Today’s episode is the audio from our July meetup in which we had three experts on a panel to discuss how the market in Cincinnati has been in the first half of 2019. More importantly, we’ll hear what they think the real estate market will do in the second half of 2019. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“You hire an agent for exposure, negotiating skills, and positioning” – Peter Chabris
Peter Chabris Real Estate Background:
- Owner and executive of The Chabris Group.
- The Chabris Group has sold over $60 Million in real estate each of the past two years, primarily consisting of single family homes valued under $500k.
- Based in Cincinnati, OH
- Say hi to him at peterATasktcg.com
Kurt Weil Real Estate Background:
- Mortgage broker with Zipfel Capital
- In July of 2019 alone, Kurt is set to close on over $16 Million in real estate loans
- Based in Cincinnati
- Say hi to him at http://www.zipfel.com/
Slocomb Reed Real Estate Background:
- Realtor, and became a house hacker in 2014, currently living in second house hack
- Has bought and sold 34 flips and 24 buy-and-hold properties, totaling 75 units, for himself and his clients
- Owns & manages 18 rental units, with 24 more under contract to close in August
- Based in Cincinnati
- Say hi to him at slocombmarketingATgmail.com
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TRANSCRIPTION
Best Ever listeners, I’ve got a special segment for you. Every now and then I’ll be doing these special segments when I come across something that I learn in my entrepreneurial journey and I think it will be helpful for you as well. I hope you enjoy this episode, and more importantly, I hope you get some value from it that you can then apply to your life.
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
We are here in Cincinnati, filming this live, and the purpose of today’s conversation and this panel is to talk about Cincinnati specifically. So if you’re not interested in Cincinnati, go ahead and listen to something else, watch another video. If you are interested in Cincinnati, then come hang out with us for a little while.
We have a panel today. We’re going to be talking to each of these three gentlemen about last year compared to this year briefly, and then most importantly where they see the market headed in Cincinnati relative to their respective focuses.
First, we’ve got Slocomb Reed. Slocomb is a realtor and became a house-hacker in 2014. Currently living in a second house-hack. Bought and sold 34 flips and 24 buy and hold properties, totaling 75 units for himself and his clients. Owns and manages 18 rental units with 24 under contract to close in August. Big August, congratulations on that. All three of these gentlemen are based in Cincinnati, so I won’t repeat that.
Then we’ve got Peter Chabris. He’s a realtor for the Chabris Group…
Peter Chabris: Yes, sir.
Joe Fairless: The Chabris Group has sold over 60 million dollars in real estate each of the past two years, primarily consisting of single-family homes valued under 500k.
Then we’ve got Kurt Weil. How are you doing, Kurt?
Kurt Weil: Good.
Joe Fairless: I just found out Kurt’s uncle is the former president of Junior Achievement, that I’m a board member on; I just learned that. Cincinnati is such a small town, isn’t it?
Kurt Weil: It ends up that way.
Joe Fairless: It ends up that way. So Kurt is a mortgage broker with…
Kurt Weil: Zipfel Mortgage Group.
Joe Fairless: Zipfel Mortgage Group. That’s a tough one to pronounce. In July of 2019 along Kurt is set to close on over 16 million dollars in real estate loans.
With that being said, how about let’s kick it off… We don’t need to go into areas of focus or anything for background, since I’ve just said it… So what were you doing last year compared to this year that’s different? Slocomb.
Slocomb Reed: Sure. Sales-wise, as an agent, I’d say the biggest difference — well, first of all, I do most of my work at this point with investors who are looking to buy and sell their investment properties. Mostly buy and hold stuff, some flips. When I was looking back through my transactions, 2018 and 2019, what I realized was in the first half of 2018 I actually was able to find cashflow on market for clients… And now I can’t.
My sales is gonna feel fairly anecdotal compared to the massive businesses these guys have… But what I’m seeing on the market now, early 2019, is that there are three types of investment properties. All of the investment properties that hit the MLS fall into three categories. There’s the stable, ready-for-market stuff, that’s listing too high and selling too high really fast. There is the stuff that really needs a gut rehab, that is appropriately price, and lasts minutes on market… And then there’s some stuff in the middle, where there are people who think that they can get good market value for a property that needs some work, mostly because it’s been neglected… And that stuff is really coming from sellers who have seen this hot, bullish market for so long that they think it’s basically time that they sell their junk, because they’re never gonna be able to get what they think they can get right now for it. And that stuff sits on the market for a while. I’ve had a lot of clients looking a lot at those recently.
Joe Fairless: So you have double the size of your portfolio currently under contract, right? You have 18 units, and then you have 24 under contract.
Slocomb Reed: Yeah.
