referral or every generalist referred to me is, A, I want to check the source. Who referred them to me? How many projects have they done? Have these people worked for those people before? If it’s just like, “Oh, my buddy told me about this guy,” then it’s not that good of a referral.
And then when I get these people on the phone, the first thing I ask for is what’s their license number. I will not hire unlicensed people. We pull a lot of permits, there’s a lot of liability in not doing so, you can get fined. So we want to make sure that they have a license. The other reason I like to hire and make sure they’re licensed and bonded is because that means they can run a actual professional company. You’re not just hiring some random guy that’s going to tear your house apart that can cause a lot more damage for you down the road. So you want to make sure that they’re licensed, that they’re bonded. I actually check to see how long they’ve been in business too on their license. Like if they just got their contractor license four months ago, I’m going to ask them where they worked prior before that. Like did you work for someone before? Or if they said, “I had a different company,” I want to know what happened to that company. I want to know the name of that company.
I’m going to pull up to see if they had any claims, because you can also check online to see if they have any claims against their bonds. The other thing I want to do is I always make sure I get addresses of three recent jobs they did for investors. Not for a homeowner, they need to be the same… Remodeling for homeowner is different than remodeling for an investor. So you want to make sure that you get the addresses of the projects they worked on. I like to pull up those addresses, see what they sold for. I want to see what the pictures look like. I want to see how long it took for it to sell too. Because if it took 90 days for it to sell in a market that usually takes five, was it a pricing issue or was it a quality issue?
And so those are things that I’m always going to check. And then I always get the name and can refer to. The name of someone that can get me actual references. I want to talk to them on the phone. And this is all a lot of work and it can be quite invasive. A lot of my clients are like, “Well, the contractors get a little annoyed when I ask these questions,” and I’m like, “Well, if they’re getting annoyed by you… these are all valid questions, probably not the right person to be hiring.” And so if someone pushes back on these questions, I instantly cross them off my list because nothing’s worse than hiring the wrong guy. And so those are always my first set of questions. And then I go into my pricing questions from there because I want to make sure, A, that they’re qualified, but then also they can actually do what I need them to do.

Ashley:
James, before we go in to the pricing, why do you prefer contractors that have worked for investors and don’t care if they’ve done work for homeowners? What’s the difference there?

James:
The reason being, like if you’re working for a homeowner, and this is why I would never do a renovation for a homeowner it’s, it is a different business. Construction is not all the same. Commercial construction is not the same as residential construction. Multifamily construction’s a lot different than actually fix and flip construction a lot of times, like how you do it, how you… what kind of materials you’re putting in. Custom and homeowner construction is also completely different, because they’re usually pricing things up higher because to be perfectly honest, investors are a lot of times easier to work with than a homeowner because you’re not building your dream house, you’re building a home that can create revenue and can create a return or maybe it’s a rental property that you’re trying to keep your cost down and you’re trying to make it more bulletproof rather than visually appealing.
A homeowner changes their mind a lot. And so contractors build that into their pricing. They got to have way more conversations with the people, they got to get a lot more feedback, the people will be moving things a lot more. Just like when I’m doing construction on my own personal house, I have a lot more opinion on it than I do a flip a lot of times. And so those guys, they’re used to dealing with that, like a custom build, there’s a lot more expectation, there’s a lot more personal opinion. And so you should charge more for that. It’s no different than if I’m buying a fix and flip property and it has a lot more hair on it, I’m expecting to make more money because it’s more complicated. If you’re a contractor and you’re working for a homeowner, it’s going to be more complicated most times.
The other thing is too, it’s about the subcontractors that they’re actually trying to go find. If it’s a custom home builder, they’re going to usually get their supplies from a very consumer friendly shop where they can send their customer down to a design center. They’re going to work with a designer, they’re going to pick out all their materials and then they’re going to put the plan in play, whereas we don’t do that. We pick the materials first, we pick the budgets and then give it to the contractors, so then we can control the budget. So it’s just a different format and it’s a different end product at the end of the day as well.

Tony:
Yeah. Thanks for clarifying that, James. I think that distinction is really good to know. I just want to go back to the event, the return point you made. Really quickly one more time. I think that I understand at a high level what you mean by that, but I think some of them are listeners might be wondering, what does that look like in real life? So when you find a property, how are you finding that undiscovered potential that maybe other investors are passing out? What is it that you’re looking for? How do you know if it has the opportunity to have that in turn or that return invented? Give us some insights into what that looks like.

