Real State

Our 2022 Real Estate Regrets and How You Can Benefit From Them

Home buyer’s remorse, low interest rate dreams, and not taking a second look at a property. These are some touchy subjects for real estate investors who had wins but also big losses in 2022. While real estate investing is one of the best ways to grow generational wealth, it still has its home-induced headaches, either from going over budget on a project, waiting too long to buy, or doing the wrong rehab. But don’t get down if you made any of these mistakes. Our expert investors have done the same!

Welcome back to On the Market. In today’s show, Dave, Henry, James, and Kathy, talk about the biggest real estate regrets and mistakes made in 2022. This show proves that even if you’re experienced, you can still fall prey to making mistakes and losing hundreds of thousands of dollars doing the wrong deals. But this isn’t all doom and gloom. The cast shares lessons learned from these big mistakes so listeners like you can avoid these money-hemorrhaging life lessons the next time they pop up in your life.

We also talk about some of the biggest mistakes across the news in 2022. These span from the FTX crash and SBF’s fall from grace, the crypto slump of this year and last, and why so many buyers were caught off guard by the almost unprecedented interest rate hikes of earlier this year. Tune into this episode, and stick around for next week’s as we give a glimpse at what we’ll be doing to build even more wealth in 2023!

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined today by Henry Washington, Kathy Fettke and James Dainard. How are you all?

Kathy:
Great.

Henry:
What’s up?

James:
I’m doing good. How are you?

Dave:
I miss you guys. I feel like it’s been a while since we all were on a show together.

Kathy:
Yeah, it’s been way too long.

Henry:
Don’t let it happen again.

Kathy:
Yeah, you should fly out this weekend.

Dave:
To me?

Henry:
No big deal.

Kathy:
No big deal.

Henry:
Just a flight from Amsterdam.

Dave:
Just a casual 30-hour round trip to go to Jamil’s party. But it does sound very fun.
Well, today we are going to do a really fun episode where we’re going to talk about our biggest mistakes for 2022. I don’t know about you all, but when I read a lot of investing news or hear about a lot of investing content, it glorifies a lot of the stuff that goes right and omits a lot of the stuff that goes wrong. But I think it’s really important for investors anywhere to acknowledge that things do go wrong. And today we’re going to share what we did wrong in 2022 and what we learned from it. You guys ready for this?

James:
All right, I’m ready.

Kathy:
Yeah.

Dave:
All right, great. Well, actually, in the first section here, we’re going to just start, not about your specific business, but let’s just talk about mistakes that happened in the news for 2022. What was a big whiff from this past year? It could be anything, some business, some economic thing. Kathy, let’s start with you. What do you think the biggest mistake that happened across the news or economic spectrum in 2022?

Kathy:
There were so many, but I’ll just focus on one. It was really interesting, I was lucky enough to have Rosie Rios stay at my house, the 43rd treasurer of the US, and she was here on November 11th. I remember that because 11/11, great day. And that was just a couple of days after FTX fell apart. Right. And I didn’t really know much about it, but I had the former US Treasury of the US at my house. So we were just talking, having dinner, and she said, “Do you know the biggest story right now?” And I’m like, “What? Twitter? I don’t know. What is it?” She goes, “Well, yes, but FTX.” And again, I didn’t know what that was, but she was literally with CZ, who is the founder of Binance, which was the competitor of FTX and the one who kind of basically pulled the card that had the house of cards fall because they pulled their money out.
So I heard the story before it was a story in the news and learned a lot about it from the inside because she had just come from Portugal for the crypto conference that was there and was with all of these people right before the collapse. So fascinating, fascinating.
The amazingness of this story is, oh my gosh, I just want to see the Netflix version. It’s so much corruption. Anybody who still believes that there isn’t corruption within the government, within government agencies and oversight committees, just please study this story because it goes deep, it goes really deep where the politicians that FTX was funding were also in charge of oversight of crypto. I mean, come on guys. So it’s still happening, with Maxine Waters being one of the politicians who received donations from FTX and is still now on the House Financial Services Committee that will be overseeing the hearings for this. It’s just wow. It’s unbelievable. So yeah, just know that there’s big companies that fund politicians who also, those politicians, oversee the oversight of those companies. It happens all the time. So you’ve just really got to look deeper.
It’s why I love real estate, it’s just so simple, it’s just you buy a property and there’s just not a whole lot of complication. Obviously, there’s regulation in our industry, but real estate investors just want to, generally, stay out of that web and kind of be doing their own thing. It just brings me back to why I love real estate. You can lose your money in real estate too. If you’re an equity investor, you have the most risk if you have to sell your property. If you hold your property and the cash flow’s, asset values just don’t matter, with real estate, obviously. But if you are flipping, and we all know this, or you’re building houses like we are and you’re an equity investor and you have to sell at a certain time, well, yeah, you can certainly lose your equity. But at least that there wasn’t all this hanky-panky going on. You guys, I just can’t believe it.
And I’m not against crypto. This is not a story about Bitcoin, and I do want to say Bitcoin is, in my opinion, it’s an investment in a coin, a real… It’s not real. It’s crypto still, but it’s been mined and it’s protected. But this was trading, this was just trading. And they were market makers. I know a lot of real estate investors that do this too, but this was really big, where FTX, he created another company that his girlfriend ran, Alameda Research. And basically they would trade back and forth this coin that they created. And every time Alameda Research and FTX traded it back and forth, they would raise the price and then, of course, investors were like, “Oh my gosh, this must be a value,” when they were just making the market. Right. I’ve seen investors do that where they’ll go into a market, buy a few properties with cash to set some kind of appraisal value there. So it happens in every industry and you got to be careful about that.
But it’s fascinating that so many big firms didn’t see it. Jim Cramer saying that Sam Bankman-Fried was going to be the new J.P. Morgan, even though Sam Bankman-Fried didn’t find anything, didn’t create anything except a fake crypto. So anyway, it’s amazing that… And again, if you look, FTX, I believe, was financing Jim Cramer’s show. So always look at who the sponsors are, just be aware. And then, other huge firms like SoftBank and BlackRock investing in FTX when it turns out now that they’re looking at the books that they didn’t have books, they didn’t know who their employees were, they would just send emojis when someone sent in money that they wanted reimbursement, they didn’t have a receipts, so it would just be, “Yeah.” So the fact that these big, major, major companies invested, it just seems like a complete shell company when you look at it like, “Okay. Was it just for donations to political endeavors?” I don’t know. All I know is that I hope that there is oversight as a result of this and that people start to look into what they’re investing in a little bit deeper.