Joe Fairless: Clearly, last year or this year you’ve been able to grow.
Slocomb Reed: The biggest difference would be in off market lead generation for those properties. I do more off market now, so I have the capacity to buy a 24-unit now with partners, that I didn’t have this time last year. I could dive into this; I would like to talk about it more later…
Joe Fairless: Okay.
Slocomb Reed: …but the summary is going to be that you really need to be finding deals off market, probably from a variety of sources, if you’re gonna find good deals in Cincinnati right now.
Joe Fairless: Alright, we’ll jump back to off market stuff. We’ll bury the lead. Peter, what were you doing this year compared to last year?
Peter Chabris: We’re mostly status quo. We’re primarily resale. We do work with investors that have found the opportunity and they’re looking to take it to market… But that really just constitutes as a typical resale play. So the only thing that we’re doing differently this year than last year is that we wind up spending more time negotiating multiple offers. Cincinnati’s inventory continues to drop. It’s dropped for four years straight, it dropped 20% per year, and over the past 12 months it’s dropped another 12%.
We’ve seen the average sales price in Cincinnati increase 5%-6%/year for the past years. The historic appreciation in Cincinnati is 3%, so we’ve been doing double the appreciation, driven by the decrease in inventory. That is waning. Over the past 12 months the average appreciation in Cincinnati is down to about 4.5%, and inventory year-over-year is down 12%, versus that 20% difference that we’ve seen. So while price have been doing this, they are still appreciating, but it’s starting to level off a little bit.
Joe Fairless: So any time there’s statistics, there’s all different ways to slice and dice the statistics.
Peter Chabris: Yup.
Joe Fairless: I read in your bio that you focus on 500k and below homes, is that correct?
Peter Chabris: Yup.
Joe Fairless: So what about above? Are those stats still true?
Peter Chabris: Yeah, luxury softened up about two years ago. Luxury is different in every Cincinnati we consider it 500k or more. I think part of the reason why is that people that have that kind of money – their values system for that kind of dollar has changed. So what we traditionally consider a luxury inventory, these massive properties on big land, a lot of maintenance – isn’t necessarily catering to the demands or the needs of the next generation of luxury buyer. I think luxury is trying to figure out what does value look like in that segment.
From a business model perspective, luxury homes take more time, take more maintenance, they’re harder to sell, they require trickier marketing… We like to set things up, we have a system and we know it works, so we try and keep within that system.
Joe Fairless: Knowing that the luxury market is soft relatively speaking, have you worked with any clients to convert those big homes – lots of rooms, lots of land – to assisted living, or anything like that?
Peter Chabris: That’s a great question, and the answer is no, it has never crossed my mind. Normally, our experience in the luxury — because we do still service luxury inventory; not as frequently as the non-luxury… Generally speaking, a luxury seller doesn’t want to horse around with converting a property into a multifamily or an assisted living, or something like that. They have demands in their lives, and they just want to have a clean separation and get it done, and have it be a business deal, and… Obviously make the most, but not horse around with details.
Joe Fairless: I was thinking more of an investor coming in and reaching out to purchase properties. That may be a discount relative to where they should be because it’s softer.
Peter Chabris: Sure. Yeah, I assume as long as the zoning makes sense, it’s a great idea.
Joe Fairless: And Kurt – you’ve got a lot of loans going on. What’s the difference between last year and this year?
Kurt Weil: I think the biggest difference in the lending sector would probably be investors; especially Cincinnati being in the Midwest, we have a very attractive real estate portfolio overall, so we’re bringing a lot of outside investment in; compared to our cap rates, to what lending rates are, it’s a nice spread… So I think that compared to last year, this time more of that outside investment is coming in. It’s getting more attractive. Rates are fluctuating, and the Fed went up a couple times; they’re looking to come back down tomorrow per se.
The bond market has already reacted… And with that, people need to find a place to put their money. The economy is good, people have discretionary income, and with that, outside investments are coming here harder, because we have very low vacancy rates, very good growth rates, we have a great job market…
So I would say overall probably just investors – there’s more of them.
Joe Fairless: Help me reconcile the in some ways contradictory information. Because I hear the market is softening, I hear it’s tough to find deals…
Kurt Weil: Sorry… Let me clarify that I say that about investment property specifically. He may say in the luxury market —
Joe Fairless: Well, he was saying 500k and below it’s 20% inventory–
Kurt Weil: On the residential side… Whereas I look at it more as multifamily investing, single-family blankets, industrial flats, office space, things like that. That is more where I’m finding more outside investors coming in. Not just from East Coast to West Coast, but other countries. The Midwest market is very attractive, and that’s more so what I would say when I say investors coming out.
