Ep 193 – Growing Your Portfolio with 4.75% Interest Rates on New Builds in Fast Growing Florida Markets

Being in the path of progress is the way to expedite your returns through significant appreciation and rent growth (while still being positive cash flow day 1). One of the best places to do that today is in the southeast, and specifically in Florida.

Adam Schroeder and Zach Lemaster talk with their boots on the ground builder in Florida about what markets they are building in (and why), what the driving factor is behind all the movement, and long term prospects of the area as you continue to grow your portfolio.

Transcript:

Adam

Hey, Rent To Retires, it’s Adam Schroeder here with another episode. Joined as usual by Zach Lemaster, the founder and CEO of Rent to Retirement. And today we are going to talk about everyone’s favorite state. And a lot of times when I say things like everyone’s favorite, it’s being sarcastic and talking about Texas. But today it’s actually everyone’s favorite state to invest in, and that is Florida. And we are joined by Jim, one of our top providers there in Florida. Jim, thanks for joining us to talk about this venture today. Thanks,

Jim

Adam. Good to be here.

Adam

Yeah. So Build to Rent is something we’ve talked about a bit on the show that we love. It’s one of the business models and investing models that is just fantastic for investors all around. Um, you guys are building, I think, literally all over Florida, and tell us a little bit about the build rent model in Florida and why. I mean, in my opinion, it’s pretty much the only way to buy a house in Florida right now, but why it is a good choice specifically in Florida?

Jim

Well, you know, Adam, you and I have known each other for a number of years now. If you remember years back, I used to do bulk foreclosures. I’d find old houses that were in foreclosure, fix ’em up and rent them. And that can be a very solid model. Absolutely. But the thing that I liked about Build to Rent, which we kind of fell backwards into 10 years ago, was I owning a lot of properties. Had something that we called the three-year curse. Now I own a lot of older properties, but it seemed that I just, after three years, even if I did, you know, new roof heating, cooling, plumbing, kitchens, baths, my, my maintenance repairs is higher. And I didn’t like that. I mean, some people don’t mind that and that can be great. But I wanted something with for more longevity. I mean, as you guys say, rent to retire, I’m looking now at my kids and their kids’ kids with my portfolio.

Jim

So I want properties that really have solidarity and, and long-term fundamentals. And the new construction, you know, now doing a a few thousand foreclosure renovations compared to a few thousand new construction, it just seemed like a lot of the, the littler headaches went away. And that first five years of home ownership is so important as we’re growing, you know, our portfolio to that next wave of the cycle where rents have gone up, values continue to go up. You guys have all experienced that we all have on this call, and it’s really nice. And the new construction, I felt, got us there easier. There’s less maintenance and repairs, less tenant turnover. We’re able to build in better areas, uh, with stronger fundamentals of growth. And that’s what we’re all looking for. So putting together several portfolios of older homes versus the new construction. Both can work, they can both get you there, there, but I felt like the new construction really helped our clients buy back their time and spend time doing the things they really wanted to do instead of being involved with the properties.

Adam

Yeah. And I found like whenever the hurricane, the recent hurricanes that have come through, um, and hit the, you know, south, uh, southwest Florida coast, I mean, if you heard about all the unfortunate devastation that happened, I don’t think I heard about a single one that was to a, uh, you know, a new build. Yeah. It was the existing homes that, sorry, if you own those, that was rough.

Jim

Well, you know, and, and that’s a, I wanna talk on that for a second, Adam, ’cause that’s such a a, a big conversation here. And we all remember, um, when our parents used to say, um, put on your seatbelt when you go out driving, put on your seatbelt and Yeah, yeah, yeah. And then you got in that first, you know, fender bender and you’re like, man, I’m really glad I had my seatbelt on. Right. Well, that’s what new construction was for us last year at Hurricane Ian. I mean, hurricane Ian, you know, building in southwest Florida with a hurricane category four coming there, which has not happened in many, many years. It put us to the test. And, you know, out of 278 projects we had going on down there, we had four projects, just four that required insurance claims. That means there was more than $5,000 worth of damage.

