BiggerNews: How Much of a Return Should Your Investment Property Produce?

Summary

BiggerPockets Real Estate Podcast Summary

Episode Title: BiggerNews: How Much of a Return Should Your Investment Property Produce?
Release Date: November 15, 2024
Hosts: Dave Meyer, James Dainard, Garrett Brown

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Introduction

In this episode of the BiggerPockets Real Estate Podcast, host Dave Meyer engages in an insightful discussion with co-host James Dainard and short-term rental expert Garrett Brown. The primary focus is on understanding what constitutes a good return on various real estate investments, including flips, long-term rentals, and short-term rentals. The conversation delves into essential metrics, strategies for maximizing returns, and the balancing act between risk and reward.

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Key Metrics for Evaluating Deals

Cash on Cash Return

The conversation begins with an exploration of cash on cash return, a fundamental metric for assessing the efficiency of real estate investments.

• James Dainard emphasizes simplicity in his approach:

  "[00:46] James Dainard: I always like coming on talk deals."

• Dave Meyer elaborates on the metric:

  "[01:03] Dave Meyer: ...cash on cash return is basically just a measurement of how efficiently your investments produce cash flow."

Internal Rate of Return (IRR)

Dave introduces IRR as a more comprehensive metric that accounts for cash flow, appreciation, and the time value of money.

• Dave Meyer explains:

  "[06:05] Dave Meyer: ...IRR measures the return that you get on a lot of different variables."

• James Dainard adds practical implications:

  "[20:19] James Dainard: ...I target a 12% IRR because... 8 to 9% compounding returns in the stock market..."

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Different Investment Strategies and Expected Returns

Flipping Properties

James outlines his aggressive strategy for flipping homes, targeting high returns within short periods.

• James Dainard details his targets:

  "[16:01] James Dainard: ...I target a 35% return in six months..."

• Dave Meyer highlights the comparison to stock market returns:

  "[17:38] Dave Meyer: ...that's eight times the average S&P 500 return."

Short-Term Rentals

Garrett Brown discusses the dynamics of short-term rental investments and the returns investors can expect.

• Garrett Brown shares insights:

  "[08:10] Garrett Brown: ...average short term rental investor probably is going to be closer into that 10 to 15% bucket..."

• Dave Meyer reinforces the importance of considering personal involvement:

  "[09:19] Dave Meyer: ...the return you should be looking for is relative to your specific situation."

Long-Term Rentals

James elaborates on his approach to long-term rentals, balancing cash flow with equity creation.

• James Dainard explains his criteria:

  "[20:19] James Dainard: ...I target about an 8% cash on cash return... and a minimum of 10% equity position..."

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Risk and Reward Spectrum

The trio explores the inherent relationship between risk and potential returns in real estate investments.

• James Dainard categorizes his approach:

  "[14:39] James Dainard: ...I have aggressive goals, a target to get to those goals like in five years... higher risk."

• Dave Meyer emphasizes personal risk tolerance:

  "[15:52] James Dainard: ...I chase higher returns because I'm trying to get there quickly, but they come with a lot of risk."

Balancing High Returns with Manageable Risks

James discusses the necessity of padding deals to mitigate risks, acknowledging that losses are inevitable in flipping.

• James Dainard states:

  "[19:06] James Dainard: You got to pad those deals for sure... it's a lot of work, long nights, random events."

• Dave Meyer concurs, highlighting the importance of cushioning returns:

  "[19:32] Dave Meyer: ...you have to target those really juicy gains... give yourself enough cushion..."

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Reinvesting Strategies

The discussion shifts to strategies for reinvesting profits, whether into new deals or existing properties, tailored to individual investment goals and market conditions.

Garrett Brown’s Reinvestment Approach

Garrett explains his rationale for reinvesting into existing properties rather than expanding his portfolio.

• Garrett Brown shares:

  "[31:35] Garrett Brown: ...consolidate all of these properties onto one property... lower insurance rates... manage taxes effectively."

James Dainard’s Portfolio Optimization

James outlines his method for auditing and reallocating funds based on available deals and desired returns.

• James Dainard describes his process:

  "[35:04] James Dainard: ...audit my inventory... different asset classes with varying returns and risks."

• Dave Meyer adds actionable advice:

  "[37:16] Dave Meyer: ...benchmark your local deals by analyzing multiple deals in your area."

