The Legacy Wealth Code Podcast

Dissecting Real Estate Investing Trends and Opportunities in Affordable Housing

• Michael Notbohm & Andrew Hoek • Episode 17

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You're not just in for an informative episode but a wealth of wisdom on real estate investing trends and opportunities. Your hosts Michael and Andrew, roll up our sleeves to dissect the current state of the real estate market. We scrutinize the surprising resilience of the market despite the indicators suggesting otherwise, and unearth potential hotspots for investors amidst the projected downturns. Listen in as we delve into the boom of growth in the larger cities, predominantly in multifamily apartment complexes, condos, and class C apartment complexes. Plus, we reveal how savvy investors can ride the wave of markets that have strong job growth and tax benefits.

Venture with us into the second half of our episode as we delve into the challenges of providing affordable housing in today's market. From the high cost of construction to finding willing sellers, we unravel the complexities of this sector. But don't despair just yet! We share our insights on the hidden potential of manufactured homes and the opportunities that the current interest rate landscape may offer. And for those with an eye on the future, we discuss what economists predict about travel and spending habits come summer 2023. With Labor Day as a key date to watch, this episode is jam-packed with insightful tips, strategies, and forecasts that could guide your next move in the real estate investing world.

Onward!

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Speaker 1:

This is the Legacy Wealth Code podcast helping you build long-term wealth and a lasting legacy through real estate investing, tax strategies and motivational stories from some of the most successful and influential people out there. Here are your hosts real estate investor and entrepreneur, Michael Knoppam, and real estate investor and attorney, Andrew Hook.

Speaker 2:

Hey guys, welcome back to another episode of the Legacy Wealth Code podcast. I'm Michael Knoppam, here with my partner and crime, andrew Hook.

Speaker 3:

Hey guys, how are you and?

Speaker 2:

we are delighted, on a Friday afternoon, to bring you some cutting-edge content about some of the deal trends that we're seeing, what we're buying, what we're looking at, what we're staying away from, and then just what we're hearing. You and I talk to people all the time in the real estate world mortgage people so you hear the doom and gloom and then you hear positivity and I think trying to decipher where to draw the line in the sand, I think, is probably a struggle for most people, including us sometimes.

Speaker 3:

Yeah, I think to me and a lot of the conversations I have I think question mark is the best thing that comes to mind at the time being is like I think certain markets you've already seen downturns and of course other markets, like the market we're in Tampa, has really held its own.

Speaker 3:

I mean we've seen some slow down but it almost defies the odds and I feel like they're sort of this kind of stubbornness in the economy, in the real estate market, that sort of. There's all these signs and indicators that things should be worse than they are, but they're not really that bad yet, or at all, and so that's leading to all these questions.

Speaker 2:

And it is kind of mind-boggling. You look at some interest rates doubling, basically from where they were a year, just over a year ago, and people are still buying these houses. And at what point does that kind of turn around? And I think for us being investors, you're always kind of waiting for that downturn because hopefully that's where opportunity presents itself.

Speaker 3:

And you keep hearing that there's so many of these people that are waiting for a plunge and like, oh okay, we're going to wait for the market to crash and the 2009-ish style crash. I don't honestly believe we're going to see a crash like that. I think you're going to see a plateau or retraction Some markets. You're going to see maybe a 10-15% drop. I don't see these things. I don't see prices of homes falling 40% or more.

Speaker 2:

Right or rent going down. I mean we still have a housing shortage in the country, so it's funny because Tampa's got so much stuff going on. I went to Nashville not too long ago same thing. There's 20 cranes up in the air and I think you talk to people across the country. It sounds like big cities I mean almost all of them have a ton of growth happening. A lot of it is around multifamily apartment complexes, condos, so you and I talk about this a lot. I still think that there's good value in the Class C apartment complexes that really have just it's a mom and pop that have owned them for 30 years. The rents are way under market, but that's because the condition of the property isn't great. So I think there's an opportunity. Obviously, the catch 22 of that is make sure you understand how to price out your deferred maintenance costs.

Speaker 3:

Yeah, I mean definitely that in interest-only loans and variable rates and some other things that can snag you in that style of deal. But I think the deferred maintenance typically on Class C is going to be. You have to go in with your eyes open and understanding of that. But I mean, at the end of the day, if you can take a product and you can give people a safe, clean place to live, you're never going to have a shortage of demand for that. Yeah.

Speaker 2:

I mean you and I. We're looking at some deals right now like the one in Cleveland. I think when we start thinking about building long-term wealth, creating a legacy, which is the goal of the Legacy Wealth Code, there's a lot of opportunity in markets to get a good cap rate. Like Tampa's probably not going to give you a 15 cap on something that's turnkey. You might get a 15 cap on something that needs a ton of work that you can patch together. But like the deal in Cleveland, fully remodeled and current rent is like a 14 and a half cap and ARV rent, just because they haven't raised it, puts it like in 17 and a half.

