Investing with High Rates, Recession Prepping
High interest rates are stopping you from investing, so what do you do? Wondering how to prepare for a recession if one hits soon? Should you sell your rentals and pocket some cash, or will you regret dumping your performing properties to secure some short-term safety? These tough questions can’t be answered by just anyone, so we have our expert investors David Greene and Rob Abasolo on to help you navigate through the most financially puzzling parts of real estate investing.
In this Seeing Greene, we’re tackling topics like how to prepare for a recession as a landlord, what to do when high interest rates kill your deals, and whether you should build an ADU (accessory dwelling unit) or simply park an RV on your land and rent it out instead. But that’s not all; a contractor wants to know how to work with investors while making even more money. Is he barking up the wrong tree, or is going the investor instead of the residential route a better choice for those trying to grow their contracting business?
Plus, how long a tenant turnover should take and whether your property manager is moving too slowly. All that, and much more, is coming up in this Seeing Greene show!
David:
This is the BiggerPockets Podcast show, 9 81. What’s going on everybody? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with a Seeing Green episode, and I’m joined by my good buddy, Rob Abasolo. If you’re listening to this podcast, then you are a part of a growing and thriving BiggerPockets community, and this show is where we get to connect with you and the other community members like you directly by answering listener questions that everyone can learn from. Rob, where are you today?
Rob:
I am in Copenhagen, Denmark. It’s currently, I think I’m seven hours. No, I think I’m nine hours ahead of you.
David:
And if you woke up today wondering if anyone loves you, the answer is yes because Rob stopped his Denmark trip just to make Seeing Green with me because he loves you and so do I.
Rob:
That’s right. Well, I’m excited for today’s lineup because we’re going to be talking about some cool stuff. One, how long should a property turnover take with a property manager? And two, should I sell a property with a pending recession so that I have more reserves in my bank account? And yeah, we hit some back and forth on this one. I’m excited to get into that one because I think a lot of people are probably feeling this way.
David:
Oh yeah, it is a tough market and that’s why we are here for you. There’s some really good stuff you want to listen all the way to the end because we get into some really good content about when to sell properties, when to keep ’em, how to handle over recessions and how to deal with contractors because that’s such a crucial part of investing in today’s market because you have to do value add in most cases. You’re not just going to buy cashflow anymore. You got to force cashflow, make cashflow, and build equity oftentimes through the rehab.
Rob:
Now let’s jump in. Hey
Logan:
David, my name is Logan from the Northwest Arkansas Market. Actually standing out in front of my first ever house hack, getting it ready for the tenants to move in. All thanks to your advice and guidance. And my question today is actually regarding expanding my portfolio using a private money source. And so my question comes around the structure of these deals. So I’ve really gone through a lot of different structures, whether it be in a debt versus equity debt and equity split, and just due to the high interest rate environment that we’re currently seeing, I’m struggling to find deals that pencil out for the private money source to get a good return, and then also being able to have the deal cashflow and then also have enough meat left on the bone in order for myself to see some sort of return. We have looked into heavy value add, but just being a newer investor, I do lack some confidence in the construction space. And then the MLS, having the private money sources fund down payments again, just doesn’t seem to pencil out. I am in a place to where I don’t necessarily need cashflow coming in myself, would be happy to take the equity play but still try to find a structure that works. Would love any guidance that you have on this. Thanks to advance David. Love the show.
David:
All right, so Logan, you’re having the same problem that just about everybody is having right now. Let me see if I can sum this up. You’re trying to get into real estate investing at scale using other people’s money, which is probably what you were told to do from TikTok and Instagram and everywhere else, and interest rates are too high to make these deals work. So you’ve been told buy real estate the cash flows, use other people’s money scale, get as much real estate as you can and run it like a business. And then you went in to go try to do it and you found that rates are a lot higher than what they used to be. So it’s hard to find a deal that cashflow is putting 20% down. You’ve also been told to borrow other people’s money, so now you got to pay them for that 20% and you probably got to pay them more than the going rate because they’re going to be taking more risks. So now you have two high interest rates and you’re trying to make it cashflow and you’re finding out what everybody’s finding out is that when rates went up like this, it’s not working. Now, it’s not that you have bad ambitions. I love that you’re trying to grow a portfolio. I think it’s that you’re using a method that was more likely to be successful five years ago as compared to today. So Rob, in this dilemma that he’s facing with debt this expensive, what do you think can be done?