James:
That’s a great question. And that always comes down to, are you creating the right plan and are you able to control the costs? Because fix and flip or BRRRR properties, they’re all the same. We’re buying something at a certain price with a certain margin in it. The middle is going to dictate how good of a deal that is. If you buy something at 60 cents on the dollar, like you can buy it for 60 cents, it’s worth a dollar. That sounds like a goodbye, unless you’re are spending 45 cents on your renovation, then you’re over market at that point. And so it comes down to what’s the middle number. And so what we do is we’ll look at it a lot… Every deal I look at, we cut it up three different ways. We’re going to look at it, “Hey, what’s it going to look like as a cosmetic turn?” If we just do carpet, paint and a quick turn, that’s usually going to be a lower profit, lower renovation by a higher cash on cash return on an annual basis.
That’s where most people are going to look, right? Most investors, especially right now, there’s a lot of newer investors in the market, they’re going for the normal plan that everybody’s looking at. You know, I got a four bedroom, two bath house, a comp is a four bedroom, two bath house, I got to replace the cabinets, countertops, windows and then that’s going to get me at this price. Whereas we might go in and say, and they’re going to spend $80,000 to do that, we’ll go in and go, “Well, instead of spending the $80,000, because that’s usually investors’ first question is, “How can I get this renovated for as cheap as possible?” Sometimes renovating it for the cheapest possible thing is not the right plan. Where we’ll go in and say, “Well, instead of having a four bedroom, two bath house, we’re going to rip this all the way down to studs and spend $150,000 on it instead and it’s going to take us three times longer, but we’re going to create $200,000 more in additional value.
And we’re not afraid to go for that higher… we always want to know what highest and best use is for the property. And it doesn’t matter how complex the plan is, as long as the return’s higher at that point. And in Seattle, there’s a lot of really old homes, 1900 and 1920s with old basements, they need a lot of structural work, a lot of reconfiguring. The more reconfiguring you do, the more complex and harder that it is at that point. We’re just not afraid of the hard work. And then part of that is we know the cost that it’s going to take to get it through the hard work. If you don’t know the cost, you can’t estimate it correctly. So if I’m doing a studs down house in Seattle, and I think it’s going to be… I’m saying it’s going to be $200,000, I’m going to break down how I’m going to get there.
If I bring a contractor out and I can’t control that contractor and the construction to keep it at $200,000, I can’t invent the return then at that point if every other contractor’s coming out and saying it’s $250,000. So what we do is we look at the total budget and we don’t just go to the normal route of hiring a general, putting the plan in play. We hire a general, look at where he’s expensive, take those items off, plug in our own guys to take our costs down and that’s how can create that margin at that point. So we’re not creating the margin on the buy, we’re creating it by reducing cost and putting the right plan in play. And that’s why we say, we invent it because it’s really on us moving the pieces around rather than just going A, B, C make your profit at that point.

Ashley:
Can you give us an example of that? Like a project you’ve worked on recently, what were some of the things that you took out that you put your own people on just to save some money?

James:
Yeah, so they’re… I like to call it the bundle method in construction. I like to get a full scope of work for a contractor, and I get all their… and when I get my scope of works, I always make sure that they’re broken down for material costs and install costs. I don’t get lump sums. I want every line item broken down at that point. That’s how I can kind of invent that return, because I can pull out the expensive parts.

Ashley:
And that’s another thing too that you should expect from your contractors. How you said, if they’re like getting annoyed or mad that you’re asking so many questions, they shouldn’t be annoyed or getting mad that you’re asking for this breakdown. Because if they’re actually taking the time to actually put together a valid budget for you or an estimate for you on the cost of this, that shouldn’t be a problem to get that breakdown.