Dave:
Yeah, I think the really remarkable thing here is that Sam Bankman-Fried was sort of billed as the virtuous person in crypto and that he was altruistic when really it was just a glorified, not a Ponzi scheme, but it was just a glorified scam. It was just a fraud.

Kathy:
Definitely a Ponzi scheme. Yeah.

Dave:
Yeah. So yeah, it’s pretty remarkable. And if you want a good follow on Instagram or Twitter, look at the Inverse Jim Cramer ETF, it’s basically a ETF where they take the opposite of what Jim Cramer says and it outperforms Jim Cramer just way more. It’s very, very funny.

Henry:
I love that there’s an actual ETF meant to mock someone.

Dave:
I don’t think they’ve actually created it, but someone tracks the stocks and just does the opposite. And-

Henry:
Please, please, actually make this an ETF we can buy and trade.

Dave:
It’s so funny. Yeah, it’s very funny.

Kathy:
And when you have a company in The Bahamas, and again, like you said, he was this altruistic guy, supposedly, and yet, there, he was living in a $30 million mansion in The Bahamas. They were, apparently, on lots of drugs. And I don’t know, they were a polyamorous group, and not that that matters, hey, whatever makes you happy, man. But it’s just so funny that they were living a very wealthy lifestyle, wild, and I guess, what some people might dream of a rock star lifestyle, when the world saw them as kind of hippies that were just doing good things for the world and giving all their money away.

Dave:
Yeah, it’s a little ridiculous. Well, that was a big issue. We’ll see what happens with crypto. I’m no expert here, but I do think, per your point, Kathy, that it’s likely that we see institutional investors back away from crypto for a bit. I feel like they were just starting to get comfortable and now you see that there really is, without regulation, without predictability, without accountability, a pretty risky asset class, even riskier than we all thought it was, which was already pretty risky. All right, Henry, what’s your big mistake from 2022 in the news?

Henry:
Man, I feel like every new Year since 2020, the new year is like, “Oh, is that what you did 2021? All right, hold my beer,” ’cause it’s been crazy. There’s been a lot of crazy stuff that happened. I mean, first of all, I think Putin got a little more than he bargained for with that war in Ukraine. I don’t think that that’s going as smoothly or easily as he thought. So call that a mistake, whatever you want, but I don’t think anybody really expected the results that are happening from that.
You look at crypto, to kind of piggyback on what Kathy said, you talk about FTX, but it’s the crypto crash in general, right, it’s happening across the board. And I think a lot of people are learning a lot of lessons about how to make smarter investments, me, especially, I have a crypto portfolio, I still have one, but I have since consolidated my investments down to the two coins that I think are really going to matter in the future and that’s Bitcoin and Ethereum, but I was on the bandwagon of buying all these different coins for all these different super cool technologies that I got that I thought were going to be a thing.
And when you look at history, like the dotcom boom, if you looked at the dotcom boom, there was all these different types of dotcom companies that people were all high on. And at the end of the day, it all came down to two or three and everything else kind of fell to the wayside. And this seems very similar.

Dave:
So you’re not buying the dip on FTT right now?