Speaker 3:

Yeah, and I think again I mean so. If you know the point of today's podcast, the thing is to kind of understand trends and to see where opportunities lie. And I think you know I started hearing people talk about it used to be Tampa was very much a secondary market, maybe even borderline tertiary, but they were looking at Tampa as kind of a secondary market and starting the conversation as to smaller areas as tertiary markets to say we gotta start looking in these. And this is I mean I think I've heard this now for about four or five years. So some of those people were really early on in that trend. But I think now is, as you said, you're not gonna find stunning deals. Or if you find stunning deals in a primary or secondary market right now, they're gonna be a needle in the haystack.

Speaker 3:

So it almost forces you into kind of some of these outlier markets where and I mean some of the things I think you look for where do you have strong job growth? Where do you have a town or city that's holding its own? Maybe they're reinventing themselves somehow, maybe they just continue to prosper in some fashion as to they've got great weather, they've got great tax benefits or something along those lines to keep generating growth. But if you can find those areas that are kind of outliers maybe not primary or secondary cities jump on them.

Speaker 2:

Yeah, well, it's weird for us because we talk to people in these markets and it's pretty much a norm there, I think, for people to be getting a 14, 15 cap. So if you start to accumulate properties and you're getting that kind of return, I think the part that well, I guess a big part of the legacy wealth code is the fact that we push tax strategy, tax planning, taking advantage of things like bonus depreciation and cost segregation, and when you start factoring that into your cap rate because you are I mean it's either you're gonna send that check to the government or you can keep the money. So you start factoring in what that looks like from actual dollars in your pocket, Like this one in Cleveland is 650,000. So you figure, reduce out the 20% for land, so you probably have a $500,000 asset roughly that you can run the cost sag on. So just ballpark numbers, probably around 200 and 220 in a year, one deduction.

Speaker 2:

You start looking at that in the 35% tax bracket, that's $100,000 in our pocket. So now when you look at that return, you're getting 17% back on your money from just the pure rent standpoint, plus roughly a hundred grand that either you stroke a check to Uncle Sam or you take that and you can reinvest it in real estate.

Speaker 3:

Right, yeah, no, I mean definitely wanna be taking advantage of those tax plays, but so, outside of the kind of secondary, tertiary markets and looking at some of those areas that maybe you weren't looking before, what else do you think are creating opportunities right now? I mean, one of the head scratchers for me and I always get people asking about how do we start in on foreclosures or how do we start on distressed property. I'm still not seeing a spike on that, at least locally, and I'm not hearing the stories on a national level as to spiking foreclosure rates or anything like that. So I mean it kind of begs these questions as to like, where do you, where else do you look? And I mean, what are you seeing right now for that?

Speaker 2:

I mean, I think that there's a good opportunity just because the cost to build is so expensive now in those prefab or manufactured homes. You know, I can't remember what we were I think it was a podcast we were listening to and they were saying that their cost is like $80 a square foot. You know?

Speaker 3:

And I think that was even after you tie in and install.

Speaker 2:

So and we're talking to builders here. Now, tampa is a little different because you got flood zones and you're having to build up to code, et cetera. $300 a foot, 250 a foot. You know, when you and I built that first house in St Pete, I think our hard number was we wanted to be at 200 a foot right.

Speaker 3:

Yeah, with land costs.

Speaker 2:

With land and everything and we got pretty close to it. But now I mean even these big track builders, I think probably are above that price and the finishes aren't great.

Speaker 3:

Yeah, I mean I also. I mean the manufactured home is kind of what we were talking about a minute ago on the Class C properties from a standpoint of providing a safe, clean, affordable place to live and locally in particular and I think a lot of areas around the country we're starting to hear more and more about affordable housing. But I was listening to a podcast this morning and it was talking about one of the. One of the guests on there was a builder out of the Salt Lake area in Utah and his comment was you know, our bread and butter for years was like the not mega mansion, but like borderline mega mansion. They were building 5,000, 6,000 square foot homes in smaller communities with very, very high end stuff. Their press lately has been we're building a smaller product that's more affordable and they're flying off the shelf. And I really think that there's such an opportunity if you can figure out how to give affordable housing options and when I say affordable housing I don't mean, you know, low end stuff, I'm talking about literally middle first time home buyer.

Speaker 2:

What are they gonna?