James:
Yeah. And you don’t want to burn out your construction team. I mean, if you’re a difficult client, no one’s going to want to work for you. And so it’s about having really good communication with your construction guys is, if I have a general come out and he bids electrical for… he has his own electrician. That’s his guy or his two guys. He is also dictated on their pricing at the time. We don’t know if his two electricians are really booked out and maybe they’re charging a little bit more because he’s charging their cost plus 10% to 15%. And so I’ll just ask the question, say, “Hey, your electrical is really high, what’s going on?” And he might say, “Well, our guys are busy, costs have gone up.” So what I offer him, so then it still makes it worth his time, because if I have a really good general, that’s going to show up and do his job and has good communication and works with me, I want to keep him on my team and on my bench.
I’ll give him an offer. I’ll say, “Hey look, what I can do is I have three more electricians. Let me price this out.” And if they come in lower than his, he’s at $20,000 and let’s say my guys are bidding at $15,000. And that’s where it goes back to that bench, always have three people on your bench so you can plug this in. So I’ll get three quotes and then I’ll take my lowest quote and say, “Hey, I’m going to use this guy instead, let’s pull this off your scope of work.” If he has to manage them at all, I’ll still pay him his 10% on top of my bid, because he’s still doing the work. So I’m just saying, “Hey look, I’m still paying you, I still want you to do the work, but I just want to plug this guy in because it ends up going back in my pocket.” And typically, people are going to go, “Yeah, that’s a good way,” because you’re still taking care of your general, he’s still going to help run your site and at the same time you can reduce your cost down.
Typically, in the bundle method, I like to have my general do the framing, the plumbing, the electrical, the windows, the gutters, the roofing at that point. But if any of those line items are high, I will pull them off, let the contractor kind of help me put it in play, pay him for it. Or maybe the guy that wants nothing to do with it. A lot of time generals are bidding stuff high because they don’t actually know how to bid it. They’re going to say, “Well, I don’t want to get burned by my electrical quote because there’s so many variables in this house. You got to take down studs, we got to run new 200-amp service, we got to bring the meter in, whatever it could be.” And because they don’t know they’re throwing a real high number at it. Whereas, I like to know my number’s going in and so you’re almost doing them a favor at that point because you’re taking off the unknown and you’re plugging in an actual at that point.

Tony:
So James, you clarified a question that I had earlier, but I just want to make sure that I’m understanding it the right way, because you said up front that you like to use GCs. And you said you have about three general contractors that you rotate through, but you also said you keep two to three subcontractors. So the reason that you also keep the subs on your team is for this like substitution method that you just talked about?

James:
Yes, correct. Yeah. So we can always… So it really makes us and our general as a team. It’s better for them if I’m making money and I can go buy another house and they can keep working. I’m still paying them, but I’m giving them additional resources at that time. It helps them out, it keeps their cost down. And I always want that option because as a house, it’s not different than any business.
If I’m a manufacturer selling this pen, I got to sell this pen, I need to buy these. I sell 10,000 of these a month. I’m always going to have a backup supplier because if I can’t hit my… for some reason, this pen company goes out of business, I need to make sure I can still sell them to my customer or if this pen suppliers telling me that one cent today could be one and a half cent tomorrow, back down to one cent and then that’s messing up my margins, I need to be able to plug in that backup and kind of help keep your margins the same. And it is just, you have to have those people in line because just like anything, if you call that person and they’re busy, it’s going to cost more. And so you have to be able to outlay out.

Ashley:
So now that we know how to find a contractor, how to use a general contractor, how to bundle, use the plug and play. Let’s talk about actually getting together a pricing, a budget sheet before you even go and see the property to help you accurately analyze the deal. So you talked about how you get pricing from contractors before you even hire them. How does that incorporate with your budget sheet?