Rob:
Well, debt is expensive, but I think in this instance, why go for debt when you can go for equity? And here’s what I mean. Basically right now, your option is one, you can go and you can raise money and basically pay 10 to 12% probably to a private money partner. Or you can say, Hey, instead of paying you a 10 to 12% return on that money, how about I cut you into the equity? Maybe it’s a 50 50 split, maybe it’s a 25 75 split. But regardless, what I like about this is that you can kind of go for the appreciation play, give whatever cashflow there is in favor to the actual investor. Maybe you don’t make a ton of cashflow yourself as the person putting together the deal. And then whenever interest rates drop, you can refi out, hopefully return some of that money to your initial investor and then get your cashflow at that point. Ultimately, what I like about this is if you don’t have a 10 to 12% interest rate hanging over your head, I just feel like the stress is going to be down. There will be more margin for error. Whereas man, whenever you’ve agreed to a 10% return on a partnership split like that, it can get pretty ugly if you don’t hit your marks or make the money that you think you’re going to make.
David:
In pillars of wealth, I talk about how money is energy and energy comes in different forms, and in real estate it typically comes from cashflow or equity. Equity is energy that’s trapped inside the property and cashflow is energy that comes out of it. Now, energy is pretty much only taxed when it comes out of the property. That’s why you get taxed on the cashflow. But you got to manage both forms of energy wisely. If you don’t have enough cashflow, you can lose the property or you won’t be able to pay back your partner. If you don’t have enough equity, you won’t be able to sell the house or you won’t be building long-term wealth tax free. So you just have to think of it. It’s not all the same. And when rates are high, that’s going to affect the energy that comes from cashflow. So like you’re saying, Rob, shift more of that energy into the equity side if that’s what you have to do and the person can get paid upon the exit or upon the refinance, whatever your method was to move that energy from this property to somewhere else. Yeah,
Rob:
I think it’s fair, man. And honestly, a 10 to 12% return, if you’re hitting your marks, you can still probably hit that on an equity split and still give that to your investor. I just want to pad some. I just want to protect yourself a little bit. All
David:
Right, so there you go. If you’re running into cashflow problems or you can’t figure out a way to pay back people for using their money, consider letting them keep their investment in the property in the equity, and it can grow there assuming that the market keeps going up and the loan keeps getting paid down, and then they can get paid back later, and maybe you even give them a bigger equity split than they would’ve got from the cashflow.
Rob:
Yeah. Yeah. And hey, the 10 to 12% rate that we’re quoting you right now is by no means the standard. It’s a little bit more the standard when you’re going out and you’re raising money from investors that maybe you don’t have a super close relationship with. You haven’t built that rapport yet, but I know plenty of people who go to the direct networks, friends, family, coworkers, people that they actually know and people that trust them, and they get five to 7% debt all day. So everything is possible. You just may need to go turn over some stones to see what’s the best rate you can get out there on money. All
David:
Right, we’re going to be getting into our first commercial break, so stick around because coming up we’re going to be talking about if it’s better to look for a primary with an A DU or renting out an RV instead as a cheaper option for rental income. And while we’re away, make sure that you follow our show so you get the latest seeing green content as soon as it drops. All right, welcome back. We’ve got a question on house hacking, Monique and Orlando says, I have one rental out of state and I’m in the market for a primary residence that I can house hack. I’m looking for a single family home with an A DU already built or a home with enough space to build an A DU. My plan is to short or midterm rent the A DU. As I was analyzing the cost and time to build an A DU in my area, I thought wouldn’t it be quicker and cheaper to just buy used rv, park it in the backyard if the neighbor allows it, get a contractor to install an RV hookup and then rent that out. What do you think are people willing to pay to stay in an RV parked in someone’s backyard for days or months? And with that, I’m going to turn it over to the tiny home experts, ATO solo. Yes,
Rob:
Yes. Very interesting. Okay, so I guess top of my head, probably your neighborhood is not going to let you do this if you live in a residential neighborhood. Now, if you live somewhere out in the country with some acreage and your neighbors are kind of far apart, you may be able to get away with it. I don’t know if necessarily your county will allow it as much. One of the first Airbnbs I ever stayed at with my wife, I said, Hey, can I be the one that chooses the Airbnbs this time? And she was like, yeah, sure. So I actually booked an Airstream because I wanted to Glamp, and this is going to her question of will people do this? And I booked an Airstream and I was like, I’m so excited for this romantic glamping experience. And then as I read through the details, I found out that the Airstream was actually craned into the backyard of this home in Portland, very fitting, and I was basically in someone’s backyard. I got to actually talk to the host about it. They said that they paid for their entire mortgage, Airbnb, that Airstream. So I thought it was a really cool, unique experience. I kind of knew what I was getting into. I liked it. I do think people will pay for this kind of thing, but then again, there will also be a lot of people that are turned off by the idea of staying in someone’s backyard in a trailer.