Henry:
No, no, I am definitely not buying the dip on FTT. I am staying far, far away. But I am still in, I don’t want to mislead anybody here. I am still in investing in crypto, I’m just trying to be a little smarter about it.
The other thing is both hedge funds and iBuyers realizing that they overpaid for lots of properties and they’re getting their butts handed to them right now as the market is shifting. And you’re seeing iBuyers get out of the business or go under. And you’re seeing hedge funds dumping properties that they bought recently. And so, I think, obviously, they realized they’ve made a huge mistake in the price points they were willing to buy homes at. And huge mistakes in foregoing a lot of the inspections and repairs that now these properties need in order for them to actually get the value that they want out of them and they can’t afford to do them or sell them where they want to. So big mistakes on all fronts.

Dave:
All right. Those are good ones. Yeah. It’ll be interesting to see how that plays out through a dip if those companies survive. James, other than dropping your computer on the floor last night, what mistakes did you see generally in 2022? And just so people know, James is having some computer issues today, so if he sounds like a robot, don’t blame him, he’s just all technical issues.

James:
I’m just struck when it comes to technology, I just break and drop things. But I was going to bring what Kathy talked about because obviously that’s been the biggest meltdown we’ve seen. I mean, it was kind of like this thing that happened that was just in the back of my mind like something really bad is going to happen with the crypto and with how accelerated and how much growth it had.
But I think the biggest story of the year, at least for me, is the thing I missed the most is we knew inflation was going at a rapid pace, we knew our economy was out of control, and at the beginning of the year, they were saying they were going to do minimal rate hikes and it could be a soft landing. And we all, or at least I bought into that Kool-Aid for sure. And I guess I’ll talk about that a little bit more later in the show. But that was the biggest miss of the financial year because the rates have increased the fastest we’ve ever seen and it is causing mass issues in all sectors of our economy, whether it’s credit card debt, housing and just cost of money in general.
That was definitely the biggest, I think it’s having global impact across everything and it’s going to start causing things like this FTX to kind of be exposed and we’re going to see some more ghosts in the closet coming up because of all this. But I think common sense should have dictated that we should have anticipated rate hikes a lot quicker and a lot faster, but we never thought that they were going to go up at the fastest they’ve ever been. And it is definitely breaking some things. So I think, for me, that was the biggest miss I had of the year was drinking that Kool-Aid thinking that it was just going to keep riding out for another 12 to 18 months when everything, we had hit this peak pricing, everything, logically, was saying that something’s going to stop. And then, the rates, they did, to the rates, what they needed to do to start slowing things down.

Dave:
Totally. I agree. Well, actually, the news or policy mistake I was going to say is that the Fed continued buying mortgage backed securities into September of this year for some inexplicable reason, even though they were raising interest rates and inflation was over 9% in June. So yeah, I think there were some interesting monetary policy decisions, often contradictory monetary policy decisions that happened this year. But okay, so those are some of the broader things that we saw.
I’ll also say, I made a big mistake casting Jamil on this show because he didn’t even have the guts to come on here to talk about the mistakes that he made.

Henry:
Oh, shots fired.

Dave:
No, I’m just kidding. Jamil has actually been very open and honest about some of its mistakes this year. If you haven’t listened to some of the stuff over the summer, he’s great about that, just have to get a shot in because he couldn’t make it today.
But with that, we’re going to take a quick break and then we’re going to get into the specific mistakes or regrets that you have in your own investing decisions from 2022. We’ll be right back. All right, Henry, let’s start with you. What was one of your biggest mistakes in 2022 related to your personal investing portfolio?

Henry:
Yeah. Good. Glad you started with me because I’m not going to talk about something super broad, I’m going to talk about something that’s probably all happened to us regardless of market and economic conditions and that is, I bought a property, luckily it’s a buy and hold, it’s a duplex. And I got very excited about the purchase price point and underestimated the amount of renovation that that property was going to need and when I was going to have to spend it. So we had tenants in it, the tenants were paying okay rents and the plan was to keep them and then we would make minor modifications as they moved out. And they moved out immediately. And what we thought were going to be minor modifications ended up being, I don’t know, I think we planned on spending like 15 grand and we’ve probably spent closer to 70.

Dave:
Whoa.

Henry:
And-

Dave:
What was it? What were the mods that you missed?

Henry:
So we had to completely replace the stairs because it’s a duplex, but it’s an up-down, so you got stairs to the top unit. They were in worse shape than what we remembered and maybe that’s because they did more damage after we bought it, not really sure, so we had to completely replace those. And you know, lumber and labor both, this year, weren’t always at great prices. We ended up completely remodeling the inside of both units. I made a lot of rookie investor mistakes by not properly estimating the renovation, not properly estimating the timeline. And then, I didn’t pick great contractors. I’m on my third contractor with this property.

Dave:
Wow.