James:
That’s in a very important question. Because we budget, it’s all based on logic. Budgeting should be treated the same way as the analysis for the sale or the rental, the lease up. If you want to know how much it’s going to lease for you, pull comps. You want to know how much it’s worth, you pull or you pull rental comps. If you want to know how much it’s worth, you pull actual comps. So with contractors, we want to be able to break it down the same way. So what we do, the best thing that we did and this, we started doing this about five years ago, is instead of going lump sum, when we were first brand new investors is it would be like, “Hey, we need a kitchen, we’re going to put $10,000. We need a roof, it’s going to be $10,000. We need to rewire, it’s going to be $12,000.” It was always those lump sums and it was just a rough ballpark.
And that’s not a terrible way of doing it, it will kind of give you like a ballpark. And it also worked a lot better when there was tons of contractors around. That worked well in 2012 to ’15, because there wasn’t as much work for guys. And so they would do more to make that deal work. Now there’s too much work and there’s less guys and so what we want to do is how we break down our budgets so we can do the plug and play is we take all of our line items. If I’m calling an electrician, I write down what scope of work do they typically do. Well, I know they’re going to do a panel. I know that they’re going to knee a meter. I know that they’re going to do a mask. They’re going to possibly fully rewire house. They got to trim the house out and then they need to install fixtures. Those are the core things that I need to know in a house.
And so when I’m talking to an electrician, the first thing I do is I qualify myself and say, “Hey, we’re Active Investor, we are a flipping company. We do volumes so we can give you numerous jobs.” So as I’m telling them, I’m telling him I’m going to give him more than one job down the road. I also tell him my payment structure. I’m touching on this before I ask them the questions. And the reason being is contractors can be a little bit of a prima-donna right now because they’re so busy. They’re being very selective on who they work for them. And I don’t blame them, they should. That’s their business to do it. But qualify yourself so then they also kind of get off the edge a little bit. They don’t want someone just drilling them with questions.
I tell them who I am and then I also tell them how fast I pay. “Hey, once you’re done, we will cut you a check within 24 hours of it being done.” People like hearing that. We’re not saying we’re going to pay you in 30 day from when you’re completed, we’re going to get you paid right away. So you qualify yourself and then I start asking them questions. So now they’re less on defensive side. They know who I am, they know how I pay, they know I have experience, I’m going to take care of them. And then I just say, “Hey look, before…” The other thing I do is I value your time. I don’t want to take you out to a bunch of houses because they don’t want to do it either. Go bid them, just not to get at the work. And so the next question is I’ll say is, “Hey, can we just run through a couple different pricings?” And based on my prior jobs or what other investors have told me in the market or other electricians, I just ask the questions. “Hey, can we go through some core costs?”
“On an electric panel, typically, we pay 2…” And I don’t ask them for a number, I give them a range. I say, “A typically, I pay $2,000 to $2,500 for a panel. Is that about right?” And they’ll say, “Yes, that’s in there,” or, “No, I’m at $3,500.” And then I actually document, we actually database these people and write what they’ll do them for. Because they could be a really good electrician and I really like them, but they might be costing too much. And if I’m in a jam, I’ll still call them out but I’ll know their pricing. So be for a panel, I go $2,000, $2,500 to $3,500. For a meter, they usually cost me $500 to $700. So I just kind of throw out ranges and see where they bite on. And I go through and I ask them those same core questions. How much do you charge to rewire on a per square foot basis? Just roughly. You say $3 a square foot. And then lastly, I’m going to say, “Well, how much do you charge to put each light fixture in?”
Typically, that’s going to be $25 to $50 depending on the type of electrician per fixture. Based on asking five questions, I can get 95% of the way there with my quote with my electrician. Because is I’m going, “All right, if I need to rewire a house, I know what my panel costs, I know what my meter costs, I know what my mask is going to cost. He said roughly $3 to $4 a square foot to rewire just for Romex, my house is 2,000 square feet, so that’s going to be $6,000 to $8,000. Trim out is a dollar square foot, so that’s going to be another $2,000.” And then I can count out my own light fixtures and go, “Okay, he’s charging me $50 a fixture, it is going to be this.” And then at that point, it’s just up to me to pick the right spec.
If I’m going over budget, I’m going to look at my comps and go, “Well, I got to hire this guy that’s charging me $50 a light fixture, whereas usually it’s $30 from this other guy. Well, maybe I cut down my material cost by $10 by sourcing the right thing and I’m still going to fall right about the same budget. I can hire two different guys with two different pricings and still get to the same pricing as long as I’m picking the right specs at that point.” And so it’s about kind of logically breaking down every little section.
If it’s a flooring guy, I don’t ask him how much it costs to install hardwoods because that’s a… laminate floor, because that’s a open ended question. What kind of floor? Where are you getting it from? What’s the price for the allowance? I’m only asking them, what do you charge to install it? After that, it’s up to me to pick the right material that fits inside my budget. And so it’s just ask the direct question and they’ll appreciate it too, because you always want to go back to, “I don’t want to waste your time, contractor. I value your time. So if we can just answer these questions, I’ll know when I can call you out.”