David:
I think people will pay for it. I don’t think it’ll be as popular as a property. So let’s see. How are we going to answer this? Here’s what I’m going to say. If there’s a ton of demand and not a lot of supply, I like the strategy. If people can’t be picky, they’ll stay in an Airstream, especially if they think that they can save a little bit of money. But if you’re in one of those markets where there’s not a lot of people traveling, but there’s a lot of supply for them to choose from, this is a terrible idea because no one’s going to rent your property.
Rob:
I don’t think that’s true actually. I really think if it’s okay, this person is talking about a fifth wheel that’s kind of janky and a little weird and not nice, no, I don’t think that it’ll get booked. But if it’s actually a very curated, beautiful Airstream, like I said, I booked it once. I kind of figured that out. We loved it. So I definitely think there’s a market for it. It just sort of depends on how high end they’re talking about the way this was worded. I’m not confident that we’re going for a premium experience, but I might be making assumptions here. Do they
David:
Make trailers that are that cool? Is she going to splurge on the Taj Mahal? Yeah.
Rob:
Have you never stayed in an Airstream before?
David:
When I was a kid, we went camping. We had a fifth wheel, but I don’t remember it being luxurious. Oh
Rob:
Yeah. Well, Airstreams can be really, really, really nice. They can be 10 out of 10. Nice.
David:
So how much would it cost to get that kind of Airstream?
Rob:
80 grand.
David:
And how much would it cost to build the A DUA
Rob:
Hundred to 200 grand on the low end?
David:
Okay, you’re making an convincing argument here.
Rob:
However, with that said, actually there’s a couple of arguments. One, you could finance that Airstream on a 20 year RV note, and so your cashflow could actually be pretty insane. However, I will say this, if that’s the route that she wants to go, it is purely a cashflow play. There’s no equity, there’s no appreciation. As a matter of fact, a trailer is just a straight up depreciating asset. So as long as you know that you’re not adding any value to your real estate, then maybe proceed. But I still think regulation wise, she’s going to hit some hurdles.
David:
Can you give us some hypothetical examples of regulation issues?
Rob:
Well, it’s not a permitted structure. Like I said, I’m sure there are some counties that you could probably get some kind of permit, but it’s very rare that you can just buy a house and then plum like an RV hookup and RV electrical connections, and then throw an RV in there and then rent it out as a dwelling unit because you didn’t go through the typical building process to lay foundation inspections and all that stuff. Now the more rural you get, the more possible it’s going to be, but I don’t think in a city or in a metropolitan area that’s going to fly.
David:
Alright, so Rob says, go for it. But Rob’s also a bit of a unique duck. The guy likes sausage restaurants, so go out of his way to go find unique sausage to eat. He likes shopping at Goodwill. The other day I was driving through a town in the Smoky Mountains and they had like, Hey, stop here and buy these weird things that we’ve whittled out of wood. And I was like, Rob would love that he was in the car next to me and he’s, oh, I have to stop right there. What if they have a toan or a garden gnome? So it could be that you are a little more geared towards walking on the edge and doing something a little more adventurous, a
Rob:
Bit of a weirdo, I will say.
