What is a CAP rate, IRR, and ROI???

Most of your are familiar with ROI (Return on Investment), but much less are familiar with IRR and CAP, two very common acronyms in the commercial investment world.

CAP – Capitalization Rate 

This is the net income of a property divided by the price you’re paying for the property.  For example, if a retail strip, 4-plex, or whatever are producing $100,000 net income (after all expenses are paid out) and you’re buying the property for $1M then the CAP is 10%.  Certain types of property tend to trade at lower CAPs because they are in higher demand (or are less risky).  If you were to buy a retail strip anchored by CVS, then you’re likely to pay around 4% CAP.  So if we know that shopping center is bringing in $100,000 then we can divide by 4% to find what the market value of the property is: $4M.  Quite a difference.

IRR – Internal Rate of Return

This is essentially ROI broken down into an annual return.  If you are an investor in an apartment flip, then you’re likely looking at 5 year turn-around.  The project may have a 120% ROI but this is a 5 year project so the average annual ROI or IRR is 24%, a respectable IRR for a passive investor.  When looking at projects, IRR is the most important because it takes time into account.

 

2018 DFW Real Estate Market Forecast

Back in 2017 I had a much more dire market forecast because I saw foreclosure starts on the rise and lending practices loosening (which typically leads to more foreclosures).  Not to mention the fact that we were 9 years into the typical 7 year real estate cycle, and the higher interest rates (which were supposed to go up in 2017) would certainly soften the market.   Well the rates didn’t go up as drastically as economists predicted and the overall demand to live in DFW has caused even more development and further increase in home values across the metroplex.  So what’s going to happen this year?

Massive job growth in DFW

We still have 10,000+ people moving to Dallas each month and there is no sign of a slow down.  Dallas is home to over twenty Fortune 500 Companies including Toyota, Exxon, AT&T, American Airlines, Southwest Airlines, Kimberly-Clark, Texas Instruments, GameStop, and Dr. Pepper Snapple Group.  All of these companies are experiencing healthy growth and are hiring talent from all over the country.  Now add to that all the companies that are relocating to DFW.

Steady growth and then stabilization in 2020

I predict a steady growth of the real estate market over the next two years and stabilization in 2020 once the interest rates have settled around 5.5%.  It won’t be anything like the growth we saw in 2014 and 2015.  It will likely be around 5% growth in the low-end of the market, 3% growth in the mid-end of the market, and 2% growth in the high end of the market.  Every area of Dallas has it’s low, mid, and high price points depending on where you are.  If you’re in Highland Park, the low-end is $800k-$1.4M, mid-end is $1.4M – $2.5M, and high end is $2.5M+.  If you’re in Frisco, the low-end is $150k – $275k, the mid-end is $275k – $500k, the high-end is $500k+

Inventory Remains Low

Housing inventory is still very low but new construction is helping to offset this deficit.  New construction makes up about 27% of the inventory in the market which should slow the increase of prices across DFW.  This is especially apparent in areas where resales are directly competing with new construction, and have to decrease their prices to be more competitive.

Interest Rates Poised to Increase

Experts predict interest rates to go up as high as 4.75% in 2018 and then settle at 4.5% by the end of the year.  With this, you never know if they are going to go up, but what we do know is that higher interest rates reduce buying power, which in turn softens the market.  For every 1% increase in interest rate, buying power drops by 10%.  So if you were qualified to purchase a $500k home, you are now only qualified to purchase a $450k home.  Pretty significant.

Still a Good Time to Invest in Real Estate

If you want to flip houses, this may not be the best time for that.  There are hundreds of avenues in the real estate investment world, and flipping houses is just one of them, albeit the most popular one.  You have to invest where the demand is, and what my investors and I found to offer the highest returns is in single-family new development in the $1M to $2.5M range, value-add commercial projects, and commercial new development.  I think the biggest reason for this is because these opportunities are not as blatantly obvious as flips, which is also why flips are not very profitable these days (everyone is going after rehab projects and overpaying).  Rentals are not a bad option either, just make sure you’re cash flowing if you’re going to carry a mortgage.

At the moment I’ve got numerous projects on the ground, and I’m always looking for investors to partner with.  I’m happy to vet your projects and give you my feedback as well.  My team and I are always happy to help 🙂

New Development Opportunity w/ massive ROI

Hey guys! I don’t post all my deals on here, but every once in awhile I’ll post a deal that has a very short fuse or huge ROI, in this case, this deal has both!  We have to close on this lot by 10/12/17 and the ROI is going to be approaching 70%!  Also keep in mind that this is a rather passive opportunity.  It won’t suck your time.

Here are the details:

• Off-market lot – 0.55 acre in Bluffview – $750k
• Comparable sales in the last 9 months are $2.35M to $3M
• Plan is to build around 4800 sqft for $910k (see numbers and finish out example below) and sell for $2.4M.  The build cost includes the builder’s 15% fee.
• Need a total of $500k cash to make the deal happen, and builder is willing to throw in $100k.
• The attached photos are of a house that sold two doors down 6 months ago for $2.36M at 5200 sqft.  The lot it was on was less desirable than our lot.
• The builder I have lined up is David Leite.
• Survey for 8410 Midway Rd in Dallas
• Timeline – Cash in and out in 14 months or less.

