House flipping was almost a guaranteed win in 2020 and 2021. With home prices steadily rising and interest rates dropping, throwing on a new coat of paint was often enough to make a six-figure profit on what would otherwise be a basic home. House flippers got accustomed to doing quick jobs while walking away with almost unbelievable returns. But, many of them got overconfident. Now with the housing market in a correction and the US on the edge of a recession, flippers find themselves with inventory no one wants to buy.
But, this isn’t the case for every flipper. The time-tested expert investors knew that this would happen, and as a result, they’re still making a killing on their flips. Some of these flippers are joining us on the show today. As always, we’ve got Seattle-based superstar, James Dainard to give his multiple-decade-long take on house flipping. And, joining as new guests are Dominique Gunderson, New Orleans-based flipper, and Leka Devatha, luxury flipper and one of James’ favorite buyers!
These three house flippers operate in very different ways. James touches on multi-million-dollar luxury flips and multifamilies, Leka focuses more on high-end yet still affordable flips and Dominique provides high-quality housing at a reasonable price for residential buyers down south. These are three flippers who have NOT let the market change their business plans, and because of some smart moves (which they share on today’s episode), they’re still sitting pretty and getting deals done, even as the market starts to slide.
Dave:What’s up everyone? Welcome to On the Market, we are here for a very special show, we’re doing a flipper roundup. If you’ve been listening to a bunch of our shows, we’ve been doing a couple of these panel shows with one or two of the OG regular panel, but bringing in some experts based on the specific strategy that we’re talking about. And we’re going to be doing that for flipping today, which is going to be a really awesome show. We just had a great conversation with Leka and Dominique and of course for our flipping, we had to bring in James. James, what’s going on man?
James:Oh, just enjoying the sunny weather today. I’m excited, I was just in flipping in Seattle where I was getting rained and just, it was freezing cold, wet and now I’m in sunny California.
Dave:That sounds lovely, that’s actually what I’m doing, I was in Amsterdam. Amsterdam and Seattle have the same weather, but Jane and I decided to just get out of town and now we’re in Portugal and it’s so sunny and beautiful, it’s lovely.
James:I’d rather be in Portugal, that sounds amazing.
Dave:I forgot to ask Kathy, I wanted to figure out what she’s doing there with the Golden Visa thing, but we’re working and so and then just eating a lot, but it’s been great. But before we get into the flipping show, which is awesome, you are friends with Leka, so you know her, but we have Dominique Gunderson who first time I’m meeting her, incredibly talented young flipper, great conversation, but I corralled you into joining us beforehand because we just saw some data drop two hours ago, three hours ago, about October inflation numbers. And I felt like they were pretty encouraging.
James:That was great, when I woke up this morning and I saw that hit my phone, I was like, “Oh, thank you.” Because it’s not just the data numbers, it was the prediction, finally. They’ve been predicting wrong for six months and they keep over pushing and pushing. It’s the first time I think that what? Inflation came out at what? A 0.4 increase and they were anticipating 0.6, is that correct?
James:And they were a hundred percent wrong last month, they predicted 0.3 and it came in at 0.6, so it’s a step in the right direction of what’s going on.
Dave:Totally. Yeah, and last month, so September data that we got in October was a pretty big step back. It felt like, here we go, things were not getting better, but if you look historically, the July numbers were pretty good, the August numbers were pretty good, those September numbers were scary and now we’re back down to pretty good numbers. And so what happened, just to recap for people is inflation last month was at 8.2% year over year, now it’s down to 7.7%, which is the lowest it’s been since January, so that’s really good.And then the core inflation rate, which is really what the Fed cares about, it strips out energy and food costs because they’re volatile. And that went down from 6.6 to 6.3%, so we’re not out of the woods by any measure, but after last month, having that scary bump up, it’s good to see that overall the trajectory seems to be that inflation is heading down.
James:Yeah. It definitely makes you feel be… I mean last month I was like, “Man, is this ever going to work?” I’m like, “Are we really stuck with this for 10 years?” And so just watching that trend for this month is great, great news. Definitely made my morning better.
Dave:Oh totally. Yeah. And just so people know, the way it works, what we’re talking about, 7.7%, 6.6%, that’s a year over year data, so we’re comparing October 2022 to October 2021. And the interesting thing is inflation was bad in 2021, but it really started getting bad around this time last year. And so in all likelihood, even if inflation in an absolute basis keeps going up, the year over year number which is what the Fed cares about, what we should care about, is probably going to keep going down. If you look at it just mathematically, not even policy changes, nothing, just mathematically it is very likely that it’s going to keep going down slowly, but I think this is a sign that we will probably start to see more normal numbers. We’ll probably start to see the Fed instead of raising it to 75, maybe they’ll cut it down to 50 basis points in December. And hopefully this is-
James:Don’t jinx us.
Dave:It’s not a victory, but it’s hopefully maybe a turning point in the battle against inflation, still a long way to go, but hopefully this shows that we’re heading in the right direction.
James:Yeah. And at least you can… we just want to get to stabilized. If it’s high, that’s okay, we want to get things stabilized out and moving in the right direction. This is not an overnight fix, but it’s showing that we’re taking the right steps and that things are getting better.