David:
Yeah, a bit of a weirdo. So I don’t know what type of our population fits into the weirdo category as opposed to me, I’m pretty boring. If I was a spice, I’d be flour. If I was a food, I’d be a brand muffin. I would probably not want to stay in the rv. I’m also a little bit bigger, so I don’t know if it would be tall enough to be a comfortable bed, but there you go. We’re admitting our subjectivity when it comes to how we’re answering this question.
Rob:
Totally. Yeah, the riches are in the niches. I think it’s really cool. I think it’s a great idea for cash flowing. I just want to make sure that she checks her local laws and regulations. If they say yes, consider it. But yeah, you’re going to actually build wealth by building that a DU in the backyard.
David:
And I just was thinking if it’s a big enough backyard and you could put a fire pit back there and AstroTurf and maybe cornhole, you can kind of turn it into a bit of a fun experience. So here’s how I’m going to answer it.
Rob:
Look at you. You’re coming around. I got you.
David:
If your backyard is already dope, you have a swimming pool, you’ve got an outdoor kitchen or something like that and you’re complimenting it with this rv, I’m a little bit more into it than I would’ve been before. But if I’m picturing just tall weeds and a trailer in your backyard, like what I would’ve seen doing evictions as a deputy, I probably don’t like it as much.
Rob:
No, it was cute at an outdoor shower. Yeah, it was fine.
David:
All right, there you go.
Rob:
We’ll book an Airbnb. I’ll book an Airbnb for us. We’ll do a podcast from an Airstream on the next scene. Green.
David:
That sounds great. The Joe Dirt edition. All right, thanks, Monique. All right, moving on to the next part of the show. This is where Rob and I like to answer comments that come out of the YouTube channel or sometimes answer questions that come out of the BiggerPockets forums. Rob, why don’t you start us off?
Rob:
Let’s do it. Okay. This first one is from Cali Valley, 9 0 5 6. I pay off all of my rental properties. I have open HELOCs for winter property, pops up for a purchase or need the cash for major fixes. I have almost worked it so that I will never need to go to the bank for mortgage again. Maybe two more rentals and I’m there. Awesome. Okay, so they worked very hard to actually pay off their properties and they use their own equity to basically fund their own real estate journey. I love it.
David:
I love it too. You know what else I love about this? They built their equity in their properties and they’re okay to let it sit there until the right deal comes along. They don’t have this crazy pressure that I have to find a deal and I got to get out there and use this equity for something. It’s burning a hole in my pocket. That’s a great accomplishment to pay off a bunch of rental properties and still be working so that you have the DCI to get more heloc. So well done Cali Valley. Love it. All right. Our next question comes from the Harrison, the Texas homestead exemptions. Take the value that your home would be taxed at less the current exemption amount. So last year in 2023, that was $40,000, and this year in 2024, I believe it’s $100,000. This was in response to one of our questions that we answered on the show that someone was asking about losing their homestead, and I had never heard of that. Yeah, it’s a pretty
Rob:
Good little tax benefit there. You could save quite a bit, especially in Texas. Man, the property taxes here are high.
David:
All right, we’re going to take a quick break, but coming up, we’re going to have a question on when to sell. When you have liquidity during uncertain times. We’ll be right back after the short break. All right, we’ve got a question about the core four, but up first, when to sell part of the portfolio to be safe. Alright, Jake h from Calgary, Alberta, Canada.
Jake:
Hey David. Thank you so much for taking the time to answer these questions. It’s really appreciated and I think folks like me who need somebody to ask questions to and to have an opportunity like this, to speak to somebody like you as changing. So thank you so much for your time and everybody at BiggerPockets and what they do. My question is this. I have three duplexes and they’re all doing great. They’re cash flowing and it’s in a really cute little small town that seems to be doing quite well. I’ve got enough equity in there that keeps me happy, but I thought to myself maybe it would make sense to sell one of those properties and put about a hundred thousand dollars worth of equity in my pocket. I don’t want to find myself in a situation where I regret selling it. I’ve heard from folks who have properties say, oh, I wish I’d never sold.
