← BiggerPockets Real Estate Podcast
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- [00:00]
A
This is the best rental property to buy in 2025. Today we're going to give you our real picks and our actual numbers for the deal that will work, even with prices and interest rates where they are today. If you're too stressed about all the different ways to get started investing in real estate, we're making it easy for you. Just buy this type of property. We're going to share with you today. Hey, everyone, I'm Dave Meyer, a housing analyst, a rental property invest and the head of real estate investing at Bigger Pockets. We've also got Henry Washington with me on the show today. Henry, good to see you, man.
- [00:40]
B
Hey, thanks for having me, man.
- [00:42]
A
Excited to be here with you. This is going to be a really fun show because real estate has this sort of trade off, right? Like, one of the best things about it to me at least, is how customizable it can be. You could do so many different things in the world of real estate investing. Most of them can produce good returns if you're good at them and it fits your lifestyle. But sometimes that can also be sort of overwhelming, like the amount of choice that you have. So today, what I'm hoping to do with you, Henry, is simplify it for our audience. Given everything that you and I both know about the market, our experience investing in different types of properties, which are the right deals to buy today that are going to be low risk, high upside.
- [01:25]
B
I'm excited to see how this episode does because this is like the question people ask. It's always like, hey, what exactly should I go do? And I'm like, I don't know you, where you. I don't know anything about you. And they're like, how should I invest? So here we're going to tell you exactly what you should go buy.
- [01:42]
A
Exactly. We've sort of avoided doing this show because to Henry's point, there is no one size fits all answer. It's so customizable. But at least the way I approached preparing for this episode, and maybe you did this differently, but the way I prepared was like, for the most people, 75% of people or something, like, what is the best way to buy a rental property? That's what I'm thinking about. It's not going to work for everyone and where you live and what market you live in are going to depend a little bit. But I tried to just like the, the best things that you can think about for the most people is what I'm going to be sharing.
- [02:16]
B
I think what I would want to hear and I think what's probably more beneficial for everybody is to hear like what your ideal rental property scenario would be for people. Because if I do it like everybody knows I find off market deals.
- [02:30]
A
You're better at it than me. Is that what you're saying?
- [02:33]
B
I just mean the amount of work that someone would have, the casual investor would have to put in to find what I would deem worthy as a good rental property. Like most investors, most casual investors aren't going to do. So why don't you share with people like what does the, the part timer investor look for for a rental property?
- [02:52]
A
My ideal rental property, I'm going to try and be as specific as possible for both myself and what I would recommend for people trying to get started is what I have been calling the slow burr on the show for most of the year. BRRRR, if you are not familiar, is an acronym. It stands for buy, renovate, rent, refinance and repeat. So your goal of the BRRRR is to buy something that needs a little bit of work. You're going to build equity in that property by renovating it. Then you are going to hopefully create a cash flowing property once it's renovated. Ideally you are generating positive cash flow. That's part of my criteria. Then you refinance and pull some of the money out because you're going to put a decent chunk of change into these properties. If you're going out and buying it, you're renovating, you're going to put some money into it. So you refinance to get some of that money out and then you do that over and over again as many times as you can, presuming you can find more profitable deals. So that's a great way to make money. And if you can do that in the traditional way, you should absolutely do that. But the traditional sort of had a specific dimension to it that I don't think works as well as it used to, which is you were looking to buy something typically that was vacant so there was no people in the property. Those are getting harder to find and you need to renovate it really quickly. So you're usually buying this on high interest debt. So either a hard money loan or a bridge loan or private lending so it's a more expensive debt. And there's this pressure to renovate the property in three, six, nine months and get it it so you could refinance out of that high interest debt into something more sustainable. And that's where this concept of the slow burr comes in. So my ideal rental property is a brrr but rather than finding something that's vacant and renovating it as quickly as possible, I look for places that are cash flowing with tenants already in them. I'm looking for something that has at least break even cash flow, Ideally somewhere between 2, 4, maybe up to 5% cash flow as is, I buy it and it's already making money. That's what I want to find. Then when my tenants go and move out from this property, which might be in three months, it might be six months, it might be a year or two, then I go in and do the renovation, I build equity in the home, then I get rents up to market rate and that will get my cash on cash return at to a minimum of 8%, ideally higher. And I think in the deals that I'm looking at, you could probably get them to 10 or maybe 12% once these things are stabilized. But to Henry's point, like for me as a part time investor, this allows me to take advantage of the burr, but take some of the time pressure that I don't like out of the equation and I'll share some more about my buy box in just a minute. But Henry, how do you react to this framework in general of like what people should be looking for for a rental property?