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If you’re interested in this project or a project similar to this, please feel free to reach out.  I’ve got others in the pipeline, but this one has the best numbers I’ve seen in awhile.  We need as little as $250k to close on this lot.

Brandt Barham – brandt@nailandkey.com – 469-531-4131

Got an off-market 4 plex!

Hey guys! I just got a call from a guy offering a 4-plex in Garland that’s was just remodeled.  It’s off market and there may be some wiggle room in the price, but likely not much.  I ran the comps and the building next door recently sold for $378k and it was not updated.  Here are the numbers I ran for this 4-plex.  See below…

If you have any interest, please let me know quick because this will not last.  Thanks!

Is flipping season over?

The quick answer to this question is yes for about 95% of the flippers out there.  The other 5% are what we call institutional flippers and they have 20+ people working for them finding inventory, remodeling, and selling the homes for them.  Institutional flippers, even with their systematized approach, only net about $25k or so per flip.

I was just reading an article in the Dallas Morning News last week that said 6.7% of all first quarter sales in DFW were flips (see article here). That’s up 18% from this time last year, and inventory was very tight last year. Flipping has become so sexy that everyone wants to do it.  With many professional and amateur investors going after an ever shrinking inventory of distressed properties, prices go up and profit margins go down.  Houses that have no business selling for over $225k are selling on the open market (and sadly the wholesale market) for $270k.  There goes all your profits, and if you’re lucky, you’ll exit without losing money.  The only way to win in flipping right now is if you’re able to get the inventory off market at the right price, which means you’ll have to find all your properties yourself.  This means door knocking, mailing thousands of postcards and letters, cold calling, bandit signs, etc.  Finding distressed inventory is a full time job.  You’re essentially competing with wholesalers.  More about wholesalers here.

The market is simply too hot right now and most homeowners know it, so you will likely need to wait for the next down market to buy up some cheap inventory.  This doesn’t mean the market will be lower than it is now, it just means there will be less buyer competition and more inventory on the market, so you have more chance at getting a good deal from a motivated seller.

There are options for real estate investment outside of the traditional house flipping.  Most of my clients have moved into new development or are participating in apartment flips, which typically require about $50k cash to be a player.  Both of which generate upwards of 20% annualized returns.  If you are looking for ways to put your capital into play in DFW, let me know and I’ll be happy to direct you to the right project or partnership.  See you next time!

Brandt

2017 Dallas Real Estate Market Forecast

Hey everyone!  I’d like to take a moment to explain what’s happening in the real estate market today as well as forecast what we can expect for the rest of this year and 2018.  We are presently in the midst of of shift from a sellers market to a buyers market.  I first noticed the shift in August 2015 in the higher price points, which is typically how it happens.   When comparing sales prices from 2015 to 2016, there was no upward movement in values for most areas of Dallas.  2017 is looking like it’s going be slightly down from our 2016 values despite having a large number of people moving to Dallas from out of state.  There are several factors for this downward shift:

• 26% of home inventory is new construction – this dilutes supply and pushes down prices, both new and preowned.
• Housing is no longer affordable – prices are up 20+% in the last 2 years and salaries are only up a few percent in the same time frame.  We’ve hit the proverbial ceiling.
• Interest rates are on the rise – for every 1% increase in interest rate, home prices need to fall 10% to maintain the same monthly payment.  Interest rates are up 0.5% over this time last year, so technically home prices should fall about 5% to get back to equilibrium.

Towards the end of 2017 and into 2018, we are going to have all the of the above factors still in full effect and then there is going to be a few additional factors that will likely drop prices further.

• Foreclosure starts are up 25% this year – this is the highest number of foreclosure starts since 2011.  Lending practices have loosened up quite a bit in the last couple years, which has helped create more buyers, but also creating more loans to people that probably shouldn’t be buying.
• ARM mortgages make up a large percentage of all outstanding mortgages –  This sounds crazy but I spoke to a couple friends at Nationstar and they told me their mortgage portfolio is 70% ARM!  Most of these ARMs are at about 2.5% APR and are hitting their maturity date in the next 18 to 24 months.   By that time, interest rates will likely have plateaued at 5%.   For the typical $250k home, this will be an increase of $520/month.   This will likely trigger a sale or a foreclosure, either way, it’s additional inventory which will further dilute the existing supply.
• The bandaid is coming off – This is more speculative – President Trump is likely going to cut back on several government assistance programs, which enable more low income buyers to purchase a home with little to no money down.  The reduction of buyers may increase the amount of inventory on the market in the lower price points.