Tony:
I was just going to say that. That was like a master class in estimating rehab costs right there. And for all of our rookies that are listening, almost every episode has like that two to three minute segment that’s worth just like putting on repeat and that was it right there. I think so many new investors, they feel, and this is how I felt too when I first got started, it was like we’re in it. It just feels so overwhelming to try and identify what I might potentially spend on a rehab, but if you just call any trades person and ask, “What do you charged to put in a light fixture? What are you charged to put in a new panel? A plumber, what do you charge to put in a toilet? What do you charge to re…” Like you just start slowly piece by piece, getting all the information that you need and once you’ve got everything, it’s just a matter of putting it all together. So man, it’s so eloquently put, I love that approach and I’m sure all the Rookies listening will as well.

Ashley:
Yeah. And James, you have the Excel spreadsheet that you actually put those figures in. So it’s really just plugging in the square footage or the number of light fixtures and boom, you have your budget estimate.

James:
Yeah. And it makes it very easy to get your budget really close. I mean, me and Ashley, we actually mocked up a budget for a flip and I ballparked it. And I was like, it’s going to be about 115, right? Because I’d memorized my budget sheet. And we were within 1% of that number once we cranked out all the numbers. So by having a sheet, so we take all these install rates and then I have four different budget sheets. Each budget sheet has a different allowance in there based on the quality of renovation. So if I’m doing a rental property, I have my rental budget sheet which is calling for like bulletproof items but also very in the expensive fixtures to where it’s going to fit inside my kind of model. Like I’m not going to put a $50 light fixture in a rental a lot of times, I’m going to go with a $10.
And then from a high end renovation, my light fixture allowances will maybe be at like $200 rather than $10, but it’s the same install rate that’s in there. So the budget sheet’s only changing based on the specs that I’m putting in. And it allows me to crank through budgets very quickly and when I’m underwriting and make a decision fast to where I can bring people out. In addition to, the best thing about asking these people these questions and putting into a sheet, it happens constantly where you are going, “All right, I have my budget,” let’s say my plumbing’s $12,000, “I bring my out there, he comes back with a quote of $15,000.” And I’m going, “Okay, I’m $3,000 over. Why?” I then bring him into my office and I don’t do the whole, “Hey, you’re over budget, can you help me out here, thing.” I go, “Hey, I just got some questions for you.”
I don’t even talk to him about the quote, I go through. I go, “Hey, how much do you charge for a tub to install? It was $500, right? Okay. How much do you charge per fixture? It was $50, right? How much do you charge per roughing?” I literally ask him the same interview questions I asked them prior to having them estimate. And then I get to the end, I go, “Okay, so that’s what was inside my budget. Why are we $3,000 high? What am I missing here?” And 95% of the time, they don’t have an explanation. And they go, “Okay, I will do it for $12.” And then you can also kind of guilt them later. Be like, “well hey, I asked you all these questions,” and I always check with them every two months, are these numbers still right? And I go, “If you’re going to raise your pricing, you got to tell me before I buy the house. Isn’t that fair, right?” Because it only comes down to fairness.
And so you can almost guilt them and instead of going back and forth over $1500 or $3,000, they’re just like, “Okay. Yeah, you’re right.” I’m like, “So next time I’ll pay you more if the pricing goes up, but this time, why don’t we stay committed to what we agreed to?” And it works 95% of the time. Or they’re going to say, “Hey James, you missed the mark on A, B and C and here’s why,” and then I can go, “Okay, I need to make sure I pay attention to that on my next project.” Yes. There’s a good learning lesson in there as well. So organizing the pricing, having it in a sheet, will help you negotiate as well. But it also teaches you lessons on how to have less variance on your next project.

Ashley:
So before we move on to the actual property, let’s kind of recap how you can do everything that you just mentioned before even going and looking at a property. So you can build your team, calling contractors, getting referrals, you can find all of your contracts before you even see a deal or analyze a deal. Then you can go on to building your budget, your scope of work by looking at the property tax records. What’s the square footage, how many bedrooms, how many bathrooms you have. And then also going and looking at the pictures. So whether you’re buying the property off the MLS or you have a wholesaler that sends you pictures, look at the pictures of the property. And James, you use, I think the first step that you actually do is, you enter the address and pull it up on Google maps, right? And just look at the area and look at even the exterior of the house to what that looks like.