Jim

But here’s something interesting, those four properties, well, they were in the beginning stage, it was just the freestanding walls. We hadn’t had time to tie the roof on, which gives it the strength and integrity. So the walls fell down, but we had zero flooding, see, with new construction after 2004 when Hurricane Charlie hit Punta Gorda, which we build in now, and the eye of the storm went over. It’s an interesting story on that, of this last hurricane. Um, they changed the rules. Instead of being able to build at two feet above sea level, you gotta pull in a lot of dirt, which is a pain in the rump, but it’s like our seatbelt. And we have to build at 13, 14 feet above sea level. That makes a huge difference. Plus the structural integrity they require for any property built 2004 or newer in Florida, total game changer.

Jim

So when you combine those two things, it really helps you with facing a storm like we did and saw such good results. You know what else it helps with, which is good for all of us on our performance, is the insurance costs. So, like I know you and I have joked Adam, when people come to me and say, well, I heard insurance in Florida’s expensive. I go, well, which property though? Because if it’s a 1952 built at two feet above sea level to different structural integrity, that’s gonna cost you more a new construction, they give you a discount. ’cause their analysts say, the odds of the problems happening on this property are much lower to lower premium.

Zach

Jim, this is great stuff. I think this is, I mean this is so relevant because Florida is our, it’s our top market. I mean, it’s, if people can, a newer construction is a little bit more expensive. Uh, and we’ll talk about just briefly the pros and cons. I think I, I want to touch on a lot of what you mentioned, but when we look at, um, when we talk about Florida investing in Florida, those are always the, the buzzwords that come up, right? It’s hurricanes and flooding. Um, and it’s people that live in different parts of the country that are concerned about those things. And, and they really just need to be educated. And those, those questions need to be addressed. So generally speaking, I think you try to avoid flood zones to begin with. Plus the building standards, like you mentioned, you’re, you’re building at, um, more elevation now, um, which the standards have just changed.

Zach

The, the block, these are concrete block construction. These are not stick built houses and they’re, they’re meant to withstand 150 mile per hour plus winds. Same thing. Um, you know, and then we can, we can go back and we have a specific case study now with a recent, you know, category four hurricane that came through Southwest Florida to say, well, this, you know, ’cause people ask about hurricanes. It’s like, well, this just happened. And, and, and look how these houses with withstood this, uh, same thing with us. We had many, many projects between ourselves and our investors going on in southwest Florida, like specifically Cape Coral area. Mm-hmm. <affirmative>. Um, and we only had two properties that needed, um, an insurance claim. Those just so happened to be my personal properties <laugh> that, uh, same thing though. They were just

Jim

Luck of the draw right there, I guess <laugh>. Yeah.

Zach

But those were, these were, um, actually, and those were coastal. Um, they were, uh, golf access lots that I was building for short term rental. And they, same thing. They had the, the walls like up, and it wasn’t even, the walls fell completely down. It was just like portions of ’em, you know, and it was just, it was just enough to require an insurance claim, but everyone else did completely fine. Um, maybe there was a little bit of roof shingles, but I mean, houses are built per code to withstand these things. Um, so I mean, that should squash a lot of, a lot of concerns that people have. Uh, when we look at build to rent specifically, I mean, I think the conversations that we have with people is like, okay, well why? ’cause we, we really transitioned our business a lot because of the things that you said to focus specifically on new construction, because we are true believers that yeah, new construction is a better way to go.

Zach

And you’re also usually in a better market. I mean, builders are building in these areas for a reason. Um, that’s because you’re in the path to progress and there’s a housing demand in these areas. Otherwise you wouldn’t, you wouldn’t be building in these areas, right? I mean, it would make no sense. Uh, and so long term we generally see better appreciation both in rents and prices, um, better quality tenants, longer term tenants with less vacancy and less turnover, less turnover costs, less maintenance costs overall in general, right. Less CapEx because you have builder warranties and we’ll talk about that to begin with. But also just maintenance is, is less over time. The challenge is, I think with new construction is that they’re a little bit higher price points. And so it is a little bit more of a barrier to entry. Not everyone can afford them.