Henry:
It’s been a year and we haven’t had anybody living in it.

Dave:
Wow.

Henry:
I mean, it’s just costing me money hand over fist right now. Three contractors in. We’re still redoing some of the work that was done from the first contractor. We were ready to almost get this thing listed and then we started testing the water and then we had a big leak from the top unit down into the bottom unit. So then, we had to tear up floors and tear up drywall, fix plumbing issues, redo the shower. It’s like it’s just one thing after another. It feels like we keep starting over. So lots of rookie mistakes, but the mistake isn’t that I bought it because if I had to do it again, I would still buy it, I would’ve just paid a whole lot closer attention to what the actual true rehab cost was going to be and planned for that rehab on the front-side. I didn’t anticipate it being on the front-side. I anticipated small rehab repairs down the road and then it hit me in the face on the front-side. So yeah, that was definitely my biggest flub from a property perspective this year.

Dave:
Well, first of all, sorry that sucks. That does not sound like a fun experience. But what did you learn from it?

Henry:
Yeah, so I learned that the fundamentals matter no matter how experienced you are. The more deals that you do, the more comfortable you’re going to get. Right. And so, you’re going to walk into properties and it’s easier to overlook things when you’re comfortable because you feel like you understand a lot of the nuances of the business. And so, I’ve got to stick to the process of properly evaluating every property on the front-side and anticipating the repairs if they happen on day one. Right. And does it still make sense to buy this deal if I have to make these repairs on day one versus when tenants move out?
And then, I mean, the other lesson I learned is that I’ve got to be more diligent in vetting contractors on the front-side. I just wanted to get somebody in here quick to get it done, I didn’t properly vet everyone that got in there to do the work and it cost me on the backside because now I’m fixing problems that should have been fixed months ago that we didn’t even know were problems. But I know that had I selected the right contractor, paid a little more for the right contractor, we probably wouldn’t be sitting in this place. What do they say? If you think a-

Dave:
It’s like, “If you think a $150 an hour plumber is expensive, try a $15 an hour one.”

Henry:
Yeah, exactly, right. So I went with a contractor that had decent rates and if I’d have went with one that was more expensive, maybe I wouldn’t be in this boat. But I’ve had horror stories of contractors that were expensive too. It’s just more about vetting them as a company and vetting them on their quality of work.

Dave:
That’s a really common question about how to vet contractors. In retrospect, is there any red flags that came up that you feel like you should have seen coming or do you have any tips for anyone listening to this about how they can really do a good job vetting potential contractors?

Henry:
Yeah, so I think my biggest mistake here was the contractor I hired, when I did vet them, most of the work that they were doing for me was paint work and finish work and the problem that I ended up having with the work that they were doing wasn’t on the paint work and the finish work, it was on the plumbing. So I just made some assumptions that because the work that they were doing in some of these other trades was good, that they were also doing a decent job at some of the plumbing work and electrical work that they were doing. And this is the second property I’ve had plumbing issues from the work from this contractor.
So it’s about, not only do you need to vet your contractors, but every trade is different. So if it’s a general contractor, you need to know who they’re subbing their work out to, you need to know if they’re qualified to do those kinds of things because plumbing seems to be the hangup with this contractor, even though everything else seemed fine. So I made some general assumptions based on the work that I did see about new work that they were doing and it turned out to bite me in the butt.
So the general tip would be like you have to have a scope of work and then, you have to get into the details about how that scope of work is going to be handled across each trade. Because I did vet their finish work and I did vet their paint work and it was very good, but I didn’t look into what kinds of plumbing jobs they had done in the past and what kinds of success they’d had, talked to any other customers who had used them to do different types of plumbing work. And I bet, had I done that, I would’ve found a similar issue.

Dave:
All right. Well, sorry to hear you had to go through that experience, but thank you for-

Henry:
Still going, it is not done or rented out. So we are currently getting my butt kicked.

Dave:
Hopefully, this isn’t on your 2023 list of mistakes also.

Henry:
Currently getting my butt kicked.

Dave:
Sorry to hear that.

James:
That’s just what happens sometimes, you get the domino effect going through your project where it doesn’t matter how many projects you’ve done. I mean, I really loved what Henry said with staying disciplined going forward, just staying on your systems because once you break your system because you’re just trying to get things done and trying to get someone out, you can end up just bringing in the wrong person and it domino effects and the project just never goes away. It’s like you cannot get it to the finish line. I mean, we’ve all had these, I probably have a handful of them going right now, where it’s just like, “Why won’t you go away?” I just want to get rid of this house and you’re just stuck at the one-yard line.

Henry:
Ugh, man, every time the phone rings and my contractor’s like, “Hey, let’s talk about such and such property,” I’m like, “Ugh, I don’t… Just do it. Whatever you’re about to say, just fix it, just fix it. Something is broken, it needs fixing, just fix. Don’t even tell me, just fix it.”