I do completely agree that inventory is very well, but in the basic economics of supply and demand, the demand is overabundant and the supply is not there.
Joe Fairless: Got it. I should have broadened my mind a little bit… You’re loaning on more than just single-family homes.
Kurt Weil: Correct.
Joe Fairless: So I guess I should have asked that – what are you loaning on?
Kurt Weil: Anything from single-tenant investment properties to 250-unit multifamily properties, office, industrial, flex spaces, self-storage warehouses, you name it.
Joe Fairless: You said international investors are working with you?
Kurt Weil: Not necessarily me as much. They’re more coming into the Midwest, and a lot of times those deals are harder to do, because you have to find international banks that not only can service that to do an actual loan, but get them qualified… So a lot of it is more coming in the form of cash.
Joe Fairless: Got it. Slocomb, off market stuff – how are you finding deals now? Let’s start with that.
Slocomb Reed: There are some great people in the room right now who do a lot of off market lead generation, and we’ll probably all say that you start with building a list of people that you wanna be able to contact, for whatever reason; they own property in Cincinnati, don’t live in the area, they are delinquent on paying property taxes, they live in the specific neighborhood you’re specialized in… You get a list built, and then you figure out how you can contact all of those people.
What I’ve been doing specifically is I have a team of people who work for me who use public record data, mostly from county auditors’ websites, to create a list of people that I wanna contact, and then we work on finding contact information, mostly phone numbers. Then all of my lead generation starts with cold calls. I have people who work for me who make calls full-time, and I make some calls as well, depending on the property.
Joe Fairless: How did you find the people who work for you?
Slocomb Reed: I use virtual assistants. I found a company that is now called UpWork, that is great for finding people who can do remote work. All of the people who work for me in lead generation are in the Philippines.
Joe Fairless: And do you have one point of contact with UpWork, and then — I’m familiar with UpWork; do you have one virtual assistant who then has a team that they manage, or do you manage multiple virtual assistants?
Slocomb Reed: I’ve found an agency based out of the Philippines, and one of the two founders of that agency now works for me full-time. She helps me find other people who can fill other roles. She’s found three different callers for me. She does the initial interview, she preps them to be interviewed by me, and then I interview them. We go through a couple of practice calls, and then they’re off to the races.
Joe Fairless: What are they compensated?
Slocomb Reed: They are compensated between $5 and $7/hour plus bonuses after I close a deal… Whether I buy it myself, or sell it and get a commission, or some sort of fee. When we get to the end and I’m getting paid, I make sure that they get some of that. But it’s a pretty low hourly rate until then.
Joe Fairless: So they get an hourly rate, plus bonus whenever you close.
Slocomb Reed: Yeah.
Joe Fairless: So it’s $5-$7 hourly rate prior to closing, and then once closing – what do you give them for a bonus?
Slocomb Reed: I give the manager, the person who made the call, and the person who works on the back-end, making sure my callers have their lists – she really just does data entry, but there’s a lot of data entry involved; these people are making thousands of calls a week – I give each of them $100.
Joe Fairless: Got it. And how do you get the phone numbers?
Slocomb Reed: How do I get the phone numbers… There are a few different sources, and I’m doing some more general scrubbing of the internet to find owners of LLCs that own properties, and things like that. I have used Cole Realty Resource, which Cole Information is a big data company; Cole really resources what they use for real estate agents specifically who are looking for contact information for property owners in the area where they sell.
I’ve been using Cole Information to cross-reference with the property owner lists that I’m creating from public records to see who I can find contact info for.
Joe Fairless: Anything else about that process that is relevant to talk about?
Slocomb Reed: Well, I would say that the kind of lead generation, regardless of whether you are cold-calling, you’re hiring people to cold-call, you’re sending direct mail, you’re doing stuff on the internet – when you get to the point of being successful enough to create a full-time income for yourself, that’s a pretty serious commitment of investment dollars… But you can build up to that. I didn’t have 4-5 VAs in the Philippines working for me at the beginning; I was doing it myself, and sending a few postcards, and then using the revenue from that to scale up into bigger things.
Joe Fairless: If you did not close on a property in one month, but you had the team in place, how much would you pay expense-wise for that team?
Slocomb Reed: About $2,000.
Joe Fairless: Peter, we’ve got a bunch of investors watching and listening – what are some relevant things you think they should know in this market, based on your expertise?
Peter Chabris: I think Coleman nailed it. It’s really hard to buy cashflow right now.
Joe Fairless: Slocomb.
Peter Chabris: What did I say?
Joe Fairless: Coleman. [laughter]
Peter Chabris: Slocomb.
Slocomb Reed: Slocomb. He nailed it.