Jake:
I wish I’d never sold. But I also want to make sure that I’m in a position that if things were to go sideways, I am liquid and I can take care of myself and my family or use that money to maybe take advantage of opportunities that might come down the pipeline if this recession or whatever might happen, sort of opens doors to opportunities like that. I want to be able to be prepared. And the other things is if things do go in a direction that’s not favorable for folks and I have a vehicle that I’d like to pay off, would it make sense to sell that property, get myself out of what we call bad debt and sit on the remaining of that cash and wait for opportunities? I dunno, I think you understand what I’m trying to say. I just want to put myself in a position that is going to benefit me and my family and if selling a property to have liquid capital makes the most sense, I’d love to hear if you agree or disagree. Again, I don’t need to sell these properties, I just want to find myself in a good situation and put myself in a good position. So thanks again for your time. Really appreciate it. Can’t wait to hear your answer and thanks again to everybody at BiggerPockets.
David:
I like this. So it is important that you hold as much real estate as you can. So what we’re really doing is balancing, if I sell a property, am I going to regret that I sold it, it will go up over time, or if I don’t sell it, am I going to regret that I didn’t sell it because I lost my other properties because we had a recession and I had no money. So to me, Jake, the most important question we didn’t get information on. How much money do you have in the bank right now? If you have a lot of capital, I’d say, no, you don’t need to sell. Just have a nice chunk of reserves. But if you don’t, I’d probably be more inclined to say, sell one of ’em and keep that money in reserves to make sure you keep the rest of the portfolio.
Rob:
Well, I guess my thought was more, if they’re doing great, we’re making some assumptions here. That means he’s probably cashflowing a decent amount, meaning that if we did hit a recession, he could in theory maybe not make as much and still at least break even on the property. I guess the point you’re bringing up is maybe his tenants just won’t pay at all.
David:
So let’s assume that when he says recession, he’s saying, my tenants are not paying the bills.
Rob:
All right. Well, I mean maybe I guess I don’t know. Then no one should own real estate
David:
Unless you have money in reserves. I do think you need a plan for these big moments that hit. It’s kind of like tornadoes in Oklahoma. They’re not coming every day, but you do want to have a plan when they come because you do know they will come.
Rob:
Yes. But I mean at the same time, this is sort of like whenever someone’s like, I’m like, okay, I’m going to buy a long-term rental, and they’re like, but what about
Speaker 5:
The squatters? The squatters Rob?
Rob:
And I’m like, I don’t know what about them? I guess they could squat at my property. Well, David, the other thing he mentioned though, I guess getting back on track here was that it isn’t a college town. So I guess the question is also would a recession maybe impact things in the college town rate of enrollment? The amount of, well, I guess that would be the big one. How many students are coming in and out of the town during a recession versus when we’re not in a recession? I think
David:
It’s just can I get tenants? And if your tenant is based on your college base, that could have something to do with it.
Rob:
I mean, I don’t expect you to know this off the top of your head, but do colleges see a large amount of enrollment drop offs during a recession?
David:
I don’t know. That’s a good question. I don’t know if I’ve ever heard any data related to recessions and college enrollment. I think because people typically are borrowing money to go to college, they don’t think about the fact that we’re in a recession. They’re not using their own money. So I don’t think that would cause the problem. But I mean, you don’t want to be completely dependent on one tenant base. It’s only going to rent to college students. You’d hope that you could just rent it out for less to someone else. But we’re still back in that position with Jake here where if you don’t get tenants to pay their rent and you still have to make that mortgage, do you have enough money, Jake to weather a storm for six to 12 months? Do you have, when I was buying a lot of real estate, when I started, I was a cop and I felt like cops are not very likely to get laid off during recessions. In fact, I could work overtime when I was buying real estate in 2010 when everyone else was worried about, I’m going to lose my job. So nobody wanted to buy it, but I was in a position where I could buy it. I had the safer job. Now, being a cop is a boring, terrible job when the economy’s doing great, but it’s a really good job when the economy’s doing bad. So how stable is your work? Are you trying to quit your job and live off the rent? That increases your risk a lot.