Zach

And so maybe a Midwest $158,000 house might be the starting point for you, but eventually the goal is like, okay, use your equity trade up and own new construction in some of these growth areas. If you can. I wanna talk about Florida though specifically, and we, you guys build a lot in different parts of Florida, but like, and I know you’re expanding out to other areas in the south and southeast where there’s demand as as well. But I mean, why, let’s, let’s talk about, can you, can you go through the locations that you’re building in and maybe just let’s do just a brief summary of those and kind of like explain why you’re building in those locations.

Jim

Yeah. So we started to build Durant in northeast Florida in Jacksonville, because that’s where my building partner Chris and I did bulk foreclosures. We knew the market, we knew the demands, we knew it really well. So it started there, but then we grew from Jacksonville down to Palm Coast, out to Ocala, out to Citrus Springs in Verness, and then into seven markets down in the greater Fort Myers area that’s Southwest Florida, you know, reaching, you know, where Adam’s talking about, you know, uh, out, uh, east of there. And then just that whole area we kind of blankets and the reason we’re in all those areas, and we can go through each one, but we have five factors that we look for, uh, Zach, before we go into any market, uh, we look for population growth, we look for economic growth. Is there jobs there when there’s more jobs coming and better pay coming, you know, we know they can pay rents.

Jim

We look for, this is the key one, and I know you guys hammer this home affordability. If you have a bad affordability index, it really throws the fundamentals out of whack because you want an affordability index just means the average household income can afford the average house in the area. And the score, the affordability index score in all of our markets is very strong. So that’s really important. We want to have a good affordability index, and I can break down some comparison numbers that you might find interesting. And then desirability, is there something drawing people to the area, you know, warm weather, um, you know, climate, the, these are things that people like, and then healthy supply and demand, you know, like before the pandemic, you know, even started before the lockdowns even started, you know, we got a report from the municipality down in Fort Myers and they were three years behind on needed rental inventory then. And then after that, Fort Myers became the number one fastest growing area in the nation, uh, that, that whole greater area. And so that’s the kind of wind we want at our back. I mean, it sounds simplistic, but you don’t want to be a builder, but in an area where there’s an oversupply, you want to go where there’s an undersupply. So that’s kind of what we look for in all of our, our areas.

Adam

Yeah. So one of the things that people have come to me about whenever it comes to Florida, because Florida is a state where there are some significant city in terms of population, but there’s also a whole lot of cities that are, you know, 20,000, 30,000 that if you’re from a major city, you can be like, well, that sounds really small. Um, you know, that’s too small to support, you know, a a real rental market. Tell us a little bit about Florida and why those types of areas can actually support these properties that you’re building. Well,

Jim

Let’s, let’s talk about Ocala. Ocala is a perfect example. So it’s a, it’s, you know, you can be there for about an hour and 40 minutes from Jacksonville, about an hour and 10 minutes from Orlando. It’s about 75 miles north of Tampa. Uh, when I first found out about Ocala, truth be told about 10 years ago, I remember going Ocala, you know, isn’t that like 5,000 people or something? You know, I, I was, I was that kind of, you know, the Thickheaded guy. More

Adam

Horses than people, right?

Jim

Yeah. And here’s what I can tell you. The numbers don’t lie. So right now in Ocala, that’s not only been, we expect that to be one of our flatter markets. It’s had one of the most best appreciations, it has one of the best median price areas right now. Rental demand, we’re filling on average in Ocala 16 days on market. It’s our lowest, uh, um, time to fill a, a, a rental, um, in all of our markets. So we are always looking at the, the population influx in areas like that, especially, you know, through the lockdowns, people wanted less density. It became, it, it changed the mindset of where a lot of people wanted to live. They wanted more space, you know, a less dense area. Um, and just kind of a simple lifestyle and an area like Ocala supplies that, not only that, it’s got its own economy there and just North is Gainesville and just south is the villages, which is the second largest in retirement community in the nation and growing. So it’s, it’s a nice little bedroom community as well, where people want an affordable lifestyle that they can really enjoy.