Joe Fairless: That was good stuff, so we wanna give him credit.
Peter Chabris: Yeah, totally good stuff… So yeah, it’s hard to buy cashflow right now [unintelligible [00:17:16].06] MLS. It has to be off market; it’s going to these kinds of ends where you’re gonna find your opportunities. If you can buy something right, it’s super-easy to sell something. Flipping is easier to do, I think, than buying and holding right now in terms of making cash. I think it’s easier to do, because — I wanna make sure I clarify, the market is not softening. The rate at which we’re appreciating is decreasing, but we’re still appreciating.
Joe Fairless: Right, so I misconstrued that. My bad.
Peter Chabris: So you still have market [unintelligible [00:17:47].11] and inventory is more valuable than it was 2-3 months ago because we’re in a hot market, and that’s not gonna change the second half of this year. So the wind’s in your sales; if you can find the opportunity, it’s really kind of hard to mess it up right now from a resale perspective.
Joe Fairless: I think you mentioned that to buy a cash-flowing property you should get them off market… You’re a real estate agent, so you put properties on market; so the properties that you put on market – are they typically not cash-flowing properties?
Peter Chabris: Typically, the amount of work that we do with investors is small relative to the total amount of volume that we do. I’ll be totally transparent about that. We are finding ourselves working with more and more investors in the last six months or a year, and with investors – they will typically find the opportunity and bring us in to make sure that they’ve got their projected sales price correct, and then we’ll help them move the property once they’re done with it. Sometimes we’ll consult on what to do on the property.
Now that we’ve kind of gotten into the scene a little bit more, we are finding off market opportunities present themselves, so we obviously share those with our investors first, and then if not, we’ll take them to the MLS… But in this market, they never get there, unless they’ve been picked over and they stink, in most part.
Joe Fairless: So I’m an investor, I have a single-family home, and I go to you to list it… What are some things that you’re gonna do, either from a marketing standpoint, or positioning the property itself, that will maximize the value when we list it?
Peter Chabris: I love that question. Well, there’s a couple things that you hire an agent for. One obviously is the exposure. We generate more exposure. The second one is the negotiating skills, and I think the third one is positioning from a pricing perspective… And then also positioning within the realtor community.
On the marketing front – the marketing used to be a classified ad in the newspaper; we all know it’s gone to the internet, so the question is “How do you more than just stick it on Zillow? What are the additional activities that you take online to generate additional interest? What is your reputation within the agent community? How do you move the property within the agent community, and how do you market directly to consumers?” Those are all what you look to an agent to do on the marketing front… And then you’ve gotta play something right; even in a market where everything sells quickly, if you over-price, you still leave money on the table, because a properly-priced home will go into multiples and you’ll yield more return on your investment than you will if you start the price too high and let the market figure it out.
Joe Fairless: I love that. Let’s get into some specifics on both of those points.
Peter Chabris: Sure.
Joe Fairless: When you’re looking at pricing, is there a formula that you use for what’s too high, what’s too low, what’s just right?
Peter Chabris: Yeah, I’m a data nerd, so we definitely do a data-driven pricing analysis with our client. We’ll figure out “How do you segment the market correctly?” Is it driven by school districts? If so, by the elementary level? Is it driven by beds and baths and square footage, the floor plan, parking…? And different things matter differently to value in different neighborhoods. Downtown a parking spot is gold. If you’re out in the burbs, a parking spot is assumed. Half bath in older homes, like a Hyde Park and Pleasant Ridge adds huge resale value and the speed with which you can sell, and yet it’s an assumption [unintelligible [00:20:48].13] So different things drive value in different neighborhoods, so that’s a critical component – identifying what is the true market segment you’re operating in. You look at supply, you look at demand, you look at obviously what has sold recently, as well as what you’re competing with, and you also look at what didn’t sell, because that’s data as well, in addition to homes that you know that you know that may be coming on the market that you’re gonna be in direct competition with.
Joe Fairless: When you look at supply and demand, what exactly are you looking at?
Peter Chabris: Well, an appraiser is gonna look at any sales that sold in the past six months. So by default, as real estate agents we only wanna use data that is no less than six months old. We’re gonna look at past sales as a way of identifying how many sales sold in this market segment over a certain period of time, and we’re gonna compare that with how many homes are on the market.
A balanced market in residential real estate is 5-6 months’ worth of inventory. That is to say if we look at the past 12 months and 12 homes sold, your absorption rate would be two homes sold per month. Then we would look and we would say “Okay, how many homes are on the market?” Well, if there’s six on the market and two homes sold per month, that would mean there would be three months’ worth of inventory. So a balanced market is 5-6 months’ worth of inventory. Over six months of inventory is over-supplied, buyers market; less than five months is under-supplied, sellers market.