Dave:Absolutely. All right well, we’ll you all posted as we hear more, but now we have to wait another month, but I was pretty jazzed about this, I’m such a nerd, but I was very excited about it. All right, well, let’s bring in the rest of our panel for this conversation about flipping in 2023, but first we’re going to take a quick break.All right, for our flipper roundup, we have a great, mostly new panel with us today. First we have Leka Devatha, how are you Leka? What’s going on?
Leka:I’m doing great. I just saw inflation numbers come in and I’m a little bit optimistic at the core index numbers going down just a smidget, but there’s so much in the news, it’s some exciting stuff, some not so exciting stuff, so I’m just peachy, thanks for asking.
Dave:When you talk about inflation, you’re speaking my love language, so I appreciate that, but can you tell us a little bit about your flipping credentials and what your experience with it is?
Leka:Boy, I started flipping back in 2014, so almost a decade ago, all in the Greater Seattle market. I have mainly done full gut remodels, so everything that is structural engineering, just massive reconstruction of homes. I don’t touch the cosmetic stuff, it’s just not fun for me. And true story is that I’ve bought 90% of my inventory from your other co-host James Dainard.
Leka:I absolutely have enjoyed, loved working with him and his team. It’s just been such a great partnership, I’ve learned a lot from them and they’ve just given me this landscape to go do some crazy projects and have always had my back. So having that amazing team by my side and then having an amazing contractor team, I’ve been able to do about 75 massive remodels in this area.
James:I can vouch for that, she’s done some major… I’ve sold her some total turd boxes and she puts them back together. Oh yeah, I mean there’s definitely been a few [inaudible 00:07:24] in there.
Dave:I was going to ask what happened in the other 10% of the business? You’re just letting that get away.
Leka:It was before I knew him.
James:Yes, they always say 10% of the deals you buy are bad, well-
Leka:That’s just a [inaudible 00:07:39]. He’s so right though, he’s so right.
Dave:Yeah, the list of all your failed flips have come from a different provider.
Leka:And I’m like, “James, what do I do?” He’s like, “Don’t [inaudible 00:07:53] them anymore.”
Dave:Nice. Well, we also have Dominique Gunderson joining us. Dominique, can you tell the On The Market listeners a little bit about yourself?
Dominique:Yeah, absolutely. Thanks so much for having me, super excited to have this conversation that’s super relevant today with flipping and what’s going on with the market in that space. I got my start in real estate right after I graduated high school at 17, that was back in 2015. I worked just kind of doing some real estate agent mentoring type stuff for the first little bit and then I jumped into investing. When I was 19, I started wholesaling in Los Angeles where I grew up. Did that for a little bit, about a year and a half. I wholesaled 40 deals and got super comfortable with the process and how to close escrow and do deals. And so that was when I branched out and started my own company out of state in New Orleans, which is where I flip today, and started that in 2019 and have been flipping there ever since. Just kind of started slowly and learning and then have been just hustling and scaling over the last couple of years. And now I’m doing usually about seven or eight flips at a time.
Dave:Wow, that’s incredible. Definitely doesn’t sound like you’re scaling slowly, to me that’s very, very impressive. Just out of curiosity, why New Orleans?
Dominique:New Orleans is where my dad lives, so it was a super accessible out of state market for me. And when I decided to start my own company and go out of state, I was still living in Los Angeles at the time, so I was definitely looking for a more accessible, cheaper, lower barrier to entry type of market. And I think one of the biggest things you can do right when picking an out-of-state market is picking a place where you have someone trusted on the ground that can really, even if they’re not in real estate, just show you the basics of streets, neighborhoods, zip codes, what’s going on, having local connections, stuff like that, so that was my major driver for picking that market.
Dave:Awesome, that’s great. I love that city, it’s just a very fun, delicious place to go. Well, James, everyone knows you but can you remind everyone listening what your flipping credentials are?
James:Yeah. We definitely like to flip stuff up the Pacific Northwest, so we’ve been active investors since 2005. Been flipping homes throughout from 2005 all the way up until today. Right now I think with our company, we’ve completed about 3000 flip transactions with our clients and ourselves, and then we personally have… we’re coming up on definitely the thousand mark. I’ve lost count, to be honest, how many houses we’ve tore apart at that point, but we’re active guys in Seattle. I think right now we have about 25 to 30 million in active projects with flips and development going on, all short term investments. So we’re active people, always buying different types of stuff and figuring out how to slap them back together.
Dave:Well, thank you all for being here, I appreciate this is going to be a lot of fun show. I admitted to you all before we started recording that I’ve never flipped a house so if anyone listening to this is thinking like, “Oh Dave’s doing such a good job pretending and dumbing this down.” It’s no, I’m actually just that dumb about flipping houses, so I’m going to ask a lot of silly questions here for you guys, hopefully, everyone else learns something here. But James, can you just tell us a little bit and start sort of set the scene here for where we are with flipping right now. What are the market conditions that are driving the flipping industry right now? And how do they compare to some of your previous experience in the industry?