- [05:47]
B
No, I think this is a very smart approach because it limits your risk on the front side because you're walking into something that's already making money or at least breaking even. So it allows you to be safe in a market where things can go bad quickly if the smallest thing changes. Right. And I think previously, and when I say previously, I mean when the market was outstanding, 20, 20, 122, you could buy a deal and then if something didn't go well, time was on your side and the property value was going to go up and the market would save you. And in this market that doesn't necessarily happen. So this saves people from the perspective of what if you buy something and then life happens and you don't get around to doing what you want to do in terms of renovating it, like you can just still operate the property, put another tenant back in at the same rents without renovating it.
- [06:44]
A
Yep.
- [06:44]
B
And you can stay comfortable versus if you buy it and you know you have to renovate it to get to where you need to be because you're on short term debt, then you don't have a choice. Like it doesn't matter if life, life's like you got to do something to get this property where it needs to be or it's going to be a detriment to you financially. So I like the safety of it. One question I would have, and maybe you'll touch on this later, is this scenario sounds like you're going to need to have some cash on hand to not just buy the property, but to also renovate it. So what kind of cash on hand would someone need to have in order to execute a deal like this?
- [07:19]
A
That's a great question, because this is one of the challenges. Because a lot of times I think this is probably what you're getting at is if you do the traditional burr, what you do is you go out and get a hard money loan for both the acquisition cost and the renovation cost. But what I'm proposing and the way I structure these types of deals for myself is that I go out and get a conventional loan on the acquisition price. And that's one of the key differences here that I think is really beneficial for people who are thinking about this. So one of the keys is having an occupied property, like something that is safe and livable. Then you're going to be able to get a conventional loan. The thing I like about this is then you can put 20% down, you're going to get good fixed rate debt that you can hold on to for as long as you need to. I think if I were new, I would probably target something that's like a duplex, that's 250 to $300,000. Like if you could find something for 100,000 to $125,000 a door, I think that that's a pretty good rate. So even if you go up to 3 plex, you can increase that budget to 300, 375, something like that. So you're going to need 25%, probably down on that. So let's just say that you are buying something 300 grand, you're going to need $75,000 to put down on that. So that is a significant amount of money. If you don't have that amount of money, you can do a couple of different things. You could do a house hack where you live in one of the units and rent out the other ones. That could probably mean you put 5% or 10% down or the second thing that I would consider doing is partnering. And I know a lot of new people don't want to do this, but like everyone partners on deals. Like I actually, I don't know how much you do, but a lot of real estate investors partner on a lot of deals, right?
- [09:02]
B
Yeah, I've got partners in some of My deals for sure.
- [09:03]
A
That's how I got started. I did my first deal with three different partners because I didn't have the money to do this. So that's one way to think about the acquisition costs is if you have 75 grand, go do that. If not, consider a partnership or an owner occupied strategy. Then you have to finance the renovation. So if you're at, you know, this $300,000 property that we're talking about, for me per unit, I'd be looking to invest like 15 to 20 grand. In the Midwest, where I would be looking to do this, I think that's pretty realistic. Is like you're buying for 100, 125 a unit. You're putting 15 to 20 grand a unit. That means it's going to be mostly cosmetic. You're not moving a ton of walls, you're maybe fixing up the kitchen, the bathrooms, paint, maybe a little bit of floors, making it nice. So you need to find that kind of property. But that's what I would be looking for. Obviously that means you need more money in there. And so I think there's a couple of different ways that you can go about financing this. Maybe you have some more ideas, but I'll just throw out a couple of ideas. Number one is if you are a homeowner using a home equity line of credit to go out and use your home equity to finance something. Remember, this is ideally going to be short term. So if you're going to put 50 grand into this property, you get a home equity line of credit, you use that to renovate, and then you're going to refinance your rental property once the renovations are done. Ideally you get that 50 grand back or part of it back. You pay off your home equity line of credit. So you're not paying it. You could go get a hard money loan. That's going to be the most expensive option. But it's definitely possible. Other options are again partnering, trying to find someone who has that capital or the fourth option that I think is interesting and not a lot of people do. And one of the reasons I love the slow burr is just saving your own money and waiting and doing it when you have money to do it. One of the benefits, I know that's crazy to like not go out and get into debt to do everything. And debt can be used, you know, applicably. But like the cool thing about this kind of debt structure and this kind of deal is like maybe you buy it and your tenants stay for a year and you just save up Money, maybe you save 1000 bucks a month. Let's just use that as a nice round number. You save up 12 grand, that's your renovation budget. When they move out, go spend 12 grand and renovate it. Then maybe you have a tenant turnover and you don't renovate the other one while you save up another 12 grand. And then just as you have time and as you have the money, you actually go and renovate that. I know that's not something we talk about the real estate world, that you could just save money and use that instead of debt, but I actually think that's one of the benefits of this slow burr approach.