Cincinnati has continued to go down, down and down, generally speaking, in aggregate, and in some neighborhoods it’s a matter of weeks worth of supply now, which is fun… If you’re selling. [laughter] If you’re an investor, it stinks.
Joe Fairless: Yeah. Great info. From a marketing standpoint, you said you want someone who’s not just gonna post it on Zillow and wash their hands of it, so what specifically does your group do?
Peter Chabris: Yeah, I love that question. We’re a big believer in teasing the market to create urgency. Luckily, the MLS has enabled us to systemize this a little bit. It’s called like a “Coming Soon.” So we’ll try and drive up some urgency within the agent community – because all their clients will starve for inventory – as well as directly consumers; that’s done through various portals… You can pay a premium to promote that availability coming.
With the portals, we use social media – we pay on social media to put that in front of prospective buyers. And we will market that to our own database of buyers; there’s about 14,000 buyers right now… And in addition to that, we’ll work the agent community, both on the MLS and then through some various communities that we’re a part of. And if you do that right, it creates a frenzy. Anybody can sell a home right now, the question is how much money do you leave on the table? Because we actually love — a quick sideline… We love when our clients are interested in a for-sale-by-owner, because we’re not competing with the 4,500 other agents in Cincinnati and their clients, so we know we’re not gonna get stuck in a multiple offer situation; we can get that deal for them for less.
So we look to agitate in public and within the agent community through paid digital efforts, and then part of it is just old-fashioned networking with the agent community. And then in our reality, in our physical space, we’ll do door-knocking, we’ll do fliers, we’ll do call campaigns around a property to drive up interest and activity. Because everybody knows somebody that wants to move into a neighborhood, so we’ll hammer in that community and create some urgency within the local neighborhood as well.
Joe Fairless: Does your client pay for the door-knocking and the fliers?
Peter Chabris: Sure, it’s part of the commission.
Joe Fairless: It’s part of the commission.
Peter Chabris: They pay us when we’re closing.
Joe Fairless: Right. So at what price point is it worth it for your company to do that level of effort?
Peter Chabris: That’s an awesome question. What we’ve found was that it didn’t make sense when we got into the lower price points, so now we just charge a different commission rate or a flat fee, and then they’ll get the exact same service as someone who has a half a million dollar home.
Joe Fairless: Okay. So anything less than 500k, you’ll either try to–
Peter Chabris: So the way we do it is typically (we’re not price-fixing here) agents charge around 6%. Under 150k, we’ll generally charge 7%, under 100k we generally charge $7,000 flat fee. Now, these are for individual clients. [unintelligible [00:24:44].06] if it is a multiple iteration client, then obviously that’s something that we’re gonna talk about.
Joe Fairless: And what have you done that was a waste of money and time that you no longer do from a marketing standpoint?
Peter Chabris: God, where do we start…? Buses, bench boards, signs over urinals… [laughter] [unintelligible [00:25:08].25] I just wanna be different and cut through all the chatter, right? So… I’ve learned a lot. Anybody who’s in real estate, ask me first before you spend the money, because I can tell you if it works or not. [laughter]
Joe Fairless: Kurt, based on your experience, what should this group know that would be relevant and helpful to them, based on your expertise?
Kurt Weil: As investors, coming from my banking background, inside, out into the broker world, I would tell you to be smart; it’s a sellers market. If you’re selling, good for you. If you’re buying, be smart. With the way cap rates are now, if you take something on market, it’s slimmer and slimmer and slimmer. And as we’re in the looming hours of tomorrow, where they may or may not cut the Fed fund rate, is that really gonna do much to the Treasuries? Has the bond market already gone out and lowered rates already? They’ve already reacted; or should I save “have been proactive.” So is your margin thin between your cap rate and your interest rate? Is there a lot of meat on the bone for you? No. So you have to be smart about your underwriting.
What I can tell you is that, going back to your initial question of this time last year, [unintelligible [00:26:18].16] and you see vacancy rates that used to be 6% just hit 4.9%. That’s good. It’s good for investors. Like I said, we’re in a good economy, things are going well, rates are low, it’s advantageous for investors, but it’s really advantageous for sellers. So be careful. Be careful when you’re underwriting, make sure you’re putting in reserves, make sure you’re looking at the cap-ex, and make sure that you’re doing your own due diligence.
Joe Fairless: And you mentioned cap ex and reserves… Thinking about an example of a previous client, who came to you to get a loan, and you said “I can’t do it based on the numbers that you’re showing”, what were the categories and numbers where it just didn’t work? …if that situation has happened to you.