James:Yeah, so right now what we’re seeing is we just came off the biggest bull run in appreciation that we’ve ever seen. The last 24 months have been absolutely absurd with the amount of appreciation, I think we’ve seen what? We’re up 35% from 2019 or 2020 roughly in appreciation, so we’ve seen this rapid increase and what that’s done is because it became so profitable. Flipping has always been a very high risk business, you’re buying something on a short term yield, you’re buying something that also needs a lot of repairs, there’s a lot of unknown factors in it and you’re buying at a discount and you have to put the right plan together. But over the last two years what we’ve seen is this rapid amount of appreciation to where a lot of investors have gotten into the market with flipping because what became very high risk and very hard became somewhat easy over the last 24 months.And so what we’ve seen is the cost of capital has increased roughly 45 to 50%, and what that’s done is it’s slowing the market down. The fed kept their rate at zero for the last two years and we all got the reward out of it. As cost of money’s cheaper, things go up in value, and so as the cost of money has gone up substantially or the fastest we’ve ever seen over the last 90 days, we’re starting to see things starting to decline back and normalize out with pricing. And so right now what that means is as the Fed increases rates and as the rates increase, it becomes an even riskier playing field to be playing in right now. And in the flipping community, we are seeing people get caught where they were buying a lot of property, they’re rolling their profits in, they’re going into bigger properties and it has now became a lot harder to control.So why is it harder to control? Inflation is still going up or is still higher, so costs are hard to track right now, so people are typically going over budget. The market is cooling down and there’s a lot of uncertainty in the market which is starting to confuse the consumer buyers and there’s less people looking for deals, which means you’re going to hang onto your flips longer at this point as well. And so what we’re seeing is the market’s starting to come down, things are taking longer to sell and we’re in this correction mode to where we’re trying to get to stabilization, but it does make flipping very risky right now because you have to kind of time and really predict the market well with the forecasting. And so I think you’re seeing a lot of shock in the market because a lot of new flippers have not gone through downturns in the market. And since we’ve been doing this since 2005, we’ve seen ups, downs, we’ve seen crashes, we’ve seen things level out, and it’s all about pivoting and changing up your plan.But unless you go through those types of cycles, you don’t really know what the next steps are, right? In the last 12 months we’ve done a l… or the last four to five months, we’ve done a lot of pivoting in what we’re doing and how we’re running our construction sites, how we’re evaluating things, we learned that from flipping in 2008, because in 2008 when we went through the same type of market correction and pullback and well, not the same type but we are seeing a drastic pullback, that’s where we had to kind of learn how to evaluate properties, look at things a little bit differently and change up all of our plans. And I don’t think right now what we’re going through is the same as 2008, but the impact in the short term is about the same because we’ve seen about home pricing, at least in our market, come down about 20 to 25% from peak pricing in a very short amount of time which can cause damage, and that’s where all the risk is coming from.
Dave:Dominique, are you seeing something similar in your market or your margins getting impacted or how has the recent shift in market dynamics impacted your business?
Dominique:Yeah, it’s super similar to what James was saying specifically with investors and flippers. I am seeing so many properties that I either passed on six months ago because I didn’t think the margins would work if the market shifted and went down or even deals that I bought and just decided to wholesale because I knew I couldn’t make the margins work and other flippers picked those up and I can see where they ran their numbers and how they projected for spending X amount and selling for X amount that it would work, and putting it up for that price and it’s just not working. And there’s long days on market and tons of price reductions, especially in the flipping space. It’s super common right now in the New Orleans market, just people who didn’t expect us to be in the place we are right now, maybe even expected things to continue to go up and were shooting for slightly higher than that past sold comp or equal to that past sold comp.And I mean the main reason why I would pass on those deals six months ago is because I was expecting to actually shoot for lower than that last sold comp. And that’s kind of how I’m running my numbers even still right now, and I have been for the past six months just kind of anticipating this. But so many people that aren’t in that head space and aren’t doing that yet, they’re definitely paying for it right now. Whether it’s when they actually sell losing money or even just paying holding costs for three extra months because they priced way too high and they’re just sitting on the market.
Dave:And are you able to preserve your margins then and just because you’re buying the right deals or in these type of times you sort of accept lower margins but keep moving forward because you have to do something?
Dominique:For me I’ve kept to my margins pretty strong, just passed on a lot more deals, really narrowed in on my buy box and I’m only buying in specific neighborhoods and zip codes that I know that have high demand. On the resale side, I’m only buying in the entry level price point right now. So when my product comes out finished and renovated, I want it to be one of the cheapest, nicely renovated homes on the market. So for me in my market that’s kind of in the 200K and under price point, on the resale. So I’ve really just narrowed down my buy box, specific location, specific price, specific type of asset. And so I’ve just passed on a lot more deals that I didn’t think would work with overinflated projected margins.
Dave:That makes sense, and sounds like you’re adapting well. I see Leka just getting excited about the idea of $200,000 flips over there.
Leka:That’s the cost of my rehab.
Dave:Yeah. What is the price point of your average project Leka?
Leka:So the acquisition price is between, I want to say 500 to 700K, now it’s 750 maybe sometimes. And then the cost of rehab is between 150 and 225, 250 just depending on how extensive it is, whether it’s full permitted all new everything is more like 200, 250. And then with holding costs and all of your property taxes and buying and selling costs, it’s about a million on an average to do a median price point flip in my market.