Rob:
Okay, so a quick Google has actually revealed that typically enrollments tend to go up during a recession. So by that anecdotal piece of evidence that we just found on the internet, I would say, I guess I would lean to not sell it because it seems like his tenant base would be pretty secure more than ever actually. And the reason enrollments go up is because people tend to pursue higher education, I guess, more so than ever during a recession. Yeah. What
David:
Else do you do? If there’s no jobs, you got to do something, you might as well go learn something. Right. All right, Jake, here’s what I’m going to tell you. If you are cutting it really, really thin and you want to sell one of those properties and put some money in the bank, I’m not against it. That could also work in your favor. If we do hit a recession and properties are priced cheaper, you can use that money to go buy more of them. All right? But you got to realize you’re going to have capital gains hits. You’re going to have closing cost fees, you’re going to have realtor fees. It’s not like you’re going to get all of that equity right out of it. So ideally you want to keep ’em. I’d rather see you work some more hours, work some overtime, work another job, or just keep working and saving your money and put your money in the bank that way rather than trying to take it out of real estate where it’s going to bleed a lot of energy when you sell. Sound good, Rob?
Rob:
Yeah, sounds good.
David:
All right. Good question, Jake. I like what you’re thinking, but just keep working, man. Too many people get a little bit of real estate and they just want to quit and not work anymore, and they expose themselves to much more risk than they would’ve needed to.
Rob:
Yeah, I don’t know. I guess I’m still a little struggling. If it’s properties are doing great and enrollments are slated to go higher, then I guess I probably just wouldn’t mess with it. I don’t know. I think the idea of selling a piece of property, taking that small hit or that, I don’t know, actually, probably substantial hidden fees like you just talked about, just to park it in a bank account where it has no earning power for you. I guess he could make four or 5% in interest on the high yield interest savings account. But I don’t know, it just feels a bit odd to me. I am fine with being super conservative if that’s really what his heart of hearts is telling him, but I feel like that’s maybe overcorrecting a little quickly here.
David:
I think Jake just got scared. It sounds like he heard all this talk about
Rob:
You scared him, David, you scared
David:
Him. Yeah. Well, it’s because guys like you, Rob, you’re always putting these flames in the thumbnails on your videos convincing everyone that the world’s going to end. And so these guys are all wanting to sell their real estate and put some money in the bank,
Rob:
But once they watch the video, they see me holding a fire extinguisher immediately.
David:
That’s right. He’s a firefighter. Ladies, too bad he’s not single anymore, has really, really cute kids. All right. Our next question comes from Chris McCarthy in Virginia Beach. Chris is a licensed contractor but does not own any investment properties yet. Could you speak more into the contractor aspect of your core four? This comes out of my book Long Distance Real Estate Investing, which Rob has not read. As a contractor. I often feel like we are treated as a black sheep of the family. Granted that there are a lot of bad ones out there, but from working with investors in the past, I often feel like a good contractor is someone who does good work but doesn’t know he should be charging more for it.
Rob:
That’s great. Yeah, I love that.
David:
How can a good contractor work with investors and still make money? I love when we get questions like this because we as investors, we rarely ever hear the other side of the story. We don’t hear what the investor says. We all complain about real estate agents, but we don’t hear about what it’s like to be a real estate agent or why it’s so bad. So this is a good question. What do you think about this, Rob?
Rob:
However, there is a rookie episode, I think it’s four 15 that features a contractor slash investor, how he approaches both. Now let’s get into the question a little bit. Well, first of all, I don’t necessarily feel like the contractors are necessarily the black sheep more than any of the other people. I feel like we definitely, we give our thoughts, our honest thoughts on everyone in the core four. But the question here is how can a good contractor work with investors and still make money? Well, I think it’s kind of this. So sometimes an investor, well, I think, okay, let me put it from my perspective. What I’m looking for in a contractor is someone that I don’t expect them to be a total business person. I just need them to be a little dialed and I need them to basically have a pretty broken out bid that line items everything.
Rob:
I need them to be able to accept payment electronically. I need them to be able to take a 10 99. That’s really what I’m looking for first and foremost, I work with so many contractors that are like, yeah, can you just Venmo me? And again, I’m not going to blame them for not really being dialed in on all their systems and everything, but for me, I’m just looking for someone that understands the organizational and business side of contractor because if they can’t, it just presents problems for me down the road. I would say nearly 100% of the time.