Kurt Weil: In regards to making improvements for increased rents, or…?
Joe Fairless: They wanted a loan, and they couldn’t get a loan because of how they were underwriting. Where did they mess up?
Kurt Weil: Sure. The biggest thing — when you’re four units and under, you can take it in the residential world, where you can pass on your DTI. If your DTI is there and you can do it with a W-2 wage, you can overpay; you can overpay all day long. And that’s gonna be a shame on me; I learned my lesson the first time around.
When you start getting into the five units and more, that’s where you’re gonna be based on a cashflow coverage. When you’re based on a cashflow coverage, you need to learn with the bank that you apply with, how do they apply that [unintelligible [00:27:40].27] because we’re at a 4.9% vacancy rate, even though the property is 100% occupied, are they always gonna put in a 5% vacancy rate? Yes. “Well, I’m gonna self-manage the property.” “Fantastic, we’re still gonna put in a 5% property management fee.” It’s gonna happen no matter what, so the margins can get thin.
Will they do [unintelligible [00:27:58].04] agency-type debt, a requirement of $250/door? Are they gonna base you on $150/door in insurance, even though you have a better quote? Those are the type of questions that you need to find out – where are you gonna take this loan, where are you gonna go with it, who’s going to be looking at it? Is your broker, is your banker going to be addressing those issues upfront? Are you doing a value-add deal, are you gonna add cap-ex? “Hey, I can still increase this right now by $200/door, but I need stainless steel appliances, and I need to repaint the cabinets, I need to put down new flooring.” Is that [unintelligible [00:28:30].11] is your proforma still gonna show, at a 95% occupancy, or while you’re going through stabilization, while you’re still in an interest-only period, with a lower stabilization – is it still going to be able to cashflow?
So those are the type of questions — sorry, I didn’t mean to get too much into it…
Joe Fairless: That’s good, thank you.
Kurt Weil: The biggest thing about investors is there’s a big cut-off – four units and under, and then five units and above… And it’s a game-changer. It’s a game-changer no matter if you’re starting out with one unit, or going straight into 12. It’s things that you really have to consider, and read up on, and learn about to be able to get your finances to build your business.
Joe Fairless: As we wrap up, anything that we haven’t talked about, that we should, as it relates to helping everyone in this room, and watching and listening, be successful in finding and buying profitable deals now, and then the foreseeable next 6-12 months in Cincinnati?
Slocomb Reed: Sure. Moving forward, there are several things that are impacting the market: cashflow, cap rates, things like that… One thing that I don’t think is going to change now is that in the last few years the rest of the real estate investing world has found us, and they’re not going anywhere. What I mean is that the people who are used to getting 4-caps, 5-caps, 6-caps on the East Coast and the West Coast – they’ve found Bigger Pockets and they’ve found Cincinnati, and when they figure out that they could get an 8-cap to a 10-cap on the market here, it sucked all the wind out of the room. And that’s what a lot of us have been experiencing.
On that — so I was listening to a Bigger Pockets podcast at least a couple years ago, and Tim Ferriss was on. He wrote the 4-Hour Workweek and basically every else about business, and this is worth listening to… I was in a rental car, on my way back to the airport in Maryland, and when I heard what Tim Ferriss had to say to Brandon Turner and Josh Dorkin, I had to pull off on the side of the highway, put my blinkers on and write notes.
We were having trouble finding deals, and he was explaining the three advantages to making any business decision. The first is an informational advantage, the second is an analytical advantage, and the third is a behavioral advantage.
Working backwards, a behavioral advantage in figuring out whether or not you should buy or sell real estate probably has a lot to do with your discipline. Does it meet your criteria for what you should do? Are you stretching yourself because you’re desperate? Are you maintaining good investing behavior?
The other two are something that I think everyone needs to have in order to get a good deal in Cincinnati right now. An analytical advantage is when you have a way of seeing something that other people don’t have. For example, if you have a building – let’s say a duplex – where both of the units have three bedrooms, right now market rent for that, depending on the neighborhood… I’m thinking about a property in a C-class neighborhood right now – your market rent might be $850, but Section 8 is gonna pay $1,250 for that same apartment. So knowing those kinds of things gives you an analytical advantage and it allows you to see cashflow and see benefits to a deal that other people aren’t seeing.
The last one – informational advantage is when you know things that other people don’t know. That’s what you have when you’re going off market. And when I say “going off market”, I don’t necessarily mean that you need to spend thousands of dollars a month in postcards and SEO and cold-calling and door-knocking every evening… But you need to know the people who are doing that and who are putting together the deals off market, that are showing serious cashflow, that are showing the 10-caps, 12-caps, that are showing the real value-add potential that creates what we call BRRRR deals. You need to have that hassle somewhere, either you or with the people in your network, so that you have that informational edge.