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Final Advice and Takeaways

The episode concludes with actionable insights for listeners aiming to optimize their real estate investments.

• Dave Meyer urges proactive benchmarking:

  "[37:16] Dave Meyer: ...run five deals in your neighborhood and figure out what the average return is..."

• James Dainard reinforces the importance of flexibility:

  "[36:55] James Dainard: ...there's always a transaction in. I just have to go, how do I want to work that transaction?"

• Garrett Brown highlights the benefits of operational efficiency:

  "[33:50] Garrett Brown: ...building the right business helps mitigate risks and enhance returns."

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Conclusion

This episode of the BiggerPockets Real Estate Podcast provides a comprehensive look into evaluating real estate deals through key metrics like cash on cash return and IRR. With expert insights from James Dainard and Garrett Brown, listeners gain a deeper understanding of how to balance risk and reward across different investment strategies. The discussion underscores the importance of proactive deal analysis and strategic reinvestment to optimize returns and achieve financial freedom through real estate investing.

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Notable Quotes:

• "If you could go out and find the 20% cash on cash return deal Garrett was just talking about. No, it's not."
  — Dave Meyer [25:20]

• "If you invest $100,000 over 30 years in the stock market vs. real estate with a 12% IRR, the difference will be $1.2 million."
  — Dave Meyer [24:16]

• "The higher the return, the higher the risk. It's about finding where you fall on that continuum."
  — Dave Meyer [09:19]

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Key Takeaways:

1. Understand Key Metrics: Mastering cash on cash return and IRR is crucial for evaluating the efficiency and overall profitability of real estate investments.
2. Align Investments with Goals and Risk Tolerance: Different strategies such as flipping, short-term rentals, and long-term rentals cater to varying risk appetites and financial goals.
3. Proactive Deal Analysis: Regularly assess and benchmark local deals to make informed investment decisions and identify lucrative opportunities.
4. Strategic Reinvestment: Decide between reinvesting in existing properties or exploring new deals based on market conditions, operational efficiency, and long-term objectives.
5. Balance Risk and Reward: Higher returns come with increased risks; padding deals and creating operational efficiencies can help mitigate potential downsides.

By integrating these strategies, investors can optimize their portfolios, enhance cash flow, and accelerate wealth accumulation through real estate.

Transcript

[Dave Meyer]

Everyone tells you you gotta go out and buy good deals, but no one actually tells you what that means. Like what is a good deal today? Well, in this episode we're gonna give you the real numbers you should be looking out for. What's up, everyone? It's Dave. And today I have my on the market co host James Dainard here with me alongside Biggerpockets short term rental expert Garrett Brown. So today we're going to dig into some real numbers of what a good return is on a flip, on a long term rental, on a short term rental, and for different types of investors. Garrett, welcome back to the show. Thanks for being here.

[Garrett Brown]

Thanks for having me back. I'm excited.

[Dave Meyer]

Yeah, likewise, James, good having you as well.

[James Dainard]

I always like coming on talk deals.

[Dave Meyer]

Well, we knew this show was perfect for you. We're talking about specific numbers, different types of returns. So let's just start there. James, before we talk about baseline for what your expectations of a return are, what metrics do you actually look at for determining what deals you should be doing?

[James Dainard]

You know, so when I'm investing, I'm pretty simple. I look at cash on cash return. How much cash am I putting into the deal, what is it producing me back on an annual basis and whether it's a flip, a development, a rental property. That is my biggest concern. If I'm going to take away any cash and park it on a property, I want to know what is going to be my return on annual basis because that tells me whether to spend it or not.

[Dave Meyer]

Okay, well, that's pretty simple. I love cash on cash return and James alluded to this. But if you haven't heard of this term, it's basically just a measurement of how efficiently your investments produce cash flow. So you just take the total profit you make from an investment in a given year, you divide that by the amount of money that you put into that deal. And that doesn't include any financing. It's like actually how many dollars came out of your pocke and you divide that and that's cash on cash return. And it could be 2%, it could be 20%, it could be 200%. And we'll talk about what numbers to realistically expect here at the end of 2024 in just a minute. But that is how you calculate it. Gary, are you similar in the short term rental space or is there something different you look at?