David:
That’s some really good tactical points. I never thought about that, just getting a 10 99, having them claim their money on taxes. I’m going to address where he said, I often feel like a good contractor to an investor is someone who does good work but doesn’t know that he should be charging more for it. This is very similar to real estate agents that work with investors. You’re going to make less money as a real estate agent working with investors the majority of the time. I think agents think in their head, oh, if you can find investors deals, you’ll just have a constant stream of income. But finding deals is incredibly hard to do and investors are not going to be loyal. They’re mercenaries. Whoever brought me the deal is who gets the money. So go out there and do a bunch of work and help me make a bunch of money.
David:
And the agents that tend to be top producers don’t work with investors. They’re working with retail people. The same is true for contractors. The ones driving the big fancy truck with the really nice house making a ton of money. They’re doing remodels of rich people, homes and kitchens. They’re not out there working with investors on a budget trying to get the very most and squeeze the most that they can out of this contractor. And then comparing that contractor’s bid to four other contractors bid. And here’s the other side of the industry that can get a little ugly. A lot of times as investors, we’re not hiring the contractor. We’re hiring the person that works for the contractor Monday through Friday to come to us at the end of the day and work on our job for less money. So you’re now competing in a sense, you’re kind of cannibalizing yourself because competing against the guys that work for you and your competition that are willing to do the job for less, that may not have all the credentials and all the overhead that you have.
David:
So my short answer here is going to be, Chris, if you’re trying to make a lot of money, working with investors is not a good place to go. Working with investors is where you go to get consistent income. You’re going to have more reliability. You’re going to keep your guys working more. They’re going to be able to learn the trade. They’re going to get more volume. You’re going to learn how to be cost efficient. And what I look for with a good contractor is someone who tells me, Hey, you don’t need to do that. Only do this part. We can repaint those cabinets. We don’t need new ones. When you want to make more money as a contractor, you’re trying to get me to buy new cabinets. So you can tag on and upcharge to that and then charge me the labor to install it. But as the investor, I’m trying to figure out for ways you can save me money. So you can see the architecture of this is set up to where if you only get hired by me, if you save me money and your goal is to make money, we are not really mutually aligned. I know that’s a bit of a hot take. Rob, what are you thinking?
Rob:
No, no, I think that’s good. I also, I will say I do whenever my contractor doesn’t sub out every single part of the job, I’ve worked with a handful of contractors that are actually there doing a lot of the labor themselves. Maybe they might be more skilled at the electrical side or the plumbing side, but they usually are very skilled at one big trade. And I think that’s where a lot of the times, the contractors I’ve worked with, they make a lot of their money there because they’re not subbing it out and then only making a percentage on it. They’re making that entire spread on their skill that they’re basically selling to you. Yeah,
David:
That’s what I was thinking of in my mind is that most contractors are going to have in-house people, I wasn’t thinking about them subbing it out because the minute you start to sub out, you’re sort of adding middleman after middleman into this deal and every middleman tax on margin. Oh yeah,
Rob:
I’ve had those where they sub everything out and I’m just like, man, it really kind of blows my mind how expensive it can be. And then I start looking at every single line item. I’m like, all right, well, yeah, they’re basically,
David:
But you’re right. It’s inefficient to sub that way. You hit a really good point there because you’ll hear them say, well, I got to make some money. Well, I got to make some money. But you’re also getting convenience because you subbed it to someone who subbed it to someone who found someone to go work and everybody there had to make some money. If you’re running a business where you’re paying people by that hour and you train these people yourself and you’re overseeing your own crew, there’s less steps where you have to add margin and it stops becoming as expensive for the investors. So maybe that’s the answer. If you want to work with investors and make money, you have to do the hard work of hiring and training your own guys.
Rob:
You mentioned the volume thing. I guess you can kind of think of investors as sort of like the Costco, right? You’re going to get a lot of volume from us, but you won’t make a ton at once. But I guess the question that we should really talk about is how does a contractor know if I am the investor making the promise to the contractor, Hey, if you do a good job for me, I’m going to hire you again and again and again. There’s always the chance that that investor doesn’t ever actually hire them again. I’ve been guilty of this and most of the time it’s because the contractor didn’t totally crush it for me. So I guess that’s my answer. They should give that discount, not the discount, but the investor pricing upfront. And if they’re really, really good, that investor will use them for the rest of their career.