- [11:36]
B
Well, yeah, saving up some money to actually invest it in your property sounds crazy. Crazy, but is legitimately a good thing to do. I think one option, one option you could consider. Now, I have to give some caveats with this option. This option is not for everybody. This option will require you to be extremely disciplined and meticulous with making sure that you are paying back this money in the appropriate schedule. But one thing you could do is get a 0% interest credit card for 15 months. For 12 months. 15 months or 24 months, sometimes you can even find them. Right. And then you can, you can finance the renovation on this credit card. And then if you're going from a property, let's say that's cash flowing $100 a month, but now after you renovate it, it's going to cash flow three or $400 a month. You take the additional cash flow and you use that to pay back the credit card. And you just need to do the math. Right. So if it's 15 months and you borrowed, you know, $25,000, then you figure out what your payment is because you're paying all principal balance down.
- [12:44]
A
Yeah.
- [12:44]
B
And you have to do it in that 15 month time frame. I would actually urge you to get that paid off one month prior to when that hits. Because if you're one day late on that payment, then you get smacked with like 22 to 25% interest and it backdates to all of the money you spent.
- [13:02]
A
Yeah. You get smoked.
- [13:03]
B
Right? You get smoked. So I would, I would urge you to say whatever it is, just take a month prior and that's when you want to aim to have it paid off. And you can let your new cash flow pay that off. And one of the benefits of this strategy is you get all the benefits and perks of that credit card. So if it's a high air miles credit card or if it's a, you Know hotel's credit card. Like, you can get free flights. Like, I know people who do this religiously for their renovations on their flips and they are traveling for free wherever they want to go because they flip a few houses a year, they use credit card points and they rack up miles and hotels and cash back. But the people who I know who are doing this successfully are so meticulous about their credit and so meticulous about paying this back that it works for them. This strategy is not for everyone.
- [13:55]
A
You have to like the game of this. I am one of those people. I love the like credit card hacking thing. I. I don't want to brag. Well, I do want to brag. I'm actually purposely bragging right now. I am about to become a million point air, which is like the biggest red flag in the world. Like you should be spending these points when you get them. But I hoard them for no reason. I don't know why. I just like, I love the game of it and like, for some reason it works. Because the reason I can possibly have a million points is because I do this with every rental property. Start an llc. I get a business credit card with it. They give you a introductory bonus if you're going to spend five grand or whatever. Like I just go and get the bonus and then I use that credit card for that property, for my expenses, my operating account on these things. You just do that over and over again. I am always hesitant, like publicly to give advice to go get a credit card. But it does work. If you are good at this. Like a million caveats. Like Henry said, you have to be this kind of person who's going to look at it every day. Or you can get, absolutely. You can get burned bad. Like real bad. Like, like forever bad.
- [15:04]
B
If you have ever in your life ever had a collections call on a credit card, this probably isn't for you.
- [15:09]
A
Yes, right.
- [15:10]
B
Right.
- [15:11]
A
Absolutely not. Like the way you use credit cards is if you know you can pay them back and you're just going to take advantage of some of this arbitrage. Like, that's the way to do it. Do not take out credit card debt if you do not have the money to pay it back immediately at any point. Almost like that's, that's the key. But I like that approach to this. All right, I got a couple more things to share though here about my buy box and the things that I would be looking for. But we got to take a quick break. We'll be right back. This week's bigger news is brought to you by the Fundrise Flagship Fund. Invest in private Market Real estate with the Fundrise Flagship fund. Check out fundrise.com pockets to learn more. Real estate it's been a cornerstone of wealth building for generations, but it's also often a major headache for investors. You get these 3:00am maintenance calls, tenant disputes, property taxes Enter the Fundrise Flagship Real estate fund, a 1.1 billion dollar real estate portfolio built for you. We're Talking more than 4,000 single family homes in the thriving Sunbelt, 3.3 million square feet of in demand industrial facilities, all professionally managed by a very experienced team. With the Flagship Fund, you're tapping into real estate's most attractive qualities like long term appreciation, potential, hedge against inflation, diversification for the stock market. All of those things. Check, check, check. All this comes without complex paperwork. Massive down payments are the soul sucking landlord duties we all know about. So visit fundrise.com/pockets to explore the portfolio. Check out historical returns and see just how easy it can be to add real estate to your investing strategy. 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 perspectives@fundrise.com flagship this is a paid advertisement.