Dave:Wow. And what do you target selling those for?
Leka:Before we would list it for say 1.1, 1.2 and then get 2, 300K over ask. Obviously, that’s not the goal now, my goal now is to deliver above market qualities for under market pricing.
Leka:So then still charge a premium, but then the minute the buyer walks in, there has to be this wow factor like, “Okay, yes I’m paying 6%, 7% in interest, but this is the house that is worth that.” And so I treat every flip as if it was my own primary residence. I’m still able to keep my costs low because I’ve worked with the same team for five years and then we kind of understand each other. I also bring on my contractors as my bridge financers, so they’re also part of the deal, they get a portion of the profit when we do sell the flip.And so because of all that I’m able to keep my costs low and still offer all these crazy sizzle features and I design them to the tee so that it doesn’t have to be expensive, but it’s a little accent wall here, a little wallpaper there, some wainscoting, something cool and different like ceiling sconces next to the master bed. These are just cool features that not most flippers do, so when they walk into a project or a house, I want them to feel like, “This is my home, I need this home.”
Dave:I like that term, sizzle features.
Dave:That’s a good term. Is that an industry standard? Or is that just what you-
Leka:It is. It is. It is a total industry standard, when you flip your first home, Dave.
Dave:I’m never flipping a home, it’s too much work, I’m too lazy.
Leka:It is too much work.
James:And what Leka just talked about is really important right now in the market as you’re flipping, right? The rates are going up, I mean actually what Dom also talked about, there was two major things that they just discussed, which is really important for flippers. A, knowing your buy box right now, and sticking to what you’re good at. When you have rates that are volatile, that means that the market’s volatile, it’s a higher risk. So if you know what you want to buy and you know how to execute that plan, that’s where you can mitigate your risk in the flipping. And then knowing what you are flipping, like what Leka is talking about, where her average price point on her flips right now, or I mean I’m her broker so I kind of know the nu… it’s 1,000,050 to 115.
James:And that is a market that has kind of became expensive with the cost of money, right? It is a lot more to service that debt, so adding in those little extra flavors is how you get those deals clicked out. And just kind of that, the little sizzle features are very, very important right now to get that pri… you got to give people a reason to buy in that price point.
James:Whereas, Dom is flipping in the lower price points, which is a lower risk because you can stabilize it, you can keep it, you can do… she’s buying what she knows, where she knows and also there’s multiple exit strategies. Whereas, in Leka’s market or our market, there’s not a whole lot of exit strategies, it is your selling that property. [inaudible 00:22:22]. And that is the riskier factor, but there is the huge margins that come with that risk at that point.
Dave:Leka, you mentioned that you were able to control costs, which seems like a pretty big accomplishment over the last couple of years because material prices for pretty much everything have just skyrocketed. Is that starting to slow down? Are you starting to see better or more, at least more predictable pricing for materials?
Leka:Yes and no. I’m just ordering cabinets for 15 units right now for a 12 unit apartment building and then two luxury flips and all the cabinets are basically back ordered till mid to late December. So then will I step in and pay a little extra to get them in first week of December? Yes, so there’s that. There’s still kind of a lack of inventory with regards to just basic stuff like garage doors, appliances, so if I have to pay a little extra to get those things then I will pay it just to get my project done and on the market as quickly as possible before the Fed raises interest rates, another 75 [inaudible 00:23:38], so yes and no. Lumber has definitely come down, but then I do flips, I don’t do new construction so we don’t use that much lumber for framing. So it’s kind of a wash for me.
Dave:Dominique, what about you? I think it seems like the two issues… well, flipping over the last couple of years has had some tailwinds, which is the appreciation, but the two headwinds seemed like both material costs and labor was just super expensive and difficult to come by. Are you still facing some of those challenges? Or what are you seeing?
Dominique:I would say pretty similar to what Leka said, I have also been working with pretty much the same team of contractors since I started and they kind of manage all of my projects. So labor wise it hasn’t changed that much, we have a really good set of both managing level and then subs that I haven’t seen huge differences in their availability or their price points as far as labor goes, but materials I would say a little bit different than what Leka said just because we are in that basic entry level kind of more simple price point as far as the renovations go. So we use a lot of materials from Home Depot and Lowe’s and Floor and Decor and some of those larger box stores, so inventory is typically easier to come by and there hasn’t been crazy amounts of back order.But at the same time I mean if you look at early 2020 pricing on materials compared to now, it’s still so much higher. I’d say anywhere from 30 to even up to 50% higher on certain objects. Just a toilet, I always used to pay $89 for toilets at Home Depot and now they’re a $119 or bathtubs, same thing, it’s like they were a $120, now they’re $220. So you’re definitely still seeing those higher prices, but again, I mean with inflation that’s gone up over the last couple of years, it’s kind of expected. We haven’t really dropped back down to that 2019, 2020 level yet, so…
Dave:That’s an interesting point that sort of the lower end finishes are more readily available. You’re using a regular toilet, I’m sure James and Leka use those Japanese toilets that when you walk in they-
Leka:[inaudible 00:26:06] toilet.