Zach

I think this has the right combination of getting into an area that you will have rental demand, you’ll have resale demand, and that you’ll have, have appreciation, have growth. Um, because at the end of the day, if you can buy a house that still has positive cash flow, ’cause in most parts of the country, that’s, that’s the challenge of new construction is it’s so expensive that like the numbers don’t make sense unless you’re putting, you know, 50% down or whatever. You can’t be positive cash flow. So I think, you know, we’re, we’re building in these, you guys specifically work in the build-to-rent space. So you have the investor in mind when you’re evaluating these areas because you guys are investors yourselves, and this is your business model. And so you’re thinking about all these things, not, it’s not just about the population growth and like, you know, things like that.

Zach

Um, you’re, you’re thinking about it from an investor mind where it’s like, Hey, we gotta have the numbers make sense. So we gotta, to your point about the affordability index, you gotta make sure that the rents are there to actually be able to cash flow. Um, which they, they still are. You can still have positive cash flow with even a 20% down traditional loan. Um, with, with today’s interest rates, and there’s a lot of different creative options we can do as well. We we’re, we work with a lender that you can put less than 20% down. This is an investor based loan. We’ve, we’ve talked about that on, on other podcasts, so we’ll put, provide links to those. Um, but you know, if you’re looking to grow your portfolio and have, you know, um, and especially from a tax play, there’s a lot of creative things to do and, and look at.

Zach

But specifically you can buy new construction in most parts of Florida where you could still have positive cash flow, you still have strong appreciation. And so I kind of refer to as having your cake and eating it. Two, you know, it may not be great cash flow year one, don’t expect a 20% cash on cash return <laugh>, however, don’t just look at year one either, right? Like if you’re in an area where rents go up 5% per year, and I’d like to hear maybe some, some stats and metrics for me from what you’re seeing, Jim, you talked about your leasing time of average, you know, 16 days and leasing around Ocala area. But I’d be, I’d be curious to hear, even like today’s market, what we’re looking at for appreciation in rental growth and things like this. But if you think about this, if you had a 5% rental increase, which most areas in Florida we see much higher than a 5% rental growth year after year, um, that’s not just a 5% increase in your return on investment, right?

Zach

There’s, there’s an exponential factor there because you use your down payment once your mortgage payment stays the same, and then the next year your rents go up 5%. That could equate to, you know, whatever the numbers are, 16, 17% return on investment after just one year. So I want to encourage people look at beyond just year one. Um, and I, and I, there’s been a lot of challenges with construction. We both dealt with it with timing and supply, so we’ll get into that. But I mean, do you have any just metrics or stats kind of off the cuff in general that you’re kind of seeing into today’s market right now? Not looking back. I mean, of course over the past three or four years it’s been crazy. But like, what are we looking at today for things like average appreciation, rental growth, and, and occupancy timelines? How long are people staying at houses? Things like this

Jim

So, so we’re averaging a little over two years for stay time in our new construction properties when it looks at overall growth for our markets for, for our performance, which, you know, I’m sure a lot of people listen to this have seen, we try to baseline it lower than the averages. So I think we do rental growth at, um, rental growth at 5% in appreciation, at 4% on our performance now, right now, Florida again, take out the craziness of, of, of, of the last few years, you know, when rents went up 27% in a year, you know, and values went up Florida averages right now, and the averages right now for our new lease up, uh, you know, when a person extends their lease, we’re getting about nine 2.9 0.2% increase on average for those new rents. So the rents are still going up. We do our performance at half of that, uh, values. Right now, I think we’re at about 8.7%, uh, value growth, um, on the average year right now we do it again about half of that. So that’s a steady incremental thing I like to see. Um, because when it starts to get too crazy, we can’t really keep up with it. But again, we’re looking long term, we can continue to work with that from the numbers that I’m seeing. So that’s about the steadiness of, of what I’m seeing in general for our markets.

