All Forum Posts by: Jim Goebel

@Jim K.

@Matt P.

@James Carollo

I'm going against the grain here.  

4 year degrees (and higher education) offer more in life, and will always have their place.  There's exceptions, certainly - and we can list them.

However, most trades take all of a 40 credit hour class to learn, at least to enter the field.  I'm wiring our 950 sq ft addition and it really, really pisses me off that I'm not allowed to do that on our investments, as I'm a licensed electrical engineer.

I'm not a big proponent of trying to increase substantially trades education.  I think something needs to change but most owners of service/contracting companies are just body shops, that offer very little in terms of career advancement, growth, etc.  This can be solved by more open minded owners that diversify their businesses and offer more.  The simple business model where an owner lives in a big house, extracts value from their employees/1099s, practices multi generational nepotism, and encourages unethical business practices by bidding 30x projects at 400% margin to get that one project from poor ol Betty Sue - this is what needs to change to get more ethical and capable entrants into the trades.

Anecdotally I haven't really noticed reduced supply in my market, but we've developed some helpful relationships over time with our go-to plumber, among others.

@Magesh R.

For the passive investor?  Or, are you getting into the work/ready to add value?  If the latter, they're out there in droves.

@Leilah Davis

I don't have firsthand (have done it myself) experience in this, but have spent some time thinking about it.  Perhaps we'll have a developer step in here to weigh in, too.

I'm following your logic on the exposure to the lender, and I tend to agree.  They only get the 'action' on the back end of the deal, which means their LOCs are tied up in construction, with no new collateral - even as their borrower's risk profile changes rapidly as they build.  The lender's not being compensated for this additional risk.  Makes sense, and I agree.

To the investor, I do think there's 'different' exposure than a buy and hold model, and I'd even make the case it is 'larger' exposure, as a small price swing to the resale market has a larger impact on the liquidity of an investor, than does the same percentage price swing, say of rents.  If margins are tight, in either case, there can be tough times, however, here are some of the negative consequences of say a 10% downward price swing on the resale market:

• If leverage is being utilized on the financing, that 10% downward price swing can actually have a much larger impact on the bottom line, and that impact is immediate (ie: large, and one time on the sale).  Contrast that with say a 10% downward swing on the rental prices and you'd have the impact of that 'averaged out' because it impacts cash flow.  That's a very substantial difference.
• If you look at research and economic theory on 'stock and flow' models for supply and demand, you'll see that the supply and demand equations for the 'stock' (rental units) vs the 'flow' (new units being brought online) cause movements in price on the new units to be much more rapid, and severe - primarily because the numbers of new units being brought on (and their demand) are nowhere near the numbers for what's already out on the market (ie: the stock variable).  The observation in this case is that barring extraordinary circumstances, the flow variable can (and does) change much more rapidly than the stock variable.
• The systemic contributors (ie: policy, lending environment, consumer sentiment) has an outsize effect on the ability for new units' pricing to move much more rapidly than existing units (ie: rental units), both up and down.  As these swings happen we have more easy lending on the upside, the scale benefits of building all contributing to that demand / supply mismatch happening in a much more pronounced way, as compared to rental units.
• The economies of scale, if you're in the business is huge.  For a one time drywall project for a homeowner, you may pay say $10,000 as an example.  As an investor, if you know because of offering volume, you can get that same labor for 30% per house say if you can offer to the same crew 20 houses The natural inclination would be to build more houses to keep your per unit costs down, to maximize profit.  However, to build more, one is more exposed financially and to all the vicissitudes of the market, as noted /reasoned above.  This kind of encourages the typical 'go big or go home' continual larger and larger risk taking, and honestly moral hazard as we've seen with the last crash, the BP oil spill, and many other examples.

@Chris Vanderloo

Any tool that gives investors a leg up in finding good deals, would be helpful.

@Quinton Huntley

Kind of like the question: What is the best business strategy?

If I was at Stanford in the mid/late nineties and was doing research on the best search / crawling algorithm on the web, then the best business strategy would have been to get into search.

However, 7 years later, probably not.

It really depends, a lot, on a lot of things.

@Anthony Cancel

Buying at market without adding value, should plateau if our financial system is working properly.  

If the deepest pockets in the land could with scale just keep buying stuff turnkey without building any value, what we'd have is an economy where what really should be rewarded is not being rewarded properly.

Your option my friend, is to learn how to use some tools :)

@Leilah Davis

I can't answer your question directly about why there's not more people doing flips or new construction here on BP, other than the observation that our commercial bankers have indicated it's less reward for the risk, and they don't like that model as much.  I also would guess that when things turn, new builders are way more exposed to that price swing, given what all is invested in a new build (as compared to buy and hold BRRRRs).

Further, new builders enjoy substantial scale benefits, so the temptation would be to stretch finances out to control costs - however, the more that's done, the more risk there is when prices fluctuate (downward). 

That I suspect at its core is what led to so many builders getting wiped out in the 2008 crises.

@Maggie L.

Hi Maggie, kudos for asking the question.  What do you have saved? - you might be surprised on what it takes to get into a RE deal that cash flows well (and the power of leverage is.. staggering, both good and bad when used) - but you typically (ideally) do need some capital to start.

You must be sharp to be effective in management consulting.  That's a kind of competitive field to get into and even top MBA grads from elite schools fall over themselves to get those jobs out of B school.

However! And this is a big however! Those skills may or may not translate to RE - the 'grit' to get into work, use your hands, use tools, I would say is the single most important thing to have a successful outlook as an investor.  Work will always need to be done, properties degrade and depreciate, and there will always be great opportunity for someone who is willing to roll up their sleeves.  I had someone tell me awhile back to take off the silk, and like a lot of great advice, it was unclear to me at the time what that meant.  Now I know, though.  You'll have to change your wardrobe from your Management Consulting days, a little.  You may want to get more OK shopping at Goodwill :)

But yes, there's a path and its rewarding.  I don't miss the $100-150k jobs and office environments. 

@Brian Eastman

@Dmitriy Fomichenko

Question for you two; I was under the impression that a Self Directed IRA was only available to those who were working outside of a traditional W-2 engagement? IE: there's no way to roll over a 401k until one leaves their W-2 and becomes self employed? Is this in fact the case?

@David K.

We've had some nuisance tripping and I was recently told by the State Fire Marshall that the most important thing to do to avoid that is to keep them covered completely while there is any dust present during construction.  Otherwise they will continually trip randomly and you have to replace them to fix the issue.  Other than that tidbit (which I found to be very helpful) I don't have much to add.