[Garrett Brown]

I definitely take cash on cash return into a big equation when I'm factoring places. But another thing that I look into is just the sheer amount of people that are traveling to a specific area I'm looking in that can help change the cash on ca cash return that I'm looking at and the appreciation rate, appreciation rates that might come with it. But cash on cash return is definitely a big metric in short term rental because we all want cash flow when we're doing this.

[Dave Meyer]

Well, that's a good point, Garrett, because looking at demand, especially in short term rentals, helps you forecast what your growth might be when you're looking at cash on cash return. I guess, James, you tell me. But I think with a flip it's a little bit easier almost because you don't have to forecast what things are going to change a year from now or two years from now. You're sort of just figuring it out in year. So when you buy something, James, that's longer term, maybe it's, let's just call it a, you know, an apartment unit or you know, a single family home that you're going to rent out. Are there other metrics that you factor in to consider what future growth potential is or factor in the time value of money?

[James Dainard]

Yeah, I mean those things I call those accelerators, right? Like if I'm going to, you know, make a strategic decision to buy something because there's economic growth, there could be tax incentives, there could be path of progress indicators, you know, like if I'm seeing a lot of economic growth in a local area, you know, like if I start seeing Starbucks goes in big box stores, more infrastructure going in certain areas, like opportunity zones, like when the opportunity zone credit came up, people started really buying in areas developing that infrastructure is getting built, which is going to typically attract more people. The more people that come in, you're going to get more potential for income, rent increases, appreciation, all those things. And so those are the accelerators. So I don't factor those into my internal numbers though. Those are upsides. And something that I do when I'm defining what I want to do for the year in my buy box, like I'm a big clarity guy every year I want to make sure I know what I'm trying to accomplish for the year and the locations that will get me to those goals. And you know, if I'm trying to pick up a lot more rentals, like this year, one of my goals for 2025 is to buy more rentals outside of Washington. I want to get in a little bit more land lord friendly states just to balance out my portfolio. Now there's so many different ways that I could invest and get a still Cash on cash return with a rental property, I still want to get at least 10% return on my money in that first year, not in the first year because, you know, I do a lot of value add construction. So year one's usually pretty ugly. You're not getting any type of income out of it. You're just creating the appreciation and creating the equity. But based on me setting that core standard of I know what I want my return to be is I want it to be a 10% return. The reason I want it to be a 10% return is because I can achieve 25, 30, maybe 50% returns on flipping homes or developing homes. I want to make sure that I can still get a high growth on my cash. The rest of it is upside. And it's about, how do I then take that 10% and go, what areas do I park it in to get extra appreciation? And that's where you can start looking at that population growth, what's going on, what's going on with the job market? You know, like, if I know that the tech's expanding rapidly in Seattle in certain neighborhoods, I might want to look at that neighborhood and invest there. If I know things are going to get up zoned, you know, and there could be a change in density, I might change those returns too. And so based on the location and what I'm trying to accomplish in those locations, I move that cash on cash return number. I think that is really important. No clarity what you're trying to accomplish. And then adjust your returns based on these extra accelerators too. If I think there's a high acceleration growth, I might go with an 8% return. And if I think there's a low acceleration growth, I might go with a 10 to 12% return.

[Dave Meyer]

That. That makes a lot of sense. And I do want to get to that in just a minute and talk about what our expectations are, because as James said, what return you should be targeting is really dependent on what upside there is and also what risks there are for a given area. Before we move on, though, I want to just say that maybe I'm nerdy here, but the metric I personally like to look at is something called irr, or internal rate of return. And this is. It's kind of difficult to explain, and it's a little bit difficult to calculate. I've written about it in my book. It's like half the book. That's why, you know, it's complicated to. To explain it. But the reason I like IRR and why I recommend people spend some time learning about it is because it measures the return that you get on a lot of different variables. So cash on cash return is great. It helps you measure cash. It doesn't necessarily help you measure appreciation in year. And as investors, it's super important not just to see how much money you're making on a deal, but also to generate that return quickly. Right? Because if you know anything about the time value of money, the faster you earn your return, the more it's worth. Just as a simple example, right? Like if someone asked you if you wanted 100 bucks today or 100 bucks in two years, you would say, I want a hundred bucks today because I can invest that money and turn it into hopefully 120 bucks by two years. And so IRR is a really great metric that helps you sort of understand, understand the whole picture. Your appreciation over time, your cash flow under time, and the talent value of your money into one number. I'm not going to call it a simple number, but it is into one number. And I just wanted to explain that before we get into the rest of the episode because I will probably refer to IRR a couple times here. So let's jump into some of these questions about what a good deal looks like today. So Garrett, let's start with short term rentals. Do you have a sense, Garrett, you know, what other investors are getting in terms of their deals and like what would be a good deal in today's market?