Kathy:
I think anyone who’s ever owned any real estate ever has gone through this. It’s one of the reasons why the property managers that we work with and that we refer people to have in-house people that they rely on and trust and have worked with for years instead of contracting out. It’s so hard to know who you’re going to get. But yeah, I would love. That could be a whole show that I think James could host, right?

James:
I’ve been ripped off for millions of dollars over the years. It’s part of the game. You are going to run into bad characters, bad actors in the market and you just got to… But putting the right paperwork together, it’s really, really important. I once hired a fake contractor.

Henry:
You hired FTX contractors?

Kathy:
He paid them with FTT.

James:
He had a fake ID, a fake business, fake referrals. And then, we were referred to him from one of our clients. And then, all of a sudden, I had my job site, we had permits on the job, they were fake permits. And he gets shut down, Elle and I shuts this down. And then, we start digging into it and [inaudible 00:25:40] like, “This guy’s not even a real person.” And he disappeared. It was like a $250,000 loss for ourselves, some people we knew. The guy just left in the middle of six projects.

Henry:
It almost seems like it would be more work to be a fake contractor than to be an actual contractor.

James:
But we had the right paperwork in line, we had our construction contracts and even though it was fake, we ended up being able to get a judgment. Now I haven’t got paid anything from it, but I have a big judgment on this guy to where if he ever does get a real job, I can get some of my money back or maybe negotiate it later. But vetting them and putting them under the right paperwork and contracts is huge, you have to do it in today’s markets, especially in today’s climate with everybody starting up construction businesses everywhere.

Henry:
Kathy makes a great point, yes, this has happened to everyone. That’s the reason I wanted to bring it up is because it has happened and it will happen to you if you’re in the business. So you’ve got to remember to stay disciplined. You have to remember that your processes and procedures are there for a reason. And you can’t get comfortable. When you get comfortable, you get kicked in the butt. And we’ve all been there, in some aspect, in real estate and so, I just want people to remember that you have to stay disciplined, not just to your numbers, but to your process.
Like this contractor that I’m having the plumbing problems from, they’re great, I love them, they’re great people. Just because you like them doesn’t mean that the work is going to be done right. So you truly have to vet the work that somebody has done in the past or the work that they’ve done for you, right, to know whether you want to use them again, regardless of if you like them or how they handle business because, just because they handle business well and just because you like them doesn’t mean they’re going to do a good job.

Kathy:
And if you’re like me and you have no clue how to vet any work that any contractor’s done, how would I know? You can bring someone else in, you could bring an inspector in just to check it out. Or there’s companies that actually do that called builder control companies that can. You have to pay that extra money, but if you just don’t know because you’re not a contractor and I wouldn’t have a clue on how to vet any contractor, then bring in someone who does.

Dave:
I mean, it sucks when it happens, but if there weren’t contractors, what would real estate investors even talk about? We would have nothing to complain about. There’s nothing to even do.

James:
The fed.

Dave:
Yeah, the fed and bad contractors keep us all in a job, so we appreciate it. Well, James, let’s move over to you. I know in Seattle, you’ve been facing some difficult market conditions up there.

James:
Yeah.

Dave:
What was the biggest regret or mistake in your personal investing in 2022?

James:
Well, I think on a concept basis, the biggest regret I had was, like Henry was talking about, not being disciplined, we were out buying projects before we could even get going on them because we just wanted to get it locked down and done. And they’d sit there for a month or two, sometime, before we could get our guys ready to go. And that’s just a mistake. And housing, for us, is inventory, we’re bringing it in, we want to get it back out the door in that sector of the business that we did. And it was just, once you start doing that, it breaks bad habits, you start going over costs. You have to run this a business. And I think that was the biggest mistake I made as far as the concept goes. So the worst thing I bought though was, this is a bad one, it was… So we just lost 380 grand on a house.

Dave:
On one house?

James:
On one. In this, talk about the house that would not go away.

Dave:
Henry, you could have bought three houses for that.

Henry:
I was going to say that’s like seven houses [inaudible 00:29:33].

Kathy:
I’m sure he feels a lot better, guys. Yeah.

Dave:
Sorry [inaudible 00:29:37].