Adam

So talk a little bit about the markets. ’cause you know, I’ve gotten some questions from people because right now the main ones that we’re seeing, the big ones you have completed, like you’ve got a duplex in Inglewood, uh, duplexes in like the Palm Coast We met, we talked about Ocala a little bit, but those aren’t the markets you’ve heard about on the news. So can you tell us anything about the, you know, the markets that y’all are serving right now that people may not have heard much about, especially like you mentioned earlier in verus the first time I saw that y’all had a building in Vernice, my first thought was that doesn’t even sound like a real place <laugh>. Um, you know, how do I say this word and had to go look it up. So tell us a little bit about the areas that y’all are currently building in.

Jim

Yeah, you know, Adam, I think one of the key things here you just uncovered is sometimes, and I’m sure you guys have experienced the biggest city names that are talked about on the news, aren’t where you want to be anyway. You know, we don’t, we don’t right now build in Orlando. We don’t right now, we don’t do anything in Miami. We don’t do anything right in Tampa because as you were talking about Zach, the fundamentals just don’t make sense. We wanna go where the fundamentals make sense, not where it’s well known. Um, and so these second tier markets, they’re called have strong fundamentals, strong economies, desired growth. That affordability is there. So people are moving there at a higher percentage than some of these bigger known areas. And that’s what we focus on, you know, and there’ll be a range, you know, Palm Coast, beautiful coastal market.

Jim

I know you guys have visited there before, you know, I got engaged there. It’s, it’s the closest market to my personal home that’s gonna be a higher buy-in. But we’re expecting higher growth patterns there, equity wise, because it is a coastal community, it does have a lot of higher end amenities and lifestyle to it opposed to Ocala, which is more of an affordable inland market. Uh, so depending on where you want to go, that’s one thing. Jacksonville, Jacksonville’s always been our hub. Jacksonville’s a very interesting city. When I left the West coast many, many years ago, uh, and came here to start investing in Florida, Jacksonville was the most affordable coastal city by far in the entire United States in 2005. And if you guys remember in 2005, nothing was affordable, especially coastal. Those two words didn’t go together. So Jacksonville is such a diverse economy, um, that it’s, it’s more of that, again, second tier markets, you know, we’re still looking at medium prices in Jacksonville, you know, right around $297,000.

Jim

I mean, that’s still very affordable. When you look at, like, we’ve had a lot of investors with, you guys come from Salt Lake City. Salt Lake City is twice the amount for their medium values. Their rents are the same, and their average family household incomes are the same. That tells you about healthy fundamentals. Um, but then with Palm Coast and areas of southwest Florida, like Fort Myers, you’re gonna have more expensive things. Parts of Englewood might be a little more expensive ’cause the location is so key to a coastal community might be there. But Lehigh Acres, which is a little more inland, well that’s gonna get you a little better buy for the buck depending on what you’re wanting. So we’re always trying to stay within those five things, Adam, population growth, economic growth, good affordability, healthy de uh, supply and demand in something desirable drawing into the area. But there’ll be a range between like an <inaudible> to a Fort Myers market when you’re going into the number one fastest growing in the nation like Fort Myers, it’s gonna be more expensive to buy into, but again, the rents are gonna be higher as well.

Zach

Yeah, sometimes we talk about, um, Adam and I refer to the lottery ticket property, which is essentially where you’re just investing in, in a property based on, you know, cashflow fundamentals, uh, with, with not the anticipation of things crazy, you know, crazy appreciation or anything like this. But it just, it so happens to work out that way over time because that area like really took off on in development. Uh, and it only takes, you know, one or two lottery ticket properties to, to really change your, your financial scenario. Um, and you can only position yourself to own lottery ticket properties and like benefit from those buy investing and, and having a diverse portfolio. But we always, we always see those in secondary markets that become primary markets over time. Um, and then sometimes that takes 10 years or whatever. But you can get into a secondary market, I think, where it is in the path of progress and you have, um, strong cash flow and, and, uh, you know, you keep the house rented year after year, but then it could really, I mean, as a population really takes, takes off.