- [16:55]
C
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- [17:30]
D
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- [18:15]
A
To invest in real estate but don't have the time or know the best local markets. Rent to Retirement has got you covered. Here's the deal. They've helped thousands of investors just like you find turnkey homes across the best US Markets. And best of all, they do all the heavy lifting for you. With over 255 star ratings on bigger pockets, Rent to Retirement experts help you build strategies to retire early through real estate. And right now, Rent to Retirement offers some amount of amazing incentives on turnkey new construction properties. Just for example, you can get up to 30% off new build prices or you can get 0% down loan options or interest rates available as low as 3.99%. So don't miss out. These deals will not last. Text REI to 33777 or visit biggerpockets.com retirement to start investing in top cash flow markets today. Welcome Back to the BiggerPockets podcast. I'm here with Henry Washington talking about what deal we are buying today and what we would recommend you go out and look for in today's market. Before the break I was talking about the slow burr that I really like because it is very low risk in this kind of environment but still has upside. It is very low time intensity or low time pressure I should say, which is really ideal for people like me who work full time and do a lot of investing out of state and it has a really good potential for debt structure that makes it low risk and has a lot of advantages. I do want to share just like some other thoughts though on my buy box because I got real specific when I was thinking about these things of like stuff that I would look for too. So right now I am really pleased. My favorite asset class in real estate is small multifamily. I love two to four units but they've been hard to buy the last couple of years. I see that changing. We were talking about this the other day, you know, like I see more of this inventory coming on the market right now and so I'm looking at that. Personally I don't care about the maximum number of units. I'm like if it's two, it's three, it's four, I don't care. It's like the numbers for Me, But I would adjust that if I were you. Based on your budget. If you can buy four units at a good price per unit, go do that. If you can only afford two units right now and it is a good price per unit, do the same thing. Second thing I would really look for in this market, especially if you're new, is low maintenance. This is something I missed when I was getting started. I'll tell you that. I bought a lot of houses that were built in the between 1880 and 1920. It's pretty much all I bought for a while. And then it's. It comes with some pros and cons. I'll just say it that way. So now in my buy box I would look for something that is ideally in the 80s or newer. If you go in the 70s or 60s, that's okay, depending on this specific situation. But like if you're just blanket looking for things, if there's housing stock in your neighborhood where you can get duplex in the built in the 80s at a good price per unit, I would look at that. You want electrical to be in the last 30 or 40 years, like ideally in the last 20 years. But like if you can get in the last couple years, you don't want galvanized plumbing, that's going to be a pain in your butt. And you want a solid H vac system that you're not going to have to replace. These are all the things that are going to sort of like reduce your huge capital expense. Needs a couple more things here just before we move on to your deal, Henry. One is, you know, I gave numbers out there. 250, 300. I look for these deals in the Midwest. I think if you're willing to invest out of state, you can find these kinds of deals on market in the Midwest, which is really beneficial. So I would look for that. But if you are in a different area, the price point thing is going to vary obviously a lot if you're in a high expensive market. So I would also just think about this relatively where just try and buy under the median home price. Like right now the thing that's messing with the market is affordability. And so if you are buying stuff that is above the median home price is going to rent for well above the median rent. It could work, it totally could. But it is a little bit riskier in my opinion. I like to just like be buying below the median home price, having the ARV close to the median home price because that's just where the demand for rentals is going. To be. If I have to go sell it, that's where the demand is going to be. I just think it makes your life easier.
- [22:26]
B
You know, it's interesting because I can hear the naysayers already in the YouTube comments that are going to be like, well, I didn't. These deals don't exist. And I was literally just on biggerpockets.com listings. So this is the bigger deals. Yeah. And in the Midwest, there are literally tons of deals on the market right now with positive cash flow. Like, you can get on bigger deals right now, and you can see deals that fit this criteria in multiple markets in the country.
- [22:54]
A
I mean, we just drove around the Midwest and saw these deals firsthand. Like, they absolutely do exist now.
- [23:00]
B
Yes, you're going to need some cash to execute this strategy. But in terms of finding deals like this that exist, they're out there and you don't have to do a ton of work to find them.
- [23:11]
A
Absolutely. All right, last two criteria, and then we'll move on to Henry's deal. One thing got to do Market kind of in a decline right now. In broad sense, I would try and buy 5% under market comps. This is kind of like Henry's whole thing about buying deep. Makes a lot of sense. And everyone, again, you choose to be like, yeah, okay, just go buy under market rents. Like, actually, you can do that right now. You can buy under market rate. And for me, I think we're going to see in a lot of markets a correction of 2, 3%. So I'm targeting 5% under current market comps. Not every seller is going to be willing to do that, but there are sellers who are willing to do that 100% right now. Like there definitely are. And so you need to find those deals. Like, that's what I would be looking for. And then the last thing is, I said that for me, I'm pretty comfortable with 2, 3% cash on cash return when I first buy it. But I am not buying a rental property for 2 or 3% cash on cash return. That's what I'm doing while I stabilize my property. And so the last thing I would say is look for at least an 8, ideally a 10% stabilized cash on cash return. And what that means is basically analyze your deal two ways. Go and analyze it for what it's going to get you when you buy it. That's got to be at least break even cash flow. Then once you're done with the renovations, whether that takes you six months, a year, or two years, what's Your cash on cash return going to be after you refinance it and after you get rents up. To me, that's got to be about 10% for me to hold on to the deal. And so that's, that's what I would look for. And again, the only difference between what I'm saying and a long burr is I don't need to do this whole process in six months. I'm willing to take probably up to ideally like a year and a half, but I'd take two years to do this too.