James:
Again, like when we were just talking about how contractors can rip you off, bad things happen, this just happens on real estate. Right? I always say, if I’m buying 10 properties and I lose money on one of those, the 10% of those, I’m doing a pretty good job as an investor, actually. You have to expect this because everything can go wrong.
So we bought this property, it was on a hillside, killer location, killer views. Started demoing it. The biggest mistake we made is myself and my partner didn’t walk this property, one of our contractor guys did, or our project manager did. As soon as I walked inside, the day we bought it, I was like, “Oh no,’ it was really, really crooked.
And so, we get full permits, we end up jacking the house up on the foundation. And then, what happened is we didn’t realize, in the hillside, they had brought in so much fill dirt it just caved in, and the foundation basically gave way, city red-tagged us again. And this is after permitting and waiting.
We were 17 months into this project by the time we had just gotten there because the permits alone, this is, I think, something that all people should know is when you’re buying in an environmental critical area, locations, you have to be careful, and not only that, you need to anticipate for some serious debt costs because permits are really long on these. You can wait three times as long for these kind of permits as a regular permit.
So we waited about 12 months to get our permits. We spent $120,000 jacking this house up, reciting the whole thing, all the windows. And then, it gives way. And then, they kick us back in in the city, because we’re in an environmental critical area, they want more engineering, more piles, they want to go back in for review and it’s going to take another nine months.
And at that point we go, “Well, forget it.” We scrapped the house and then, we permitted a brand-new house. So we still had to wait the nine months, but we kind of looked at the math on it, we were like, “”Well, this isn’t going to work no matter what.” And so, we exited the project to build new and we got right to the home stretch and the values were doing really well. It was definitely worth, in the spring, like a 3 million, 3.1 million.
And then, the Fed started stepping on the gas for rates. And as we know the market has came back 10%. And so, when you are flipping, the rates have gone up, we’re down 10 to 15%, so when you’re buying higher-end properties, it’s awesome when it’s awesome ’cause if you’re appreciating rapidly, you’re getting really big hits on the way out the door or really big pumps when you’re ready to sell. But when the market’s doing the opposite, you get really big clips.
And what happened is we lost 15% off that property. And so it went from being a $3 million property down to a $2.5 million house fairly quickly in a 90 to 120-day range. And so, when you lose 600K in value, I kept the project for over 36 months, we rehabbed it, tore it down, and then built new, it was just all ending bad. And it’s amazing that we only lost 380 grand to be perfectly… It should have been a $700,000 loss if the market didn’t pump up-

Henry:
It sounds like you’re about to sell it for lot value.

James:
Wait, no, I don’t even think I could give this lot away. That’s the other thing I definitely learned, we’ve built on all sorts of different things, flats, corner lots, hillsides, when you got hills like this, when you’re that steep of the hillside, it’s just not worth building. Someone couldn’t give me a free lot on a hill, I won’t touch it. It requires so much more cost, so much more time and so much more energy. It is never worth going on a hillside, at least in Washington.

Dave:
So are you saying if the market hadn’t reversed course at a bad time, would you have walked away pretty much even?

James:
Yes. If we would’ve got it to the peak of the peak in the spring, we probably would’ve made like 80 grand.

Dave:
That’s pretty impressive.

James:
I mean, we had almost a million dollars in this product. Talk about the worst or dead time on our money, for three years, a million bucks, we made nothing, we end up losing money on the way. But that is the way it goes.
Like we also hit a lot of home runs. One of the things I learned in 2006, ‘7 and ‘8, when you’re doing well, you need to put away your money. You have to be running with a solid reserve because at some point the songs, it just stops and when it stops, it goes back the other way. And there’s always going to be this little painful period that you got to deal with. And so, luckily, we learned that in 2008 and we have great reserve set aside and we got to pay the bill. And at least we got a million bucks back that we could go then deploy and buy more deals with and then we got to make it back up.

Dave:
Well, I do really appreciate your attitude about it. I think in any business, real estate is no different from any other entrepreneurial pursuit where you take some losses, you make bad hires, you make bad investments, things go sideways, that’s just part of being an entrepreneur. And it sucks when it happens. But you have to sort of embrace that. Risk is a two-sided coin. Right. You don’t get a return without taking on some risk. And so, that means you’re not going to hit everyone out of the park. But most of the time if you’re doing things right, you are averaging way more than you would if you weren’t taking on those risks.
But James, I wanted to ask, you said that one thing you regret and what you attribute, one of the causes is that you or your partner didn’t walk the property and you let a contractor do it. Have you continued with that practice or are you walking every deal now?

James:
No, I still buy basically site unseen. But this one was… We buy lots of properties at auction, I mean, I don’t mind rolling the dice a little bit on that. But what I won’t do is buy homes site unseen with conditions on there. If there’s an ECA rating, a environmental critical area, I’m not messing with it because that that’s way too big of a roll of the dice. And then, if it’s also on a big hillside, not going to mess with it.
There’s a really good property I can get right now in one of the best neighborhoods, best street in all of Seattle. And I can’t get inside though because it comes with a tenant that they want me to get rid of or facilitate, it’s a squatter tenant. Well, basically wait the seven, eight months to get them out of the property. And then, also, I can’t get inside. This one has an ECA rating, so I won’t do the deal. I’m like, “If I can’t get inside and look what’s going on in the foundation, I’m just not doing it.”
But other than that, I will still buy site unseen. I mean, some of the homes we buy are so packed full of garbage, you really can’t see anything anyways. But I stay clear from a couple, the roll of the dice, there’s certain things I just won’t roll the die on, which is environmental critical areas and hills.