James:
Yeah. When I’m prelim underwriting before, again, you also don’t want to become the investor that calls everybody on a fire drill and sends everybody out just for you to get there and go, “Never mind. It’s not a good deal.” And then the contractor’s annoyed. He’s going to start charging you more for the waste of gas trips at that point. And they also think you don’t know what you’re doing. If a contractor thinks you don’t know what they’re doing, that means it’s a more pain on them, which also means they’re going to charge you more. So yes, the first thing we always do is wholesaler sends me a deal and says, “Hey James, what do you think?” I go through the photos, or first thing I do is I take it, I go on Google Street View. The reason I do that is because that gives me a very actual look of what it looks like right now.
If there’s trash everywhere, but there’s overgrown sticker bushes, that means there’s going to be a ton of deferred maintenance, which is going to lead for unexpected issues throughout the project or a weekend warrior house. If I see like a bunch of weird roof lines on a house, I’m going to go, “Okay, this is going to be a weekend warrior nightmare house where someone did this, not logically. It’s probably going to cost a little bit more these way.” So that’s the reason I use the Street View at that point. Also, I like to see the yard because whether I need to put fences and stuff like that in. So I can get a lot just off the visual. The second thing I do then is pull the tax record because the tax record’s going to give me the general square footage for the house, the unconditioned space, a remodeled house may be $50,000 a foot on the upstairs, but if I’m finishing the downstairs and it’s raw, it can be a $100 to square foot. So I got to blend that out.
It’s going to give me a very good kind of baseline of where the square footages are. It’s going to tell me how many bedrooms and bathrooms I have. And then if I need to add bathrooms, that’s going to tell me whether I need to re-plumb the house or not. And then from the tax record, I also can see the lot size. Like how much do I need to allocate for the landscaping? Then I go into the photos and by having the square footage and the photos visually of what I can see, I then can go through my spreadsheet that’s already built out with pricing and just start ballparking it through. And as long as I’m within 10% of where I need to be to make that deal work, I’d say actually almost 20%, I’m going to go look at that house.
If I’m 30% off, I mean, I’m an honest conversation with the seller, the wholesalers, saying, “Hey look, this is just not going to work for me. I’m going to need to be this low on price and here’s why,” because having a prepared budget also helps me clarify the wholesalers to give me like the actual right price with logic. But you can really reduce wasted time. Like if you stop what you’re doing to go look at every different deal, you’re going to miss a good one over here. So by doing this, by going through the photos, going through the tax record, I can get my budget to 90%. It’s going to tell me whether I need to go out there or move on to the next thing or get the price down. And if I need to move on, I’ll just move on to the next one at that point.

Ashley:
And one last thing to add to that too, is that you showed me that you pulled the comps. And not only just to see what the sale price is, but also to see what the finishes are in the property so that you’re not budgeting for super high end finishes like granite countertop when everything else in the area has laminate or something like that. So using the comps to kind of help yourself budget too and pulling what other flippers or what other property owners have in that area and what is actually worth going for for that expense.

James:
Yeah. The comps are going to dictate the scope of work and the most important thing that you can get any contractor or that you need to implement into this business is a clear scope of work. Where I made a lot of mistakes as a bit new flipper or new renovator was always like, I want to do the cabinets, the millwork, the roof, the windows and the flooring. There’s a lot of ambiguity in there, there’s a lot of different… that can go 100 different ways at that point, you could put the wrong type of flooring in, the wrong type of materials, and so the comps are going to dictate. And so we spend a lot of time looking through every photo of those comps. What kind of materials does it have in it? Are these path inch laminate floors or are they hardwoods? That’s 100% difference in material costs.
Are they hollow core doors? Are they solid wood doors? Are they cheap cabinets from maybe a builder or affordable builder shop or are they custom cabinets? That could be a difference in $20,000 on your cabinets. Same with appliances. So we’re not only just looking at the materials, but then also we’re looking at what’s the comp’s going to dictate the scope of work. If I have a four bedroom, two bath house with one bath up and one bath down, and the comp has a formal suite bathroom with a formal master that has a walk-in closet and a five piece bath, I know I’m going to have to do a lot of framing on the house to reconfigure it. I’m most likely going to have to rewire most of the house because I’m going to have to run all new plum lines. I’m going to have to re-plumb the whole house. And I’m also have to do a lot of wiring because I got to move fans around, move different lighting fixtures, new floor plan.
So that’s going to already tell me based on the comps and what I currently have and to what the build out is, how much I need to actually budget in for electrical plumbing in the mechanicals. A lot of times it doesn’t really come down to the finishes is where you blow your budget, it’s how well you can control your mechanicals. How much are your core costs that are going on the inside guts, which a lot of times people aren’t going to pay for because it’s not visually, they want to know it’s new, but it’s not going to make them fall in love with it by making sure that you can kind of budget up accordingly. If I’m adding bedrooms and bathrooms, that usually means a full rewire and re-plumb at that point. And so again, it kind of tells me based on the comp, the scope of work it’s going to require all these different triggers for my mechanicals.