- [24:46]
B
And also you gotta look at your pro forma past year two or three.
- [24:52]
A
Yes, right? Yes.
- [24:53]
B
We say this is a long term game and we know real estate is a long term game. Yet when we're analyzing deals, we're only looking at like year one and year two on the pro forma. I know determining that a deal is not a good deal. The other considerations are rent growth year over year in the market. You're looking to buy this because the more your rent grows, the more your cash on cash return is going to grow over the time. So when you analyze it in your calculator, you can, on the, even on the bigger pockets calculators, when you scroll down, you can see multiple years out and you can assume your rent growth and you can assume your appreciation over that time and you can see that your cash on cash return is not static. It doesn't stay the same. It grows the longer you own that property and the more that property goes up and rents go up in value.
- [25:44]
A
I completely, completely agree. I think it's so silly looking at year one. I, I just think year one and year two about, about low risk. To me, like, it's like, just don't lose the property. Right. And then get it up to its highest and best use. And that's why I love Burr in general on this specific one is like it has the best of both worlds, right? Like you flip houses, you, you know how much wealth, value add strategies, renovations can create and the Burr gives you that opportunity in a smaller sense. It's not going to make you the same amount of equity as flipping a house, but like it gives you some opportunity to build equity and the opportunity for cash flow and you can recycle at least some of your capital. To me, that's really important. That just reminded me I had to say one thing. When I do the refinance, I do not expect to take 100% of my money out of this deal. I think I should have mentioned that earlier. If I could take like 50% plus out. I'm pretty happy. I just think we got in this era where people are like, oh, I could just acquire assets with, with zero money into them and that's just not realistic in the new day and age. Like, that's just the reality of investing in 2025. And that's okay. You can still build a great portfolio doing it this way. That's not something I really even consider. I just consider the total return on investment.
- [26:56]
B
It's a trade off. Right. Like the method that you're talking about is maybe easier to find the deal. Barrier to entry is a little higher because you gotta have the cash. Right. But you're able to almost eliminate risk on the front side based on what you're buying and the capital that you're putting into the deal. Because at any point, you know, especially if you're buying it with a slight discount, if you need to get out, you can get out, you can sell that property and you can get your money back and start over again, live to fight another day. The trade off is when you operate like me, which, like, as a full time investor, my trade off is I'm doing so much work on the front side and spending a lot of time and capital on the front side to find the amazing deals that, yeah, I can get into a deal with very little of my own capital because I'm going to buy such an amazing deal.
- [27:46]
A
That's right.
- [27:46]
B
But I had to spend 2, 3, 4, $5,000 a month on marketing to get there. Right. Like so.
- [27:51]
A
Exactly.
- [27:52]
B
It's a trade off. If you're going to put in the work on the front side, you can get the better deals and invest with less money out of your pocket or you put less working on the front side. You're probably going to have to spend some money, but you can have limited risk and you can get into the game now if you've got the capital. So it's just, it's, it's absolutely going to be a trade off.
- [28:10]
A
We got more coming up about what deals we recommend buying in today's market, but we do have to take a quick break. We'll be right back. Real estate, it's been a cornerstone of wealth building for generations, but it's also often a major headache for investors. You get these 3:00am maintenance calls, tenant disputes, property taxes. Enter the fundrise flagship real estate fund, a $1.1 billion real estate portfolio built for you. We're Talking more than 4,000 single family homes in the thriving Sunbel 3.3 million square feet of in demand industrial facilities, all professionally managed by a very experienced team. With the Flagship Fund, you're tapping into real estate's most attractive qualities like long term appreciation, potential, hedge against inflation, diversification for the stock market. All those things. Check, check, check. All this comes without complex paperwork. Massive down payments are the soul sucking landlord duties we all know about. So visit fundrise.compockets to explore the portfolio. Check out historical returns and see just how easy it can be to add real estate to your investing strategy. 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 perspectives@fundrise.com flagship this is a paid advertisement.
- [29:21]
C
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- [29:56]
D
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- [30:42]
A
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- [32:30]
A
Welcome back to the Bigger Pockets podcast. Henry and I are here breaking down what deals we think you should look at in 2025. Let's move on to your deal. Henry, what would you recommend?