Joe Fairless: Any additional thoughts?
Slocomb Reed: I can only speak to five families and less; that’s the commercial world, it’s these guys. If you’re looking at five units or less, just to your point, protect yourself. Everybody’s paying premiums right now, so make sure you’ve got an agent looking at that property and making sure that your plan B [unintelligible [00:32:50].19] Make sure you’re buying it such that you’ll be able to get out and sell it at least breakeven. I think that’s a huge, huge piece of creating insurance for yourself when it’s so competitive acquiring inventory right now.
Joe Fairless: Any parting thoughts?
Peter Chabris: All I can say is be diligent and be patient, because a lot of people are trying — like Slocomb said before, be patient, because people are trying to make deals happen, just because they’re itchy that they’re not meeting that 24-month, 36-month, 5-year goal, that they don’t have so many units. Don’t get wrapped up in the unit count. Get more wrapped up in “Is it cash-flowing?” Remember, your first one, with the bank, is always your proof of concept. If you didn’t do it right the first one, you’re not cash-flowing, who’s gonna give you a second one? So be diligent and be patient.
Joe Fairless: Thank you, you three. I really appreciate it. [applause] We have time for a couple questions. Yes, sir…
Audience Member: You guys mentioned things like inventory, appreciation rates, and those things when they affect the market. If you saw a downturn coming, what would be the red flags that are blinking? Is it an inventory rate of X, is it an appreciation of X, is it the bond market, is it unemployment? And what would be those numbers where it’s flashing and you’re like “Okay, here it comes.”
Peter Chabris: So if you watch sold data, it’s too late. You have to be watching the ratio of active inventory to the ratio of inventory that’s under contract, waiting to close. When you’re in an up market, that’s where you’re going to see the trend before it bites everybody else in the butt. Shameless plug – we do a monthly video email to our people, with the hidden economic indicators that drive our market, and [unintelligible [00:34:45].05] on what we think that means. If you guys are interested, just email peter@asktcg.com and I’ll add you to that list. But you’ve gotta watch the ratio between pending inventory and active.
Joe Fairless: What’s the ratio that would be trouble?
Peter Chabris: You look at the number of units that are traditionally sold over a six-month period – that’s the absorption rate; how does the pending inventory over a 30-day time correlate to that monthly absorption rate in the sold area? If it starts creeping up, that’s your first indicator… It’s another way of saying watching the increase in inventory.
Inventory is gonna go up or demand is gonna drop. Normally, it’s a little bit of both, and then all of a sudden it’s really extreme, so you’ve gotta be watching the lead indicators, not the lagging indicators. Does that answer your question.
Audience Member: Yeah, that’s one. Are there other factors? You mentioned the bond market… And then there’s obviously appreciation, and/or — I mean, that inventory, that’s awesome. Are there other indicators like that?
Kurt Weil: The bond market can be tricky. It depends. If you historically look at how agency treated multifamily compared to the interest rates that the bond market did on Treasuries, it potentially could be an indicator. But then it’s hard to say… And I say that because look at the interactions with the Fed itself; look what they did last year – they bumped it up a couple times. A lot of people that had revolving debt lines of credit, not that monthly installment [unintelligible [00:36:12].07] that revolving credit card debt, everybody’s tied to to prime on their home equity line of credit; if you’re flipping, you’re tied to some type of base. Most likely prime, but it could LIBOR and whatnot… But when that happens, your rates are going up, and the one that’s working that is the investor. But that leads into so many more indicators.
That leads into that discretionary spending not being there when times are good, that leads into not as much consumption GDP… That leads into so many things that get reactionary; I believe the official definition of a recession is the previous two quarters of downward trends. You don’t know you’re in a recession until it’s already happened.
Slocomb Reed: I hope you guys are taking notes. I’m on the panel right now, and I’m taking notes. I hope guys are getting as much out of it as I am.
Kurt Weil: Can I plus that up just a little bit?
Joe Fairless: Sure.
Peter Chabris: Two other indicators to watch – interest rates, GDP and unemployment drive home values, or residential home values. Commercial – it’s all about return on investment, but for residential, those are the three drives. He can speak to rates… Our unemployment dropped from 3.6% to 2.9%, and GDP has expanded as well, so there’s no indicators that would demonstrate we’re going anywhere except for our continued appreciation in values.
Joe Fairless: [unintelligible [00:37:25].14] Australia.
Peter Chabris: What’s that?
Joe Fairless: Australia has had good economic times for 27 years in a row.