Tony:
Yeah. So James man, like so much value provided, and that’s just like the first step, right? We’ve covered what you’re supposed to do before you actually get to the project. So we talked about building your team, how to do that. We talked about putting your scope of work together, getting pricing from all your subcontractors, and then just kind of doing like a pre-mock up of what that potential budget might put collect for that property. So you’ve got all this pre-work done. What happens when you actually get onsite at the property? And then just one question to add onto that as well, are you doing this onsite visit after you have the property under contract or are you doing this before as part of your analysis of the property?

James:
It kind of depends on the deal structure. I mean, typically I prefer to at least walk a house. Every house that I write, I do wave inspections on. That’s part of the reason we get a lot of deal flow and also the market that we’re in right now, it’s very hot. There’s no inventory. These sellers get what they want at this point. And so we have to move quickly. And a lot of times we can get a deal because we’re giving better terms. Someone may say, we can come in and go, “Hey, we can close this in as little as five days, no inspection give you a $50,000 earnest money, release it to you on mutual. Get that deal locked down.” But it does come back to what’s the term.
So if it’s a wholesaler, I want to run all my prelim info first, because if I say I’m really interested in this deal and I go out and look at it and I don’t buy it and I do that twice to that wholesaler, he’s not going to call me again. I’m a waste of time. And so I’m typically doing this all beforehand because I want to A, make sure my reputation’s good to where I’m easy to work with on people’s first phone call. And so that’s just important for me in general, but then also I’m doing this prelim work so I have a jump start because after I do my walkthrough with that wholesaler, they’re going to say, “Do you want this? Yes or no? You got to tell me now.” And typically, a wholesaler is not going to have… they’re trying to place that deal inside their feasibility or inspection timeline. So they’re not going to allow me to do an inspection either.
So I need to be fully prepared to walk out there. I mean, I need to be 99% by the time I’m walking that house. Typically, we’re always doing a walkthrough and if I’m not doing a walkthrough on it, I am a going to add a 10% to 20% contingency to the house. Because it is just a variance in there to where… I’ve been involved in almost 3000 of these things, but that doesn’t mean that there’s… unexpected things can’t come up. And so if I can’t get inside, which I have bought a lot of homes at like foreclosure auctions, those kind of things, I always add a contingency buffer in there. But most of the time I’m not going to get an inspection, but I can do a walkthrough.

Ashley:
Well James, thank you so much for coming on. We have a surprise for everyone because we have gone a lot longer than we planned to. And this is just on part one of the episode. So we are actually going to have James back on again on Saturday for our Rookie Reply to cover a part two and three, where we talk about actually going into the property, what to bring, who to bring with you and what happens while you’re doing that showing of the property. And then after you’re close, scheduling the contractors and everything like that. So James real quick, why don’t you tell everyone where they can find out some more information about you and where they can reach out to you. If they have questions up to this point, if not, they will hear you again on Saturday.

James:
I’m excited. This is a surprise. Coming back for… So is that the key if I just keep talking, do you have to bring me back on as much as…

Tony:
Only if it’s good stuff.

James:
So to reach out to us and find us online, you can check us out on my Instagram, jdainflips. We do a ton of construction updates and actually free construction coaching on there. And that’s actually primarily what I do is our goal is to really get back to the community and just say, “Hey, before you go spend this money, check these things out first.” So check us out, jdainflips Instagram and then ProjectRE on YouTube. We release a ton of construction videos, deep dives on kind of how to implement that right construction plan. So check us out.

Ashley:
Thank you so much for joining us and we will be back on Saturday. I’m Ashley at welcomerentals and he’s Tony at tonyjrobinson on Instagram. But before you guys go check out what’s new at biggerpockets.com.