- [32:41]
B
All right, so I am going to talk about a flip. Since we did a rental. Everybody wants to know where to go or how to go find a flip that makes sense. And I'm going to be pretty specific in terms of numbers. Like I want you to go go look for this deal with these numbers. Yes, it exists. You can probably find a deal like this on the market. You can definitely find it off market. But the big caveats are this is not going to be in every market in the country. Yep, it just like Dave's strategy, you're going to have to go looking for a market where these conditions exist.
- [33:14]
A
Let me guess, they're not going to exist in Seattle.
- [33:17]
B
No, they do not exist in Seattle or Los Angeles or New York City. Okay. But deals like this do exist in multiple markets across the country. And so here is the market conditions you want to look for. So you want to find a market where the median home price is somewhere between 350,000 to 450,000.
- [33:41]
A
Oh, that's great. So just for context, everyone, that's the median home price in the United States. So that means, means at minimum, 50% of the markets in the country hit that number, if not more. It's probably like 60, 65%.
- [33:53]
B
And then you want to also be looking for markets where the median rent price is at the national average or within 10% of it. And I know I talked about flip. So people are like, well, why? Why do you care about rent? Yeah, yeah, why you care about rent? Because what I'm trying to help you do is to find a flip that makes sense. But in the event something goes wrong and you have to pivot, we could put a tenant in this property and you could hold onto it until market conditions change, and then you can sell it later. So I'm trying to help you protect yourself in the event things don't go 100% smoothly. So you also want to look for a market where the rents are fairly strong. So if you've got a median home price at the national average or below, and you've got rent prices at the national average or slightly above, then that's a good formula for you to be able to protect yourself by taking your flip and making it a rental.
- [34:50]
A
I like that. I'm tracking so far because there must be tons of markets in this country that meet that criteria.
- [34:55]
B
Exactly. So those are your caveats. All right, so what does the deal look like? So let's start with the most important number for a flip. What's the most important number for a flip, Dave? The arv, the after repair value. This is the value of that property. After you've done your renovation, you're going to sell that property. This is the number you need to be looking for for your deal. You want your after repair value for this market to be somewhere around $300,000. Okay. And what that does is it allows you to put a product on the market at less than the average home price for that market.
- [35:30]
A
Okay.
- [35:31]
B
Which means you've opened up your buyer's pool to lots of first time home buyers. Right. You've got, you want the most buyers looking for your type of property. You also want to put a desirable property on the market, and everybody wants to buy a house for less than the normal home price in that market.
- [35:53]
A
So your thought process here is like when I go to sell my flip, which is the liquidation, that's where you make the money.
- [35:59]
B
That's where you make the money.
- [36:00]
A
Y who's going to buy it? That's what you're thinking about. You're trying to say, like, how do I find something where all said and done, there's going to be a lot of people coming to my showings and I'm going to hopefully get a lot of interest in this property. That's what you're thinking about before you even think about renovation budget or anything like that.
- [36:16]
B
Absolutely. Because you said it earlier, we're in a slightly air quotes down market, which means there's less eyeballs. And so as an investor, as a flipper, as a good flipper, what you want to be thinking is, how can I take advantage of the most eyeballs possible?
- [36:33]
A
Yeah.
- [36:34]
B
And if you're selling a house under the average home price in that market, you're going to come up on a lot of people's home searches on Zillow and realtor.com when they start looking for homes. And that's exactly what you want.
- [36:46]
A
So you were saying, just so I can recap here, I'm writing down notes because I'm interested in flipping is you're basically looking for the median home price to be, you know, like you said, 350 to 450. You're looking for something with the ARV that's going to come below that. But you haven't even talked about acquisition price yet, right?
- [37:04]
B
Nope, not yet. We're working backwards.
- [37:06]
A
Okay, so where do we go from here?
- [37:08]
B
Now what you want to be doing is you want your renovation costs to be on the low to medium renovation. So we're not looking for a gut rehab here. We're looking for something where you're going to be doing a cosmetic rehab. Paint floors, maybe you take out a wall or two, but you're not moving a kitchen from one side of the house to the other. You're not tearing up the slab foundation to rearrange the property. We're not. This isn't a down to the studs renovation. This is something where you can spend somewhere between 30 and $70,000, you know, let's call it 50 grand on your renovation. This is cosmetic, maybe a little more than cosmetic by maybe you got to put a new roof on it, maybe you got to replace the H vac, maybe you got to update the plumbing. Right. It's a cosmetic rehab with some additional big ticket items in there. And that's important because if it was just a lipstick renovation. It's going to be gone. Somebody's going to buy that. Right. Like you got to buy some sort of a problem that's going to be too big for the current homeowner to want to deal with it. Right. You got to look for that motivation. Why would somebody be willing to sell this property at a discount? Well, because it's got a couple of big ticket items, but most everything else is going to be cosmetic. So your sweet spot for renovation is between 30 and $70,000.