[Garrett Brown]

I think in today's market, I think the average short term rental investor probably is going to be closer into that 10 to 15% bucket, especially depending on what type of property you get in, what market you're going into. There's so many different factors because even myself, like even these markets I'm talking about, that I'm getting 25% in and things like that. The appreciation in a lot of these markets is not as high as some of the markets that are going to have a much less cash on cash return. But those markets probably are better markets for a lot of people that are investing in these type of rentals. I'm a short term rental investor full time, so I had a lot of free time to develop these types of stays and plots and things like that. But you know, not everybody can do that and I understand that. So if you're going into a different type of market and even if you have property management and you can get a 10% to 12% return and you have a property manager pretty much doing most of the work for you, that's going to be a really good deal in a short term rental area now, especially if you're in a, in a better market that's rising. But I would always look for at least 15% in the short term rental area just to kind of mitigate the amount of extra effort you have to put into and some of the risks that come involved with it, too.

[Dave Meyer]

I think this is a really important point. That return and the number that you should be looking for is relative to your specific situation. And Garrett just mentioned some important ones, like, for example, how much time you're going to put into something. Like if you're super handy and you have a lot of time on your hand, the target return for you should be a lot higher because you should go get into that property and go fix some stuff yourself. If you're more like me, who's relatively passive, like, I typically probably target lower returns than James or Garrett because I'm looking for deals that are really low headache and don't require a lot of my time. And so as we talk about this throughout the episode, just keep that in mind that it's a spectrum, right? There's a risk and reward work on a spectrum. Deals that are really pretty safe and are going to, you know, reliably deliver you a pretty decent return and have relatively low risk are not going to have the best returns. That's just not how it works, right? The highest returns are there for people who are willing to take on that risk, people who are willing to put that additional effort into it. And so you just have to figure out for yourself basically, like, where you fall on that continuum and what's important to you. It's time for a quick ad break, but first, just a quick note. If you're enjoying this conversation, you may want to pick up James's new book, the House Flipping Framework. James has flipped more than 3,500 properties, and the book is his comprehensive guide to extracting value and maximizing profits. With that strategy, you could order [e-mail] House flipping YT. That's the letters YT. And that's it. We'll be right back. This show is sponsored by Airbnb. Back when I lost my job in 2020, Airbnb is what gave me the extra income to work for myself. Look, I wasn't a big real estate investor then. I was just trying to take care of my family. And thanks to Airbnb, I've done so much more. Next time you're out traveling for work or on vacation or you aren't using your place, it can actually make money for you that adu extra bedroom or additional property. It's an opportunity waiting to happen with Airbnb.

[James Dainard]

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[Dave Meyer]

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[James Dainard]

Yeah, and I think this is a very important topic always. Right. Like depending on what's going on with the market, what we're going with, the forecast, you know, the higher the return, the higher the risk. Now I'm a very high risk person. You know, I have aggressive goals, a target to get to those goals like in five years. And so for me, if I want to hit those goals, I got to be higher risk. Which is like what Garrett's saying. I got to do asset classes that are more work. You know, Garrett's hitting a 25% return because you hear this all the time on like forums and they're like, no, everyone's lying. You can't hit those returns. They're selling a dream. You can hit those returns, but the more work you put in, the higher the return is going to be. Garrett's talking about doing a massive renovation project so he can do a brrrr to where he can buy it, discounted rehab it, refinance out most of his cash that gives him a higher return. At that point, then he has to manage a short term rental operation business that is substantially more work than long term rental. I don't even do short term rental because I have so much construction going on. I don't have time to do both those. Right. It's like I need to focus on one thing or the other.

[Dave Meyer]

We've finally found something that's too much time for James. Flipping, buying short term rentals, being on a TV show, podcasts. That's all fine though.

[James Dainard]

Yeah, this is a little bit too much. But now that now I'm here, 25.