Dave:
Nice. That’s great. I mean, just another example of knowing your buy box really well. And I know James has a very broad buy box, but it’s just important to know that there’s certain things you’re not willing to do. And sounds like you’ve learned that from some tough lessons, unfortunately.

James:
And I’m shrinking my buy box right now as the market gets a little scarier, as it transition. If you know what you’re buying, it’s a lot easier to get in and out of the market. So stick to what you’re good at and you can navigate any market.

Dave:
Great advice. All right, Kathy, what about you? What’s your biggest investing mistake of the year?

Kathy:
It’s a perfect segue, stick with what and stay within a tight buy box. I would say the biggest mistake is that I knew that interest rates were going to go up and I still didn’t refile all my properties when interest rates were at record lows. And I’m just so embarrassed to even say it out loud. And in addition to that, why didn’t I buy more? I know that it was the top of the market, but in the markets I’m in, it’s still fine. Those prices haven’t gone down.
So early in January, when I knew that the Fed was warning they’re going to do seven rate hikes, it was very obvious what was going to happen. And that would’ve just been a really good time to get busy and just to buy some really good deals, lock in those low rates, refi everything. We did refi a few but not everything and we’re not going to see those two, 3% rates again. And I didn’t know rates were going to go up quite as dramatically, which I have said live on this show that I didn’t think they were going to go up as dramatically as they did, and I do think they’re going to come back down, but not to that amazing opportunity that we had to lock in, two and 3% rates. I mean, wow. So that’s a regret.
And on a professional side, my job kind of for the last 20 years has been to find really cool deals, kind of get in front of the path of progress and share that with our network. And I knew about the deals, I knew about the Golden Visa Program in Portugal last year and I was in Europe last year and checking it out. And it took me a year to get that going. And in the meantime, prices in Portugal went up like 35%. So I feel bad for people who follow me that I didn’t get that out a year ago when that was a really good deal. It’s still a great deal.
Actually, my daughter now works for the company that we met with when I was in Portugal and she did her first webinar last night on how to get the Golden Visa, which basically means if you buy property in Portugal, then you get residency and then after five years, you can apply for a passport and you’re kind of grandfathered into that. And then, you get access to healthcare, almost free healthcare that’s really, really world class and university for your kids. I mean, there’s all these benefits for having an EU passport. And anyway, she did this webinar last night. And what’s so cool is when you offer something to people and it’s exactly what they’ve been looking for and they didn’t know how to find it.
So we’ve had people, I don’t know if you know this, this is a little bit off topic, but there’s people who got moved to America because they’re good at something, say technology or whatever, they’re from another country, and they live in America for, say, 20 years, but they never got a passport. They’re not American citizens. And then, when they’re done, where do they go? They go back to home, which isn’t home ’cause they haven’t been there for 20 years. So there’s a lot of people in California who aren’t Americans and don’t really have a country.
And so, we had 30 people on the webinar last night who were thanking us like, “Thank you. I didn’t know I could get a passport.” And basically, with this program, you have to invest $280,000, but then you get that back in five years, so it’s almost like free to become an EU citizen and get all those benefits. So anyway, a regret is that I just didn’t jump on that faster either and solve a lot of problems for people and help them make a bunch of money. But they still can do it. They can still do it now. We’re looking at areas that haven’t popped yet, that haven’t had that 35% growth yet.

Dave:
Well, having just come back from Portugal a few days ago, might be your next customer there, it’s so nice there. It was lovely.

Kathy:
Beautiful.

Dave:
Yeah, people are great, beautiful country, amazing food, had a great time. But it’s funny what you said about refinancing. I was reviewing some of my goals for this year and one of the goals I wrote out at the beginning of the year was like buy as much real estate as I can for like 3.5% or under. And I didn’t do that very well like in certain terms of individual deals, I was mostly investing in or completely investing in syndications.
And I was thinking to myself like, “Knowing what I know now about the market and having come down, do I still wish I bought more in Q1 of 2022?” And I was like, “Yeah, I still wish I had locked in 3% interest rates,” even knowing that, in some markets, my price would’ve gone down on paper for five or 10% or whatever it might wind up being. That was just such an incredible opportunity. And to your point, Kathy, we might never see that again in our lifetimes. So I share that regret with you as well.
All right, well thank you all for sharing this. Appreciate your candor and honesty about some of the mistakes that you made this year. We are going to take a quick break and then we’ll be back with a question from the BiggerPockets forums.
Okay, so our question is about interest rates, specifically mortgage rates in 2023. Kenny Simpson wants to know where we think mortgage rates are going to go next year and if we could see specifically VA or FHA rates somewhere between four and 5% for conventional property at some point, he didn’t say specifically, but let’s just say at some point in 2023. Kathy, since you just hit on this, let’s start with you.