Peter Chabris: That’s why they’re so happy. [laughter]
Audience Member: So if a recession were on the horizon, how would that change your investment perspective and/or how do you see the Cincinnati market going forward, next 12-18 months?
Slocomb Reed: I can start… Yeah, the first thing I’d do, to answer your question, is go on Bigger Pockets and google-search “recession-proof”, and you’ll find oodles and oodles of things. I would say if we were in a downturn or if we were preparing for a downturn, number one, have cash; and number two, cashflow can keep you from needing to sell.
One of the fundamental things – and when you’re buying your first rental property especially – that you want to avoid is the need to sell. So if you’re bringing in the revenue that can sustain your property… There are a lot of people around the room nodding heads, who have larger portfolios than me, FYI… And if you have the cashflow coming in, that will keep you afloat and keep you, ideally, generating income as the market dips, and you’re gonna be fine, so long as nothing else is compelling you to sell at a time that is disadvantageous, if that makes sense. And really, if you wanna make sure that your cashflow is going to be okay in a market that is turning down, you wanna make sure that what you own is not a niche product that is only desirable in an up market.
Joe Fairless: So that is a way to play defense, and I completely agree with you. You can search “three immutable laws of real estate investing.” I’ve got an article that talks about that – buy for cashflow, have long-term debt, and have adequate cash reserves.
Slocomb Reed: That’s awesome.
Joe Fairless: But how would you play offense?
Slocomb Reed: Have cash is a great way to play offense. One of the ways to look at market cycles is that there are times when everyone wants to buy and there’s nothing for sale, and there are times when everything’s for sale and no one wants to buy… And really, the answer would be for playing offense — your question to be asking yourself now is “How do you put yourself in a position to be one of the few people able to buy when everything is for sale?”
Joe Fairless: And I also thing that studying creative ways to structure deals, if you’re in residential – creative ways to structure deals, so that when the recession does come, you already have that knowledge to know how to do workouts with distressed sellers, so that you’re not trying to learn and go; you’ve got the knowledge and you can get going immediately.
Slocomb Reed: Yeah, awesome.
Joe Fairless: Any other questions?
Audience Member: What do you think specifically for the Cincinnati real estate market maybe is the fewest days on market, for residential? Or if you’re an investor, where do you think you can put your money today with how it is [unintelligible [00:40:22].02]
Peter Chabris: All I would say is that economically — first-time buyers have never felt a bigger pinch on inventory, that first-time buyer market segment. So wherever first-time buyers are buying, and whenever that price point is, is where you can pop things as quickly and for the biggest return.
Joe Fairless: What’s the average price point?
Peter Chabris: Yeah, I was gonna say – generally, in Cincinnati it’s anywhere from up to 175k to maybe 250k-275k in the young professional white collar entry-level inventory.
Slocomb Reed: When I get asked that question by out-of-state investors, typically people who are trying to look for their first real estate investment deal, someone who lives in L.A. or New York, for example, and wants to come here for cashflow, the generic, but accurate and helpful answer that I give during that little phone call, if you’re talking about path of progress, is look at Over-the-Rhine and downtown, and look at Oakley; then expand out in the rings. Very, very generally speaking, what we’re seeing elevator pitch-wise is that those two areas are crazy hot, with new development, with renovations, with lots of money getting invested, and that’s rippling into the surrounding neighborhoods.
So when you talk about path of progress, what I tell people who are on their laptop, on the phone, on Google Maps, is put a pin on Over-the-Rhine and put a pin on Oakley, and then just go out from there and start looking at that.
Kurt Weil: That’s a great one. I think maybe the easiest way to sum that up is follow the money. The first-time homebuyers – where are they putting their money, where are they getting that debt? Where are the projects going on? What area is being regentrified? Is there city money, is there tax abatements? Where are they being improved at? Where is the redevelopment of the strip centers? Follow that. On those ripples of those areas of Oakley [unintelligible [00:42:22].07] So just look at the ripples and then follow the money.
Joe Fairless: Last question. Anyone got a last question? It’s gotta be a good one. Pressure is on…
Slocomb Reed: One thing – shameless plug for each of these guys. They’re both phenomenal. Kurt is working on his second “Commercial Mortgage for Me” right now, and his knowledge of the market and what you can get away with when lending is phenomenal. He’s a wizard. [laughter] And that was appropriately put, by the way. The commercial game is a lot about what you can get away with.
And Peter Chabris is genius. He’s been helping me a lot in my own business, in figuring out how to do lead generation better, how to have better systems and better infrastructure. So if you get the opportunity before you leave, you should definitely shake hands with both of these guys.
Joe Fairless: Alright, thanks a lot. Oh, he’s good, too. [applause]