[Dave Meyer]

Returns I'm like, now you're gonna go buy a geodome.

[Garrett Brown]

Let's, let's talk whenever you're ready.

[James Dainard]

Good deals on those. And I'm always like, what do you do with this? But, you know, it's. I chase higher returns because I'm trying to get there quickly, but they come with a lot of risk. Like on flipping, I go for on each individual deal a 35% cash on cash return in six months.

[Dave Meyer]

Okay.

[James Dainard]

And that includes levering that project usually about 85%. And so that means I'm going to get financing on 85% of the total project purchase price and rehab, after I put out my down payment, all of my cash out of pocket on that deal. To service that deal. I'm trying to make a 35% return. So if I put 100 grand in, I want to make 35 grand in six months on an annual basis. That's going to get me to about a 60 to 70% annualized return. That's a very explosive return. But that also comes with some explosive risk. Timing is everything, right? Like as a flipper right now, it's slow. You gotta wait longer. It's gonna slow down your returns. You have more expenses. And the reason it's so rewarding is because it can go the other way very quickly, too. Like, let's say I'm flipping a house for a million dollars in the Seattle market, and the Property comes down 5%. That's not even that dramatic, but 5%, yeah, that can turn into 50 grand, really. And I might only be targeting to make 50 grand on that deal or 100 grand on that deal. And so as the market goes up and down, you can catch those swings. And so you just. For me, I'm willing to get there because I want to grow quickly. But the higher the return, the higher the risk. And that's where you really have to focus, like what Garrett said, on your business, your operations. How do you reduce risk? You create the right business.

[Dave Meyer]

I love the specificity of these numbers. So you target a 35% return in six months. If you annualize that, that's a 70% return, which is just insane. You know, that's an incredible return. If you think about what's available in the stock market, it's like, you know, 8, 9% is the average of the S&P 500. So you're talking about eight times that amount. So that will grow your wealth very, very quickly. So that's. That's super impressive. But as James noted that there's a lot of risk there as well. But that's why I just want to make sure that we, we underscore this main component here. Correct me if I'm wrong, James, but the reason James wouldn't do a deal for 15% on flipping in six months, even though that's a great return, like if you zoom out and say, hey, you're making 30% on your money that year, normally people would say yes. But when you talk about that 30% return that James is generating, you have to risk adjust it and understand that even though James is amazing at what he does, sometimes you're going to take a loss. And so you have to only target those really juicy gains because you have to give yourself enough cushion so that like he said, if the housing market fluctuates or you have some cost overruns or something happens that you don't understand that there's still enough in there that you're hopefully not losing money. And even if you do lose money, you're only losing a little bit of money instead of having sort of disastrous return.

[James Dainard]

You got to pad those deals for sure. I mean, the risk can swing so quickly when you're flipping homes. It's not a question of if you'll lose money, it's when you will lose money. Because it will happen. Yeah, you have to build that in. And that is not for everybody because it's a lot of work, it's a lot of long nights, a lot of random events that you have to deal with, like fires that are going off in all different types of areas and it's not worth it to a lot of people. It's not for every investor either, dude.

[Dave Meyer]

Absolutely not. No way. I don't want to do any of that. I mean, I actually, I have become more interested in flipping over the years just because I spend all day talking to people about real estate. And it sounds kind of interesting, but for the first like 12 years of my investing career, I had absolutely no desire to flip houses just because I work full time. I have other stuff to do. So I'll talk a little bit about my own targets because as the one person here who. Well, Garrett, you work at Biggerpockets as well, but you have professional experience in real estate, whereas I have always been sort of a part time investor. I'll share mine. But James, I just wanted to quickly ask you for like a long term rental because I know you buy that. What kind of cash on cash return are you targeting there?

[James Dainard]

So depending on the location. So if I'm in like a better neighborhood, you know, like I said, a class neighborhood. Right. Next path Progress Seattle. We usually are targeting about an 8% cash on cash return, but we also want to have a minimum of 10% equity position in that property where we're creating 10% equity. So there's a blend. I'm not just looking at the cash on cash return. Now if I'm in a neighborhood that has less accelerators, that might be more steady growth, I still target that 10% cash on cash return. And typically I want a 15% equity position on those neighborhoods because usually I can buy them a little bit cheaper because it's less competitive and in. So I do a blend. When I'm looking at my long term rentals, what's my, what is my cash on cash and then how much equity am I creating by doing my rehab plans?