Dave:Yeah, they say hello to you and they warm up and do all this stuff. Actually a friend of mine released an apartment with one of those recently and his landlord came in and got it from… he retroactively, he was like, “I miss my toilet.” [inaudible 00:26:25] just put in a regular toilet, and he is like, “I can’t use just a regular toilet anymore.”
Leka:Oh my God. I mean heated seats, come on.
Dave:It sounds nice, I admit. So I’m curious James, I’m sure you talk to a lot of people who are aspiring flippers. What do you think the market is like or what advice do you give to people who are considering flipping or maybe starting to flip in this type of market? Would you recommend it?
James:Yeah, I mean I think if you make a decision in any kind of business, if your goal is to grow your capital right now, flipping is actually still a really good business. It’s a very high risk business but I really don’t think it’s much different now than it’s been historically, it’s always been a high risk business. When we’re looking at these flip deals, we’re looking at making 30, 40 and 50% cash on cash returns in a six month basis, right? That is an extremely high return. That comes with an inherent amount of risk though, and if you have to move and you really need to perfect your business to get going. And so if you’re a new investor, you can get into the market, and actually to be honest, there’s a lot better buys right now.I mean where we learned how to flip homes was in 2008 when the market… we would predict, we would run values on a property and let’s say it was worth 500 grand, by the time we went to sell that we were factoring that we were going to sell that at 430, we were knocking 10 to 20% in a very short amount of time to get the values down. So if you’re a new investor, you can definitely get in the market, there’s actually way better walk-in margins right now that can actually help you. You’re walking into a lot better deal, which is going to kind of mitigate the risk down, but you want to take the right steps like what Dominique’s talking about is buying the right type of deal.If you want to get into a flip, buy a low risk deal. What is a low risk deal? Well, that is a cheap price point where there’s multiple exit strategies. For some reason if you buy that property, you renovate it and it looks awesome, but the market is not moving right, you can still refinance it, stabilize it, wait for the market to calm down and then sell it later or maybe just keep it as a bur down the road. And that’s the first thing I’d be looking at is lower risk deals which require lower capital.The second thing is you want to make sure that you understand the construction cost, because what we are in is we are in the inflationary period where costs are still well above where they were two years ago, but they are coming backwards. But you have to kind of know that right now to kind of really watch and see what you can get your pricing down because the public knowledge isn’t that the pricing is coming down, it’s guys and girls that are actively in the market working with people and kind of reading the trends there. I’ve seen at least a 10 to 15% drop in construction pricing in the last 45 days, but we’re also getting that price adjustment off construction because we’re changing our plans up, we’re not just accepting the answer that’s given to us. If I’m getting high flooring costs, we have to floor 5,000 square feet at an apartment building we’re renovating right now.My people in my office are calling all the different flooring companies to find out what they have on overstock and clearance because they did buy up too much product. And so it’s up to the investor to execute that plan and really create the value. If I go get the quote from my flooring company, it’s still going to be 30% higher than it was two years ago, but now what we’re doing is we’re chasing down the product and we’re going to have to find that good deal, and that’s always how flipping has been. When we were flipping in 2015, it was, how do we get our faucets cheaper? How do we get our handles cheaper? And going and actually finding the solution rather than just getting it. And so if you’re a newer investor, buy the right deals, buy something low risk, low that you can sell it, you can keep it, that will make it to where you’re not going to get clipped.If you’re buying an expensive property and you go to refinance it and you’re losing a thousand to 2000 a month because the loan balance is too high, that’s a hard property to keep. In addition to the lower price points, you’re less susceptible to big hits, right? If I’m flipping a house that’s a million dollars and the values come down 10%, that’s a hundred thousand dollars I have to deal with inside my [inaudible 00:30:50]. If I’m flipping a house that’s $200,000 and it comes down 10%, that’s 20 grand. I can absorb that, that’s not going to bankrupt me at that point. And so just you can get in the market, you just want to buy the right type of deals. In 2008 there was nobody really buying flips and we were not experienced flippers but we were buying constantly. And so we were brand new people flipping the most amount of houses, but we had to figure it out. We had to have a good lender, good construction team and a very padded up [inaudible 00:31:18] to where we just knew the deal would work every which way.Every deal has a stress test, you can put the value on it, and then what we’re doing right now in riskier markets is if we see the value is today is a million bucks, we’re going to knock 5% of the value off that. If we think our construction costs are going to be a hundred grand, we’re going to add 10% to that deal. If we think we’re going to keep it for five months, we’re going to put seven months of debt cost on there, and that’s how you stress test your deal. And if you can pad that all the way through and the deal still makes money, then that’s something that I’m going to consider.
Dave:Yeah, I mean that makes a lot of sense James, and it’s excellent advice. It sounds like you have been a very experienced flipper for many years and it sounds so logical when you say these things, but Leka, I’m curious, do you think these, are they achievable for new investors? It all makes so much sense, but do you think, does it take time to learn the skills that James is talking about?