If you’re in the market to buy, by all means buy now since it will likely cost you the same today vs. later this year.  Home prices may be slightly down but interest rates will be slightly up.  If you’re thinking about selling, this is the best time to get top value.  The next time you will see these values for your property will likely be around 2022.   If you are looking to upsize or downsize in a couple years, it doesn’t really matter when you sell since you’ll be buying in the same market.  Make sense?

Anyway, I can go on for hours about this.  If you ever want to chat about what your property is worth or where the market is headed. I’m happy to give you my honest opinion.

Talk to you soon!

 

How to calculate a flip rehab in seconds…

Hey guys!  This day and age properties move on and off the market so quickly there is little time to get contractors over to the subject property.   Even if you could get them over there in time, most contractors don’t like to take the time to put together a well thought out bid for a property you only have a chance of getting.

You need to get the property under contract first, but you need a rough rehab estimate right?  Okay, here’s how I do it.

$37/sqft – This is my average cost for doing a traditional flip that I plan on selling in the $400k to $600k range.

$45/sqft – This is an extensive rehab or a complete gut job.

$100/sqft – Adding square footage upstairs.  Don’t forget the when you are adding a second story to a home, you will typically need to budget $45/sqft for all the existing square footage downstairs.   This is also a good time to increase the downstairs ceiling height from 8ft to 9ft.

$125/sqft –  Adding square footage on the first floor.  This is more expensive because you’re adding foundation, plumbing, electrical, roof, etc.

These numbers include some room for other items that aren’t necessarily construction cost, but they are costs nonetheless.  Always better to shoot high on the rehab and be pleasantly surprised at the end.  I’ve had to learn the hard way far too many times.

Don’t let someone selling you on an opportunity let you believe that you can do it for less with their guys.  Those guys are worthless; they don’t show up for work, and they always come in WAY over budget.  Shocker!

Happy flipping guys!

 

Knox Henderson Developments

Hey guys! So I’m going to bring video into the mix, finally!  In this video I’m giving you the rundown on what’s going in the Henderson Avenue area.  Very hot area right now and a great time to be buying and developing.

 

Here are the numbers for the deal I’m talking about in this video (see below).  5 townhomes @ $550k each = $2.75M in total sales.  Land is $685k, with another $30k that will be spent on removing deed restrictions and paying for upfront closing cost.  Build cost is $115/sqft, which includes everything and will be built by Grenadier Homes.

Let me know if you’d like to do a deal like this one.  There are other opportunities in the area.  Talk to you soon!

New Rental Investment Opportunities

Hey guys!  I know rentals aren’t as glamorous as flips, but man do the numbers make sense.   I’ve got four awesome opportunities for you.  Let me know if you’d like to pick one of these up…

Garland Rental – Completely remodeled, 3 bed, 2 bath, 0.18 Acre Lot, 2173 sqft, no garage, $1750/month rent.  Yeah no garage sounds bad, but I factored that into the rent.  I have it renting for the price of an 1800 sqft home in this area.  This is a flip that someone overspent on for the neighborhood and is now going to take a bath.

Irving (Medical District) Rental – 3 bed, 2 bath, 2 car garage, 1896 sqft, 0.32 Acre Lot, $1800/month rent.  First of all, look at the size of this lot!  The home was decked out by the owner and is completely move-in ready.  The neighborhood is nice, but this house is certainly nicer than most of the homes, which is probably why the price is so aggressive.

Euless Rental – 2010 Construction, 4 bed, 3 bath, 2 car garage, 3260 sqft, 0.13 Acre Lot, $2700/month rent.  This house looks gorgeous inside and out.  It really looks like a 2015 build.  Not much for comps in this area for newer construction so I went on the lower side, $0.83/sqft.

North Dallas Rental – Adorable 1995 brick home, 3 bed, 2 bath, 2 car garage, 1488 sqft, $1850/month rent.  The numbers aren’t stellar on this one, partly because the HOA, which does manage the yard maintenance.  However, it’s selling way on the low side for the neighborhood, which could give you some more room for appreciation in the future.  Also, I have some clients that love to invest close to their home, so if you live in West Plano or North Dallas, this is the one for you!

Until next time… peace! 

 

Current Flip Opportunities

Hey y’all!  I hope you’re ready to flip some houses!  I’ve got 4 traditional flips and one new build for you.  I’ve walked all these properties and the numbers are solid.  12% to 14% ROI for is pretty standard for Dallas right now for a 4 month in and out project.  8 month projects are bringing around 24% on average.   You choose which makes more sense for you.

The Disney Streets Flip – 2808 sqft, 3 bed, 2.5 bath, 2 car garage, 0.37 acre lot

The North Dallas Cul-de-sac Flip – 2658 sqft, 4 bed, 3 bath, 2 car garage, 0.175 acre lot

The North Dallas Modern Flip – 1644 sqft, 3 bed, 2 bath, 2 car garage, 0.23 acre lot

The Lakewood Flip – 1900 sqft, 3 bed, 2.5 bath, 2 car garage, 0.2 acre lot

The Bluffview Flip – New Build – 3800 sqft, 4 bed, 4.5 bath, media room, 4 car garage, 0.27 acre lot