[Dave Meyer]

Okay, that, that is a really good metric for people who are going to be active in their long term rentals. So again, want to just make sure everyone understands that James is not just going and buying these deals off the MLS and that they're stabilized assets and that they're going to be producing this type of 10% cash on cash return. Rather, what he's doing is going and buying properties that need to be renovated. He's doing the hard work, he's getting permits, he's doing construction, he's doing the lease up, he's stabilizing them and then they're producing these really nice returns that he's been talking about. So I do now that, now that we've just talked about this, I want to sort of, I want to give voice to the more passive investor. I guess I'm not like a passive investor, but I guess I would say someone who's not going to do a lot of construction and be on site a lot of the time. And when people ask me for this type of situation, what a good deal is, I have like an almost comically stupid and simple answer here. Tell me if you think I'm crazy, but to me a good deal is just better than anything else I would do with my money. Like that's the frame of reference that I use for every decision I make about real estate. People are like, is a 10% return good? I'm like, well, are you just going to put it in a savings account? If you don't invest in real estate, then yeah, the 10% return is really good. Or you know, are you going to. Is a 10% cash on cash return good? If you could go out and find the 20% cash on cash return deal Garrett was just talking about. No, it's not. So I think it's really important to sort of learn these benchmarks, but then also be realistic with yourself about what you're going to do with the money. And if your answer is I'm going to just do nothing with it, then almost any real estate deal is probably going to be better than just like leaving your money. But with that said, I'll say that for like long term rentals that I buy, I target a 12% IRR and that is again, a combination of both cash flow and appreciation over time. And these are for relatively low risk deals where they are not going to take me a lot of time. And the reason I target a 12% IRR is that again, I look at my whole portfolio. I don't just invest in real estate and I can put my money and real, you know, reasonably low risk over the long term. Expect 8 to 9% compounding returns in the stock market that requires no work. And so for me to buy something in real estate, it needs to be better than that. And because a 12% return is significantly better than 8 or 9%, I am willing to take on the work and the risk and the, you know, the stupid paperwork we have to do as real estate investors to justify that better return. And a lot of people are out there saying like, oh, the difference between 8 or 9% and 12% is not that big. I completely disagree. If you, if you actually do the math on this, if you invest $100,000 over 30 years, the difference between an 8% return and a 12% return, do you guys have any guesses how big a difference it will be?

[Garrett Brown]

A hundred thousand?

[Dave Meyer]

It's $1.2 million. It's 1.2 million.

[James Dainard]

Think that number again.

[Dave Meyer]

$1.2 million. If you invest 100 grand and you invest in the stock market for 30 years, or you buy a real estate property that gives you a 12% IRR for 30 years, the difference in that investment at end of 30 years will be $1.2 million. So to me, that is well worth the extra work of being a real estate investor because if you do that a couple times over the course of your investing career, you're going to make a lot more money. So it's not as sexy as what James and Garrett are talking about, but to me, just those types of returns are worthwh while if I'm investing in passively in like syndications, for example, where there's a heavier value add or there's just more risk in A in a. And not as an established area. I look for 15 to 20% for IRR, which is basically, I think, I don't know James, you probably know this. Well, like that's sort of the standard I think for syndication operators to try and get their LPs, you know, 14 to 20%. Ish.

[James Dainard]

Yeah, that's. I think that's the benchmark. Yeah. 15 to 17 is kind of like the sweet spot people plan.

[Dave Meyer]

Yeah.

[James Dainard]

And you know, that's kind of that threshold which is a great irr.

[Dave Meyer]

Totally.

[James Dainard]

You know, one thing that I always like to build into that like risk too when I'm looking at that for IRRs is the operator and their experience.

[Dave Meyer]

Yeah.

[James Dainard]

Who they are, what they're capable of, what they can do. And then, you know, based on that, I'm going to adjust my IRR numbers expectations around as well.