- [38:27]
A
Okay, I like that. And that's a pretty big range, though. So does it, Is that just depend on the property or your budget?
- [38:35]
B
Depends on the property. Depends on the budget. Right. What I'm trying to do is give you a profitability range here. So if you know your ARV is going to be around 300,000 and that your renovation costs are going to be between 30 and 70, let's call it 50. Those are the two numbers you need in order to figure out what your max allowable offering is. Needs to be for this type of property. Okay, so now that we have those two numbers, let's figure the rest out. So we know we need a $300,000 after repair value. It's going to need about $50,000 worth of work. So what is the offer price you need to make to have a profitable flip here? So the way I calculate this is max allowable offer equals after a pair value minus renovation costs, minus holding costs. And so holding costs are going to be what are you paying for the mortgage while you have it? We're going to assume that the person doing this is going to have to get a loan. Typically, you're going to get some sort of a hard money loan.
- [39:37]
A
12%.
- [39:38]
B
Yeah. Pay 12% interest. So I'm assuming holding costs of about $2,000 a month for five or six months. Right. So 10 to 12 grand. Just to put you in the ballpark of where your offer needs to be. So let's call it 10 grand on holding costs. So we got Mao. Max allowable offer equals ARV minus renovation costs, minus holding costs, minus closing costs.
- [40:01]
A
Yep.
- [40:01]
B
And when you think of your closing costs, you're going to pay your closing costs twice. You're going to pay it when you buy, and then you're going to pay it when you sell. And so for a property of this price point, I would probably assume somewhere around $10,000 thousand dollars ish in closing costs. Could be a little higher, could be a little lower. And then your commissions. So 6% of your ARV is going to be your realtor commissions. That's going to be about 18 grand. Okay. All right, so we've got 300,000 minus a $50,000 renovation. That's going to put you down to 250,000, minus $10,000 in holding costs. That's going to put you down to $200,000 and $40,000, minus $10,000 in closing costs, that's going to put you down to $230,000. Then minus 6% of the 300,000 for commissions, that's 18 grand, that's going to put you down to $212,000. And then the most important number you need to be thinking about is how much money do you want to make?
- [41:04]
A
Yeah, profit. That's the one thing we're missing here. Yeah.
- [41:07]
B
So we need to submit, subtract our profit. My rule of general rule of thumb is I want to make about what I spend $50,000 renovation. I want to make somewhere between 30 and $60,000. On the flip, we'll call this one 40. So subtract 40. That puts your max allowable offer at $172,000 for this property. And I think that that is a very reasonable thing to find. It is in the parts of the country where these deals exist. And I think these are things that you could pot on the market because there are more sellers right now who need to sell and are having trouble. Now you're probably gonna have to make a lot of offers. You're probably gonna have to run the numbers on a lot of deals, and a lot of these offers are gonna be uncomfortable because you may find a deal that works like this, but the list price on the MLS is gonna be 250.
- [41:56]
A
Yeah.
- [41:57]
B
Right. And so now you've got to come in and offer 172. And that's okay. Now, obviously these numbers will fluctuate. If you pay more in closing costs, then your max allowable offer will need to be a little lower. Or maybe you're willing to make a little less profit. So your max allowable offer can be a little higher. Or, you know, maybe you're an agent yourself and so you're, you. You don't have to worry about the commissions. And so your max allowable offer can be a little higher.
- [42:19]
A
But the equation stays the same.
- [42:20]
B
The equation stays the same. This is the general. What you're looking FOR is an ARV of 300,000 in a market where the median home price is higher than that, where your rent price is about the, the national average or more. So that let's say this doesn't sell and you need to pivot. You can stick a tenant in it, maybe paying somewhere between, you know, 1,800 to $2,000 a month, and you just hold on to it until the market shifts. But this is going to get you a solid 40 to $50,000 net profit, and then that gives you enough cushion for. If you screw up on your renovation.
- [42:52]
A
Exactly.
- [42:53]
B
And you go, instead of spending 50, you spend 70. Well, you say still make 20 grand.
- [42:57]
A
Yeah. You're still making, like, a 40% ROI in half a year. That's insane.
- [43:02]
B
This is a fairly safe flip calculation.