Leka:I was doing this analysis just a couple of days ago and what I saw was my hard money costs, so if I were to buy a deal, the same deal that I bought earlier this year, if I were to buy that same deal today, just my hard money costs are 25% more. And with prices for flipped homes coming down with the target, right? The market target that is ever changing and with… yes, there’s a lot more labor now than there was a year ago because there’s a lot fewer people actually flipping and investing in real estate and actually reconstructing. So there’s a lot more general contractors available, there’s a lot more labor, but if you don’t know what you’re doing, it is very stressful, it is very high risk. So yes, you can still flip, you can still buy homes and I’m also seeing homes… before, earlier this year, I would see about four deals come to my inbox every day, most of which I would pass on. Today I’m seeing 15 to 20 deals coming my way.So now what I’m doing is I’m like, “Okay, this house is just a flip, but this house can be a rooming house or a midterm rental or a short term rental, this house I can add an ADU three years down the line if I wanted to just hold it as a rental property and not fix it up right now, so when the interest rates come down, I’ll fix it up, I’ll subdivide lots, I’ll change zoning variances.” I am looking at it through a different lens, which is very hard for a new investor to do. So what I am encouraging all the newer investors to do is go partner with more experienced flippers. Flippers like James, who has been through many market cycles, right?I started flipping in 2014 and while I started was pretty slow, but then as I… 2015, 2016, 2017, it was peachy, right? It was amazing. And then 2018 we saw [inaudible 00:34:24], and then 2019, 20, 21, boy, I have made more money than I could have dreamed of, right? And so I have seen that cycle that has set me up really well for right now that even if I have to offload properties at a discount or at a loss, just getting the money that I put into it is enough of a liquidity factor for me to go out and buy some killer deals in 2023.For a newer investor, if they were to partner with someone like James or myself or Dom and then just shadow us and see, okay, how are we pivoting? How are we being flexible? How are we constructing? How are we designing these projects to sell for a profit, not a loss. I think that is much better use of their time and money than going out and buying their own project and maybe taking a huge loss hit.
Dave:Yeah, that’s great advice, taking the time to learn right now, especially if you learn in these adverse conditions when market conditions improve, you’re just going to be set up for success for the long term. But something that always struck me about flipping, especially in challenging markets is if you do it enough, the probability is that you’re going to make a lot of money over the long run, right? But on any one deal you could lose money, right? I don’t know if any of you want to share, but you do lose money on some deals, right?
Leka:If someone that has done as many deals as us says they have never lost money, run in the other direction because that is a lie, that is a [inaudible 00:36:05] lie. Yes, a hundred percent. You do as many deals as you do and for no rhyme or reason you can lose massive amounts of money on a deal. It could just be that you got hit with a crazy inspector in the city that makes you do 37 inspections on your project, basically [inaudible 00:36:24] away all your profit. It could be that Amazon announced a head tax and everyone stopped buying real estate and then you just had to sell your property for a loss in a very hot market in a very hot neighborhood. It could be that you overspent on finishes, it could be that you just bought the wrong house at the wrong time, it could be so many factors. But yes, I have lost, the most money I have lost on a deal is $65,000. My own flip, it was flip number 37, so it’s not like I had just started flipping homes, I had quite a bit of experience, so yeah.
Dave:Well, thank you for sharing that, but I think that’s what worries me personally about flipping or getting started in adverse conditions is if you’re putting a lot of your own capital into it and it’s all of your money, right? It would be scary, and if that bad luck happened to you on your first deal, if you don’t have the ability to absorb the loss, that’s a little bit scary, I’m just telling you why I don’t flip houses now.
James:And that’s a bad business plan, you should never put any of your money in any one asset class. You need to break it up, and that’s where people get caught. I mean it is a real thing when things come down quickly, we lost 380 grand on a house.
Dave:Yeah. Whoa, jeez.
James:That’s a big number.
James:And luckily we could pay for it, but because we were rolling all our profits for two years. Like I said, bull run, we were making a lot of money for two years. So good news is we made a lot more than we lost, but it can happen very quick. And in 2008 I got wiped out, I went from… I thought I was rich, I was 23, I had saved up 450, 500 grand wholesaling, saving every penny I could, re-investing. And in six months I had 20 grand left.
James:And it was very, very rapid and it can hurt. High risk, high reward, and so yes, do not put all your money into one thing. Take your time, spread it out, start with one. We all started with one and then we start learning the systems and then go in and if you don’t have all the money to… or if you’re putting every dollar into that project, then look at investing with someone else because then you can give portions, you can spread it out, you can get in different markets.
Dave:Totally. Yeah, you wouldn’t buy just one stock or if you’re a tech investor, you wouldn’t just put it all in one startup in hope, you would spread that around a little bit.
Dave:Even within real estate. Dominique it sounds like you have sort of gone into a couple of different strategies yourself, you’re wholesaling, you’re flipping, is your plan to continue to be primarily a flipper?