[Dave Meyer]

Yeah. I have the exact opposite of what you would expect. Whenever you as it as an lp, whenever you get a deck from someone who's not an experienced operator, their IRR returns are like 20 or 25%. And I'm like, yeah, no way. And then you. And then they, I don't know what they deliver because I don't invest with them. But then you go to an experienced person and they say they're going to get you 14% and then they get you 20%. It's just like a different mentality of how they operate. Okay, we have to take a break for some ads, but on the other side, James Garrett and I will be back with more about the returns we look for when analyzing deals. Do you want to invest in cash flowing rentals but don't have the time to manage the properties? Is your local market too competitive or expensive to invest in? Rent to Retirement offers new construction turnkey investment properties that you can buy with as little as 5% down and rates as low as 3.99%. Their team handles everything from financing, management, insurance and more. So you can live where you want and invest in the markets that offer the best returns. Rent to Retirement has the best reputation in the industry with more five star reviews than any other company on the Biggerpockets website. To learn more, visit biggerpockets.com retirement or just text REI233 777 to start investing in the best markets today. Buy low, sell high. Very easy to say, but not always so easy to do. For example, high interest rates are hurting the real estate market right now. Demand is dropping and prices in a lot of markets are falling even for many of the best assets. So it's no wonder the Fundrise Flagship Fund plans to go on a buying spree, expanding its billion dollar real estate portfolio over the next few months. You can add the Fundrise Flagship fund to your portfolio in just minutes and with as little as 10 dol by visiting fundrise.compockets fundrise.compockets Carefully consider the investment objectives, risks, charges and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the Fund's [e-mail] Flagship this is a paid advertisement when you think about.

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[Garrett Brown]

So that's been something I've been going back and forth with a lot, especially between me and my partner and things trying to figure out do we want to keep expanding out further and taking our operation more, but every time we crunch numbers, especially with the deals that are out there right now and just, you know, there's just not a lot. So everything is kind of slow right now, even on all sides of my agent side and everything. We decided that looking into if we invest back onto our property, not only are we building the equity in there to make our long term exit even more, you know, attainable for what we're trying to hit, but short term rental insurance is, especially in Texas, is through the roof. If we consolidate all of these properties onto one property, our insurance rates have been much lower because we have a, we have a liability policy as well that has to be covered. And if it's on one property, the same company, the rates that have gone up through there are not as much as going to buy another property. Another reason is our taxes. And Texas has really high property taxes. I go buy another property, my tax bill is going up. If I build on the property I already have, you know, hopefully my county's not watching. So if they are, I might not even say this, but they don't come out there and assess our properties a whole lot and know exactly how much we're putting in infrastructure wise onto these properties. And so our tax bill is not just shot through the roof compared to what our actual value may be from all the things we've built on the property. And then at the same time too, I self manage a lot of my own properties which is why I can hit these cash on cash returns with all the tools that are out there now. It's so easy to like automate processes and things like that. But I already have my infrastructure built out there. I have a handyman, I have all my team, everything out there. I have a cleaning team of three to four people. It makes my life now that I have a, you know, I'm working constantly trying to find other deals. I need this to go even smoother. And I've already built out the whole operation there. Short term rental is a big operation thing and we are dominating that market and operations and in our marketing in the Houston, Austin kind of area. So we just haven't found a real reason to not invest back into our property. And every time we've done it, it's paid off in dividends even not long ago, for example, we put a sauna. It was only $3,000 to get this sauna and people thought I was crazy to put a sauna at one of our properties in Houston, Texas. They were like, why would you do that? Like you walk out into a sauna, just walking, you know, into the air.

[Dave Meyer]

There, free, just walk outside.

[Garrett Brown]

And I made that joke too. I didn't believe it, but I had somebody that's much smarter than me that's in this type of business from Europe tell me. They were like, hey, you may not think asana is a good idea, but if you're the only person with a sauna within 3, 400 miles, you're gonna stand out. And I paid $3,000 and it's hard to judge like how much does that amenity actually bring you back. But I could just tell from the amount of inquiries and bookings we were getting and from the people just saying like, hey, we love the sauna, we booked because of the sauna. And like the social media marketing that came out of it, that $3,000 investment, me putting it into that property. I'm sure we have doubled that in a few months from just what we put into it and the amount of social media clips that have went out because of this sauna that we, we put in?

[James Dainard]

Yeah.

[Dave Meyer]

I mean, if I was getting those kind of numbers, I would do the exact same thing. I think you have convinced me to add a sauna to my short term rental. I think that's a great idea.

[Garrett Brown]

Absolutely.