Speaker 3:

Middle class type genre of the segment of the population that has a need that has to be met. The challenge around that, as you just said, is if building costs are so high, how do you meet that? But at the end of the day I think you have an unlimited supply of demand if you can figure out how to answer that. And I think the manufactured homes are great one, you know, smaller footprint homes is a lot of what this guy was talking about. Today. Maybe you're going a little bit further outside of the urban core to get a little bit cheaper land, you're putting a smaller property on or smaller house on that property, but any of those things that you can do to kind of try to tackle the cost and the ultimate. You know, not everybody can afford a million dollar home, of course you know. And so you gotta be able to answer that middle ground of 250 to 500 or slightly over 500.

Speaker 2:

Yeah, I mean, and I would say the thing that probably makes me the most nervous, and not going into or down a political path, but regardless of if you're Republican or Democrat, the next 12 months is gonna be quite an adventure, I think.

Speaker 3:

I agree, but I mean that's what creates opportunity at the same time. So I mean, I do think that and I think we're a little guilty of this too, because you know, if you look at, we've been vetting deals lately but we haven't pulled a trigger on a new purchase in a little while, and I think some of it is. You know, you're kind of in this head scratch moment of there's so much information coming at you, there's so much conflicting information coming at you. There's a part of me that thinks that sitting back and waiting a little bit and watching is still a good move, unless you know that, hey, this is a diamond in the rough deal that I'm finding.

Speaker 2:

Well, so we also have maybe a tad bit jaded, based on the city of Tampa's permitting office and how great they've been to work with, would you tell me I'm not doing anything that requires permits anymore for a while, which I can't blame you, but I mean. So you've got that. And then you've got a lot of times these diamond in the rough deals like the Indiana deal. Hopefully it comes back together at some point. But you know we talked about in the last podcast and we had an under contract. It's just a lazy owner who doesn't he doesn't care.

Speaker 3:

Yeah, you have an unmotivated seller that doesn't really wanna make something happen at the end of the day. But you know, I mean, does that deal make sense? I think so. It pencils out, and do we have to do that deal though? No, you keep looking and I think you know, as we said, the likelihood of more deals coming online in the next six, 12, 18 months. I do genuinely think there's gonna be opportunity there.

Speaker 2:

Well, with these interest rates, there's a lot of commercial play that's probably gonna, I would say, start coming around, because they're basically coming to a balloon. They're adjusting, and now they were at 3% or less and now they're gonna be at 8%. You know, I mean that's the pro forma, for whatever they penciled out is definitely changing drastically when the interest rates adjust at that level. So, there might be a really good opportunity, I think in that realm as well.

Speaker 3:

Yeah, I agree with that. So I listened to an economist speak late spring, early summer, and one of his forecasting pieces was that he thought summer of 2023 was gonna still be pretty robust. You're gonna have a lot of people traveling. You're gonna have a lot of people that are out still trying to. You're even getting sort of still this kind of post pandemic pent up of. You know people still want to get out and travel. They still have some cash flowing to him, whatever the circumstances are, but he very closely targeted I can't remember when Labor Day is, I want to say like September 5th or September 8th or something like that was the date he threw out and his comment was watch that date, because I think things are really gonna change after that comes and goes.

Speaker 3:

And it's almost this idea of like, put your head in the stand a little bit, maybe, and you're hey, we're having fun this summer, we're doing our thing and we'll worry about that down the road. You know, that mentality, but I think you know, part of what we started talking about earlier is like the stubbornness of the economy, the stubbornness of the market, and I really think that we're seeing a lot of that right now well, eventually somebody's gonna be right. Sure somebody's got to be right at some point, because it's been.

Speaker 2:

I mean, I remember when we met, you know, I was the realtor in our networking group and I would stand up and give the stats about the local market and every week somebody'd say you know I'm thinking about buying something, but you know the market's been so crazy for how many years now I'm like it's been crazy for a while and then you know, fast forward and other year passes, they're still asking the same question. And I think where you had touched on like there's almost like a stalemate right now of you know, a year ago you put a house on the market and you have 20 offers. So that mentality is still lingering. I think, with a lot of people, investors, the savvy ones and even really the not savvy ones have gotten accustomed to their, their prices here. Yeah, and then. So we're not seeing a lot of price adjustments or or even decreases from where we are out.

Speaker 3:

A year ago, you know and it's funny because that's one of the things I scratch my head at all the time right now is why have these prices not come down? And I was talking with an agent actually this morning who said he had kind of done a survey of a couple different zip codes within the Tampa Bay market and what he said he sees is it's almost the back end manipulation of the deal, meaning the sellers aren't decreasing their prices but they're offering all kinds of credits and incentives on the back end.

Speaker 3:

So it's almost like keep the prices here but we're gonna help you out on buying down your rate or closing costs, you know whatever exactly and I mean there's all kinds of reasons you want to do that and I think and again that podcast I was talking about earlier, about the builder in Salt Lake his comment was they're always concerned about keeping sale prices at because they've got to keep their comps where they are, to keep moving their inventory and their product. But his tackle on it was we are doing permanent interest buy downs For loans to get them into the fours and five percent, wow. And he was like that's costing me $30,000 or more to do that, but it's bringing me buyers.