Dominique:That’s a good question, I would say in the immediate future, because I have good systems in place and we’re buying deals and it’s still working. I want to keep the flipping going at sort of the volume or maybe a little bit more than we’re already doing. But I’m definitely starting to shift a little bit, I flipped for the last couple of years mainly just to kind of get experience, get started, save capital, really learn and kind of master the different neighborhoods in the market that I’m investing in. But now I’m definitely starting to shift and starting to make offers and prospect more into small multi-family deals, apartment buildings, things that I can still renovate and flip but not necessarily have to sell right away, maybe keep it for five to seven years and then sell. Maybe sell right away if that makes sense, but just kind of scaling up doing bigger deals under one roof.But definitely still kind of what James and Leka were saying, there’s still a way to flip and make money. People are doing it, the people that know what they’re doing are still buying deals, are realizing that this is actually the time better than the last couple of years to buy a lot, there’s way more opportunity right now, there’s way less people buying, prices are coming down. So I’m going to keep it up, I mean I’m going to keep buying flips and flipping houses in my buy box that I know that works. And also just kind of backtracking a little bit, something I wanted to add just for newer investors that are trying to get into flipping and analyzing the risk if they can pull it off in this market, I would say one of the best things to do to start is to become the absolute expert on your market, specifically the zip codes or neighborhoods that you want to buy in.You should know every house that’s on the market pending, that’s recently sold, how long it took, how far over or under ask price people are getting? That’s easy, you can go on Redfin, Zillow and do that research and figure those numbers out, but I think that’s one of the best things you can do if you’re getting started because that’s where you’re going to get hit, if you don’t know those numbers on the resale. If you’re still in April of this year running your numbers, you’re going to lose money. You have to know, you have to be up to date on what’s going on right now and judging by that what’s going to continue to happen in the next three to six months.
Leka:I have to piggyback on that, that is such great advice. That’s all I did the first six months I started wanting to invest in real estate, that’s all I did. And that kind of laid this foundation that I still have today. When I buy a house in a market, you can ask me about any other house that’s for sale, that went pending, or that’s sold and I’ll tell you about it. My broker called me yesterday and she’s like, “This house sold for 1,000,060.” And I was like, “I know why.” I walked it, it was a piece of [inaudible 00:42:11] flip, it was bad finishes, it didn’t have a garage, it was a choppy floor plan, I know exactly why that house sold for a certain price and that’s why my house is worth a lot more. And this is something I honestly learned from James when I first started because I would ask him about any house because I would do seven, eight flips and he would do 50 flips.So I would ask him about any house in any market and he’s like, “Oh yeah, and the house next door, and the house opposite, and the house on this other street.” He just knew what houses, and why they sold. And then what happens is your brokers can’t BS you, your wholesalers can’t BS you, your contractor can’t BS you because all the numbers are right there in front of you. And then the people that you are selling brokers, right? The people that are bringing in buyers, when they bring in a buyer, you always want to… in whatever market, if you are the seller, you want to be selling from a position of strength, not a position of failure or loss because that’s when you make… you just give up all your money, you just give up all your equity and your profits. So I always go in like, “I have my numbers, I know why this house is worth as much as it is.”
Dave:That’s awesome advice. Yeah, I think just there’s no real shortcut to understanding your market, you have to just spend time in it. I mean when I first got started I would just… you’d just be driving around and see an open house, you’d just pull off the road and just go in it, even if you had absolutely no intention to buy it at all, just to learn about the houses. And I feel like that’s been gone the last few years, there was no open houses, people were just… things were going so quickly. So this is a really good time with things sitting on the market longer for you to go and just see more properties and just get that practice, get more repetition that Leka is talking about, so you can really understand it. And then eventually you can become the Will Hunting of house flipping like James where he is got all of the pictures of houses and the red string that connects them all his office. [inaudible 00:44:15]. Yeah. Yeah, exactly.
James:I’m the janitor in the back, yeah [inaudible 00:44:23].
Dave:No, no, you’re the genius who comes in on the chalkboard and solves all the problems at night.
Dave:Well, yeah. Well, Leka, I wanted to ask you, what are you sort of looking forward to in the next year? Do you see any market dynamics changing or do you think we’re sort in for more of the same over the next couple of months at least?
Leka:The truth is that I don’t know. I mean don’t know, what I do is I try to be flexible and versatile with what I buy. I’m also doing multi-family syndications, I am leasing out my office building that I just renovated, so I want to diversify as much as possible. So you know how people say, “If you’re flipping homes, just stick to that.” “If you are buying multifamily, just do syndications.” I think that’s bad advice, I think as long as there’s a common thread, my common thread is that I only play in one market, in the Tri-County Greater Seattle market. And because I do that, it doesn’t matter if I’m buying self storage or apartment building or office building or single family flip or a multi-family [inaudible 00:45:35], I know my market, I have my systems in place, I have my contractors in place, I have property managers, I have mentors, and so I have my network and your network can solve massive problems.So going into next year, I’m looking at a frat house next to Washington State University where it’s already hitting 1% rule and it’s only rented 50% and they want to sell it at one third of the dollar. So I’m like, “Okay, that’s a really good buy in any market.” So why would I not go research that? Or look at midterm rentals? We have such a shortage and a lack of midterm rentals, we have lots of short term rentals which might convert to midterm, so that could be an inventory problem, but right now there’s such a lack of midterm rental opportunities that I’m like, “Okay, if I’m renovating a 12 unit apartment building, why not put one unit on midterm rentals, see how it goes?” So constantly even just playing with my portfolio that I own now and seeing how I can increase profits on my own portfolio, but also going forward, how can I buy more versatile properties?