David:
I got another thing I just thought of. That’s really good advice to you. Contractors out there. There’s work that has to be done on a property, and then there’s work that could be done on a property. The work that has to be done would be like, it needs to be painted, it needs new floors, something broke. It needs to be fixed, it needs a working bathroom. You’re only going to make so much money on that type of work. The investor’s always going to come and try to beat you up on the price because they’re going to go to someone else that can do that work. But there’s other work that could be done, and I think that’s really where you make your money. So if you understand how to add square footage to a home and you can walk a house with me and say, Hey, you see that sunroom back there, I could knock down this wall.
David:
I could put up some drywall here. I could run electrical from there for around $40,000. I could add this as square footage to the house, and then I can be like, oh, if I had another master suite, if I added another bedroom, bathroom and 500 square feet to this house, that makes the house worth $150,000 more, now it makes sense to pay you the $40,000 and maybe I even pay $50,000 if I’m getting $150,000 of value in return. So as a contractor, if you can learn for those types of things that make a house worth more or you can do work that’s harder to do. If it’s an Airbnb, you can put in a movie theater or something unique as opposed to just your run of the mill, Hey, we can get it working again. I think you can talk people into spending more money on their remodels
Rob:
If you’re really good. Going back to sort that investor pricing thing, I mentioned, if you treat me right, you do a good job for me. I’m going to hire you for the rest of my career. I’m also going to recommend you. This is actually very topical. I was just talking to my electrician today and he’s doing a job for me in Houston, and I was like, Hey bro, can you come tomorrow? He’s like, oh, I’m actually going to Austin because of that guy that you referred me to. And I was like, what do you mean? He’s like, oh, you referred me to a guy three months ago. I’m going out to this house tomorrow and he’s driving two and a half hours to do this job. And I just realized, I’m like, oh, the reason he’s even doing this big job in Austin is because I recommended ’em to you. So I think there is a little bit of taking a leap of faith and trusting that an investor will continue to come back to you. But if you give a good price and then you do solid work, you’ll have referrals out the wazoo.
David:
Yeah, man, I just met one a couple days ago and I’ve been so impressed with this guy. I’ve been looking at houses and I say, Hey, I need a quote on it. And he just is like, I’ll be there later today. Gets in the house, walks it, comes back, says you’re looking at 40 to $60,000 on this remodel. I was floored with how quickly he got out there to look at houses, how quickly he gave me a ballpark on what the rehab would be and I had all the information that I would needed if I wanted to write the offer. That’s a lot different than when they’re just unorganized and they’re trying to keep track of the job because they don’t have a good business put in place and they’re giving bad customer service. He’s been so responsive. I would use him even if I got a cheaper quote, just because I don’t want to lose that person. That’s like boots on the ground getting out there and getting me what I need. So there you go. I thought this was a great question. Thanks for answering that. And if you are a good contractor, you need to be in the BiggerPockets forums and talking about contracting stuff, right? Contractors going to contract, letting everybody know that you’re available for quotes and making these connections to get some work.
Rob:
And if you’re a really great contractor in Houston, Texas or Austin, Texas, shoot me a DM on Instagram,
David:
Especially if you have experience working on Airstreams. Rob really likes those trailer
Rob:
Parks, especially that.
David:
Alright, everybody, that is our show for today. We’ve covered quite a few topics, which is awesome. We got a lot into this show, including how to navigate high interest rate percentages with private money considerations for putting an RV versus an A DU for a house hack where Rob and I went back and forth, how long a property turnover should take with a property manager, if you should sell a property during a recession, what to look for in a contractor and how to make money as a contractor. And I also told a joke that Rob completely missed. Let us know in the comments, did you catch that joke when I said it? Or are you a weirdo like Rob who takes a minute before he catches the things that are thrown his way?
Rob:
Homestead of a car.
David:
If jokes are footballs, Rob would be a cornerback. He has no hands. All right everybody, we just want to thank you so much for listening to the podcast. I love being able to do Seeing Green. I love you guys being here. Please do us a favor and leave us a five star review wherever you listen to your podcast and make sure you subscribe to this podcast so you get notified of future episodes for Seeing Green, so we can help you build wealth through real estate. If you want to follow Robber I, our information is in the show notes, so go do that. This is David Green for Rob. He’s not that short, but still the jokes go over his head. Abba, signing up.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