Kathy:
Well, we can all pray. We could do rain dances too. I don’t think we’re going to see 4%, I hope so. Either would be wonderful. I don’t see anyone predicting that. Could we get into the fives? Maybe the mid or high fives? Yes, that’s possible. I hear a lot of experts saying that’s probably where we’ll land around, I don’t know, 5.7 or six and a quarter, somewhere in there, next year. So that’s great. And that’s great. Let me just really, really emphasize that. 5% would stabilize the market. It’s probably exactly the rate that the market needs.
We actually had pretty good new home sales this last update, just this last month. It was kind of surprising how many people are still buying new homes-

Dave:
It’s crazy.

Kathy:
… at today’s rate. So just imagine when rates go down just a little, it’s going to be a frenzy. And that’s why I keep saying, that’s why we started our single family rental fund because I think we’ve got this six-month window. And man, when rates go down to… What? Again, if the Fed is trying to create a recession, which it’s trying to do, that generally means rates are going to go down, you just got to see that’s how it works. And when that happens, people are going to dive back into real estate because 5% is good and normal and it’s stable and it will be actually stable for the market, it’s a good thing. But getting to 4%, if we get to 4%, it means we’re in a really nasty recession, so maybe we shouldn’t be hoping for that.

Dave:
That’s a good point.

Henry:
I agree. But forgive me, my brain, it just works simpler sometimes. And I feel like in 2020, the ship was staring down the ocean and then, we were like, “Oh, there’s a giant iceberg called COVID.” And so, the Fed turned the levers that it had this way, and so everything went this way and we were like, “Oh crap. Now we’re way off course.” And so, they’re cranking it back this way and things are correcting and we’re going to land right back on a course that we were on in around 2019. We’re just getting back to where things were. Values of homes are coming back down to those rates that they were around then in some markets. And interest rates, I feel like will probably land right around where they were in about that time. I was buying property between five and six and three quarters percent interest, that’s just what things were, and I feel like that’s probably where we’ll end.

James:
Yeah. No chance we’re down in the fours by the end of the year. I think best case scenario, we’re going to be mid, high fives by the end of the year, like Kathy said, which is great. You can work on… I really don’t care what the rates are, to be perfectly [inaudible 00:46:14], I just want them to be stable. That’s where you get in trouble like, all right, rates are 10%, on 10%, I can adjust my math at that point. That’s just what you’ve got to deal with. Rates are 4%, adjust the math. Just stability is what I’m looking for.
I’m burnt out on the appreciation growth that we saw for two years. What was that? That was nuts, right? We’ve never seen housing increase this, we’ve never seen the returns we’ve made. It also is not a healthy way to invest, you’re just buying stuff and guessing and you’re becoming undisciplined like Henry says, and then, it just goes up and then you make a bunch of money and you look good.
And so, stability is a good thing. And I do think that rates will get stable, like in about six months, we’re going to start to really see the stability of it. But by the time we get stable, I think we’re going to be low sixes, best case, high fives, and then we’re going to probably be there for a year or two, kind of in that realm. And again, that is okay. Then it all comes down to the plan. Does the math check out? Because you can put the right plan in play. And then, what are you going to do?

Dave:
Yeah, absolutely. Well, I agree with all of you. I think that the most likely scenario is we’ll see rates about a year from now, end of 2023, probably in the low sixes, is probably my best guess. If you just look at what happens in a recession, to Kathy’s point, bond yields fall, that brings down mortgage rates. We saw that. That’s already happened. Like rates were up in the sevens, now they’re consistently bound, 6.6 already, and inflation hasn’t even started to come down in a significant way yet. So I think that’s a good thing, to your point, if we can get to a stable area somewhere between five and six and a half, I think that provides a really good backstop for home prices in the US and hopefully sets a good foundation for further more predictable growth, to your point, James, in the near future. So let’s hope. But man, to your point, Kathy, if they get in the fours, something’s gone terribly wrong.

Kathy:
Yeah.

Dave:
Jerome Powell will not have a job if mortgage rates are in the fours.

Kathy:
How does he still have a job? I mean, come on. Anyway.

Dave:
All right. Well, thank you so much for joining us. This was a lot of fun. This episode’s going to come out on a Monday, I think, and if you join us on Friday, we’re going to do the inverse of this show. So we talked about our regrets for 2022, and on next week, we’re going to go to 2023 and talk about what our goals are for the coming year. So definitely tune in for that.
All right, thanks everyone for listening. If you like this show, hopefully, you don’t regret becoming a subscriber of this show in 2022, and if you didn’t, make sure to give us a five-star review on either Spotify or Apple. And we’ll see you on Friday for our goal show for 2023.
On the Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show, On the Market, are our opinions only, all listeners should independently verify data points, opinions, and investment strategies.nnd ddd.

Speaker 5:
Come on.

 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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