Dave:That’s such good advice, I love that advice because I feel like there’s these people who say, “Only do one thing.” Or “Just specialize.” But what you’re describing is so interesting, you can become an expert either sort of horizontally, you pick a strategy and then you can use that across the country or you just vertically integrate in one market and you’re just like, “I know Seattle so well that any property I can make work because I have the network.” I think that’s very, very good advice and really helpful for people trying to figure out how to scale. There is definitely more than one way to do it.
Dave:What about you, Dominique? Is there anything you’re expecting or you said you’re going to go into some smaller multi-families, but are you seeing anything in the market that you think might impact your strategy or anything that you’re looking forward to, think will be big opportunities in the next year?
Dominique:I personally still see a lot of opportunity in the single family space, in the kind of outskirt neighborhoods of New Orleans. I’ve always seen opportunity there and I think that I’m continuing to see it. The reason being is just because there’s a lot of people in that market that are renters. And so you have a lot of people that are kind of in that space where they’re trying to transition from rent to own, just getting qualified, first time home buyer maybe using an FHA or VA loan, so what are they likely to buy? And that’s kind of looking at the population of the greater area. What I’ve always tried to focus on is I see that there’s a lot of demand in that lower end, first time home buyer, single family home type of space. I mean most likely these people aren’t going to be buying a duplex or something like that.They’re looking for that entry level, what is nice? What can I take pride of ownership in? Type of property, and there’s just a lot of inventory in the kind of outskirt neighborhoods of New Orleans. There’s a lot of single family homes, there’s a lot of tract home type streets and stuff, so that’s what I think is still a lot of opportunity in that market. Kind of [inaudible 00:49:04] staying outside of the city, there’s a bit less regulations, stuff like that. That’s where I’m going to probably continue to play, and yeah, like I said, some smaller multi-family stuff as well, but I think I’ll still be heavier on the single family stuff for the next couple of years.
Dave:Nice. All right, great. What about you, James? Any last piece of advice for people who are interested in flipping heading into next year?
James:No, I think don’t be afraid of flipping, I mean I know we’re not. I mean the reason being is the margins are still big, the returns are still really high, if you can make 40, 50%, that’s a good thing to be looking at. I mean that’s how we grown our whole portfolio is flipping properties, taking the returns of 40, 50%, stacking them away, buying more, right? So we’re always going to be buying, but right now it is risky, do not buy more than outside your SCIs. Do not put all your money into a deal, keep 50% off to the side to kind of work whatever… if you got to come up with some cash, you want to make sure the cash is there, but buying with multiple exit strategies is key. If you’re looking at a deal, make sure that you know what you can do with that deal. Is there multiple channels? The more channels you have, the less risky that deal is.And that’s why I definitely don’t agree with people saying, “Just do one thing.” The more things you know how to do, the less risky real estate is, so learn. I mean the fact that Leka or Dominique they’re value add investors, they can take that skillset and go and get into every type of market, but if you’re a new investor, learn the skillset, which is increasing the value on the plan, know how to execute that plan and then start expanding out. Don’t go all in right now, take baby steps, work with other people and just be cautious, but just make sure the deal checks out, make sure that deal stress tests, add in the extra contingencies and then you can get going, but there is really good buys right now. I mean screaming buys and so if you sit too long on the sideline, you’re going to miss these buy opportunities.
Dave:All right, great. Well, thank you all, we do have to start wrapping up. This is super helpful for complete noobs like me, and hopefully everyone listening got some value out of this. James, if people want to connect with you, where should they do that?
James:Best way to do that is probably on Instagram @jdainflips or you can go check out jamesdainard.com, we do a lot of value add construction talks, learning about ripping houses apart.
Dave:Oh yeah. Leka, what about you?
Leka:I’m on Instagram, Leka_Devatha or on LinkedIn, just Leka Devatha, or you can check out my website, rehabithomes.com, and same, we just have a lot of value add stuff that we do and we’re always talking about it.
Dave:Great. And Dominique, what about you?
Dominique:Instagram is great, I’m @dom_flips_nola and yeah, same I’m there for messages, answering questions, putting out content about our flips and stuff, so yeah.
Dave:All right, great. And I’m Dave Meyer, you can find me on Instagram where I’m @thedatadeli where I talk mostly about sandwiches. Dominique, I meant to say my favorite sandwiches in the whole world is in New Orleans. Have you ever been to Cochon Butcher?
Dominique:I don’t know if I have, but I’ve definitely heard of it. And I have heard of the amazing sandwiches, a lot of people have told me that, Downtown New Orleans.
Dave:[inaudible 00:52:22] I’m sending you a gift card to Cochon Butcher, you have to go there, it’s so good. All right. Well, I could talk about that all day, but we do have to go. Thank you all so much for joining us and thank everyone for listening, we hope you enjoyed the show. If you did, share it with a friend and give us a five star review on either Spotify or Apple, and we’ll see you next time for On The Market.On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only, all listeners should independently verify data points, opinions, and investment strategies.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.