[Dave Meyer]

James, what about you? Because you do a little bit of everything and I know you're always sort of like trying to optimize your portfolio and use your money efficiently. How do you think about, you know, in today's market, like if you can't find a deal that you like, are you going to take that money and reinvest it into some of your existing properties?

[James Dainard]

Yeah, and I think that's always something that's really important you do as an investor is to audit. You know, like as investors, what's our inventory? Well, inventories are assets, but it's also our cash. Like what is our cash? That is what I inventory. I'm like, how much cash do I have? Where can I put it? And you know, I treat my real estate investing like almost like a financial planner where I have like a pie chart.

[Garrett Brown]

Yep.

[James Dainard]

I go, okay, I have this much cash to invest. You know, there's a couple different asset classes. I invest in one's long term holds, like can I buy a rental property that's going to hit my minimum returns and create my minimum equity position expectations. Then there's flipping higher risk. I'm going for a higher return, 35% in six months, 70% annually. Then they I do private money financing where I will lend out hard money and make 12%, 14% on my money. And it's very, very passive for me at that point. So, you know, each asset class has a different return for me and a different purpose and they also have a much different risk. And so for me as an investor, my job every year is to audit. Okay, well how much time do I have to spend on these business? Where's the risk? What's my path to growth for my goals and where do I want to put this cash? But it also comes down to deal flow. If I can't find deal flow, how do I reallocate that? And so that's why I think it's just really important to always know that because flipping is really tight on the margins right now. And if I cannot hit my 35% return and my option is to either lower my return so I can get into the market and start playing and maybe that goes down to a 25% cash on cash return, that's starting to be more risky than Maybe I want to take on. And then that's where I'll lend my money out at 14% because it's a lot less risky. So I can make half the return but probably take 1/5 the risk.

[Garrett Brown]

Yeah.

[James Dainard]

Because the thing that I never want to fall into is there's no deals in the market I can't transact. There's always a transaction in. I just have to go, how do I want to work that transaction? And whether I want to be passive or active is going to tell me how high that return is, but it's also going to tell me what I need to do for the next 12 months.

[Dave Meyer]

Absolutely, that makes a lot of sense. And it sort of underscores this idea that I talk about a lot of benchmarking for people because people are like, oh, there's no deals, or I can't find a good deal, I don't know where to put my money. I always ask, how many deals have you analyzed in the last couple of weeks? Because it's really easy to say, hey, there's no deals if you're just sort of like reading the media or just kind of eyeball testing things. But I really encourage you, everyone listening to this, whether you're ready to buy a deal right now or not, go actually do this. Go run five deals in your neighborhood right now and just figure out what the average return is for whatever strategy. If you're flipping, if you're doing a long term rental, if you're doing a short term rental, just go see what a good deal is because that will make your portfolio management decisions, your cash allocation decisions, so much easier. Like Jim James just said, if you see that, you know you're only getting 10% in flips in your neighborhood and that's not acceptable to you, you gotta go figure something else out. But maybe you'll find that you're getting 25% and that there's actually a simple deal right in front of your face. So actually go and run the numbers every month at least to figure out how deals are trending in your neighborhood. And it's gonna make it so, so, so much easier for you to figure out where to put your money because you'll actually be comparing one or two things against each other rather than just like this hypothetical thing where you're like, oh, I don't know, like, you know this, I don't know if I should invest right now. It's not a good deal. Well, what else are you going to do with your money? What other opportunities have you looked at? Once you're comparing two actual tangible investments against one another, things get a lot easier to decide. All right, well, that's what we got for you guys today. Garrett and James, thank you so much for sharing with us what you think good deals are today and your process for figuring out how you're going to allocate money. Because at the end of the day, as investors, that's our job, is to figure out how to take our money and use it more efficiently, give it our own personal preferences, our risk and reward appetite, our time allocation, all of that. And this has been a great conversation about how to. How to do just that. So, Garrett, thanks for joining us.

[Garrett Brown]

Thank you for having me, James.

[Dave Meyer]

It's a pleasure as always.

[James Dainard]

And I love talking deals.

[Dave Meyer]

All right, well, we'll have you both back on very soon to let you know what deals you do between now and in a couple of months. Thank you all so much for listening to this episode of the Bigger Pockets podcast. We'll see you soon. Thank you all for listening to the Biggerpockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico, content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. the content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets, LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.