Speaker 2:

Because they're the only ones that are they don't care.

Speaker 3:

Their monthly payment is the same whether they're paying that interest rate or whether you're taking $80,000 off of that purchase price.

Speaker 2:

Right.

Speaker 3:

And, as the seller, he doesn't want to take that money off the purchase price, of course, but you know. So you're spending 30 to make an additional 50, I guess, yeah on the back end? Yeah, but it's. It's just funny to watch because I feel like there's all this sort of like back end work to try to keep prices almost artificially inflated and you wonder when that steam runs out.

Speaker 2:

Yeah Well, in this market, Tampa doesn't seem like it's going to run out.

Speaker 3:

Very true. And then?

Speaker 2:

you've got other markets, you know, like the ones where we're buying properties or looking at buying properties, that have great cap rates. Ten years from now, those properties are probably going to be worth about what they're worth now. They just don't ever see a lot of growth from an asset appreciation standpoint, sure but. But they're a good, solid return.

Speaker 1:

Yeah.

Speaker 2:

And I think that that's kind of the takeaway for me, anyways, on what we're focusing on is just, you know, if it's it makes sense from like a pure cash flow perspective, even if it's not going to be double the value in 10 years, I mean it's going to be worth. You know, likely be worth more than it is today. Yeah, but you've also got 20% return on your money every year which you're never going to get. You know, to bank, or you know, even a good mutual fund is probably five or six percent.

Speaker 3:

Yeah, so I think some of the key takeaways are, as you said. It's in particular myself. I know not as much as you, because we, because we come from different ends of the spectrum, but like I could probably talk myself voice of reason sitting on my hands at during any market.

Speaker 3:

you know, but but the reality is you don't want to do that. Of course you know, but I think this isn't. It isn't two years ago, when you could buy anything and you know, or you know, using the 2005 example, 2005, you could literally buy anything and you knew that within 30 days it was going to have gone up 10% or more and and that's kind of the the market that we saw for a year and a half, two years, and it was like you, you almost couldn't make a bad buy, you know. But now I think you have to slow it down, look at it a little harder. But if you can make your numbers crunch and stress test it and make them make the deal work as is without appreciation, it's still a good buy, right.

Speaker 2:

Use the 1% rule and don't. You know, I've, I've learned this and you'll. I think you'll appreciate this because I'm usually the what's all, that one in a million talk. I'm all in. But you know, I think that when you forecast a lot of these, you have to forecast it for the worst case scenario, because almost you know I wouldn't say it usually is, but there's always something that comes up that you didn't really account for.

Speaker 3:

Well, what was the line that one of our masterminds the guy talking was like? I've never seen a deal actually operate as the pro forma anticipated it to. Yeah.

Speaker 2:

Or hard money guys. Yeah, you know we'll do a six month loan, but then you know, for a 1% origination fee or 2%, we will extend it to 12% for you Knowing that there's like a 99.9% chance that one's getting extended.

Speaker 3:

I was thinking about that. The other day we were closing a deal and it was one of these where the borrower had been insistent on a six month loan. No way, I'm even going to take six months. And I was talking to the lender because I was representing the lender, and I said what do you want to do with this? Do you want to stick with that? Do you want to give them like 12 months? You know how do you want to set it up? And and he said if they want six months and they're confident about six months, so be it. To their credit, they had the deal, they had the deal fixed and flipped. It was at the day of closing or day before closing and the buyer got cold feet and walked and they and now they're going to blow their six month time, which is out of their control, of course, yeah.

Speaker 2:

I mean, there's always stuff like that.

Speaker 3:

You never know what's going to happen.

Speaker 2:

You know, and so Just invest smart, look for good passive income, you know, even if you want to be active in it. Just make sure that it the 1% rule, I think, is probably the easiest and there's so many markets that you can find that in. Yeah, that, you know, as we kind of go into a year, I would say, of uncertainty, because it's going to be just no one is going to want to do anything from like a government standpoint. So you've got to be prepared for, on the other side of that, what does it look like? So just make sure you're kind of covering your basis, yeah, I think it.

Speaker 3:

Go back to the basics and stress, test and pencil your deals and buy when you feel comfortable and right about it, but I don't think it's a time to force buys. Yeah, we've talked about this a lot too, but, like you know, whatever you can do to get your lines of credit clear, your cash ready, I mean, those are, those are where you want to be so that when something does happen, you're ready to pounds.

Speaker 2:

Yeah, and poised for it Cool Until next time onward.