- [43:05]
A
Yeah. I love this so much. One, if you could just make anything into a math equation, for me, I'm pretty happy. But this is. This is the reason why, honestly, I'm thinking about trying to flip a house or two, even just a year. Like, I'm not. I'm not trying to do this full time, but we're in these market conditions where a sideways market or even a modestly declining market may not make sense to a lot of people. They might say, oh, that's a bad condition to flip. And if you do it wrong, it definitely does come with additional risk. But the reason I love the way Henry is doing this is because it's adding in a lot of buffer, and it's backing into what you can actually acquire things for. It's not based on, oh, my God, I'm gonna get. Maximize my ARV or like. Like, I'm going to really figure out the way to squeeze my. My subs to make sure that my renovation budget is. Is perfectly optimized. You're like, no. Just like, this is the equation. I'm going to give myself cushion on all of this, and the thing I'm going to be super disciplined about is what I am willing to pay. And that means you are eliminating a lot of the risk that goes into flipping. Like, everything, there's a trade off, and the trade off is probably a lot of your offers are going to get rejected. Right. So that. But, like, that's fine because you're eliminating the risk for yourself. So you got to ask yourself, do you want to get more offers accepted and take more risk? I don't. I would rather just have people tell me no and take less risk. That's much more. Much more appealing.
- [44:34]
B
You may have to submit 50 to 100 offers on the market.
- [44:38]
A
Yeah.
- [44:39]
B
Before you get a deal like this accepted. But I'd. I'd argue if you're looking in the right markets, there are places where you can pull something like this off. It's just you got to pick the right market.
- [44:50]
A
Yeah. I mean, honestly, like, the reason I'm. I'm looking in a very expensive market, and obviously I'm not following your rules of median home price and that kind of stuff, but, like, these margins exist in expensive markets, too, if you have the. The capital and ability to pull this off. Like, these types of margins exist. And that actually brings me to the second thing I wanted to mention about these sideways markets. Not everything is going sideways. This is like a data analyst stream, this kind of market, because certain price points, certain neighborhoods, things are absolutely moving. And one of the things that you see when you enter a buyer's market, like we're in right now, is that the price of properties that are distressed or not renovated go down the most, and the ones that are really nice don't go down at all or go down the least or might even still be growing. Right. And so that actually increases the profit potential. Right. Because if you're. Even if your top line number, your ARV is flat for the next even year or two, or maybe if it's going down or 1 or 2%, the acquisition price you can buy these deals at is probably going down 3% or 5% or 8%. And yes, that does mean you need to be really disciplined and good at finding those deals, but it does mean that the potential is there and it might actually be getting. Getting better in the next couple of years. If you are willing to sort of be disciplined about what you pay, that profit margin is available.
- [46:11]
B
Yeah. And let's put some perspective around this, because again, I can hear the naysayers in the comments, like, you can't find a deal like this. Okay. Realistically, let's say you had to make 100 on market offers to land one deal with these ratios, and that made you 50 grand in a net profit, and it took you about six months. So if you submit 200 offers, you get two deals that make you 50 grand each, and you do one every six months. That's a hundred thousand dollars. That's more than some people's salaries.
- [46:46]
A
You're making more than the median income in the United States. 70,000. Significantly more.
- [46:51]
B
Absolutely.
- [46:52]
A
I mean, when you put it that way, it sounds pretty good. That's why I'm thinking about doing one or two a year. It's like, dude, why not just. I mean, that's a ton of money.
- [46:59]
B
It's a ton of money.
- [47:00]
A
Well, this was a lot of fun. Henry, thank you for bringing this Deal. I appreciate your unique perspective. I was learning a lot and might be doing something just like this in the next few weeks.
- [47:08]
B
This investing in real estate is possible even in the climate that we're in. But I think what we want to do here at Biggerpockets is be realistic with people about what it actually takes to be successful given the environment. And so I know what we said doesn't sound as cool or as easy as things sounded in 2020 and 2022, but that's not the way the market.
- [47:32]
A
That's just the way reality. Like, yeah, it can't be easy and profitable right now. Like, I mean, some, there's spectrums. Like, some things are relatively easy and relatively profitable. That's what I look for, right? But the idea that you're going to hit these home runs without doing some of the effort and work that we were talking about, I'm sorry, you might get one of those every once in a while, but that is not the norm anymore. And what we're trying to give you is a repeatable formula because the whole goal here, right, is to long term. It's a long game. Over 10, 15 years, replace your income, achieve a level of financial independence. And for that, you can't just look for home runs. Those are unusual. You need a repeatable system that you can do for the next 5, 10, 12 years. And these are both examples of things, things that fit that bill.
- [48:16]
B
Boom.
- [48:16]
A
All right, thanks, man. Appreciate you being here. As always.
- [48:19]
B
Thank you for having me, man. It was a great time.
- [48:20]
A
And thank you all so much for listening. I'm Dave Meyer. He's Henry Washington for Biggerpockets. We'll see you next time. 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, David 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.