Zach

I mean, then you get dramatic appreciation in that. Um, Jim, let’s talk a little bit about the construction industry as a whole and what we’re seeing right now. We have a lot of investors. I mean, there was, I would say about three years ago, two to three years ago, we were real heavy working with, um, builders doing like development and ground up construction where the investor would come in, they’d buy the land, they’d take out the construction financing. We had a handful of different builders, um, that, that we worked with they could hire on to, to build the project. A lot of those projects are still in construction right now because it’s just crazy how long things have going. Some of those, you know, may be issues with the builders themselves. Some of those are certainly, um, permitting things, hurricane, slow things down, whether, you know, supply chain and labor, like this is something we’re all having to deal with.

Zach

And now, now our model’s completely shifted where we’re recommending that we, you know, we let the builders build the houses and we, we put them under contract when they’re either done or close to being done. And I think that’s just, even though you may not have this equity entrance point that you were kind of gambling for initially, um, and a lot of people did quite well, like the, you know, people that finished those projects. But tell us from a builder perspective, like how the construction industry is developed and evolved over the past two to three years, specifically in Florida. What are some challenges you’re still facing and maybe some changes you’ve, um, experienced internally with your guys’ business model?

Jim

Yeah, it’s a great question. Look, the, the pandemic was a weird time. And I think that, you know, of course me being a builder, I’m telling you, uh, how to get a haircut from the barber, right? But as a builder, I can tell you, you go off of what has been the norm. So we had been building for a number of years, and our average build time was six to eight months. All of a sudden this thing happened where none of us have ever seen in our lifetime. And all of a sudden that build time more than doubled because permits weren’t getting approved, supplies weren’t available. Uh, it just was, it was an absolute screwy time, which to be honest, I’m glad to see it’s over. Uh, and here’s why I can say that. It’s, it’s over, um, material prices and you can mark my words.

Jim

They’ll never go back to what they were, you know, pre covid. They’re just not gonna go. However, they have come down some, which is great, you know, it’s kind of that ricochet ricochet where it goes up and then it’s, it’s settled. We’re seeing that settling and the availability has definitely gone up. Um, and also with build tons, I think we all got used to, well, this is how it is, it’s gonna be done in six to eight months, no problem. But then things outside of our control, which again, we have to take full responsibility, the builder, it just lengthened this to a timeframe we could not even fathom. We could have never said in 2019, oh yeah, it’s gonna take 18 months to build a house. Of course, that just didn’t, it, it seemed like that was impossible. So moving forward, what I’m seeing right now, like with our business is just like you guys used to do, where it was kind of that starting point together.

Jim

We’re taking an end point with our clients now, meaning you’re not getting in when the land’s there and it’s just starting to get built. The properties that, as, you know, your client buying from us now, they’re either done or within 90 days of completion. So we’re not possibly stuck in some sort of weird zone of waiting for supplies, of waiting for some sort of, uh, permit or approval that could just stagnate you for months. We’re keeping that risk on our plate so that by the time you guys are presenting it to your clients, again, it’s either done or what’s, it’s within a, you know, two to three months span of, of being complete and being able to, you know, go. So that’s been a big change I’ve seen. Um, and we’re working with new prices. I mean, if you look at 2018 material prices and, and try to say, Hey, I was getting this in 2018, well, that’s just a different world.

Jim

We, that’s adorable. Yeah, it’s, it’s very sweet. But, but the good news is guys, especially when you’re in an area like Florida, um, the inflationary effect has some, some bad things, but also some good things. What else has happened from the inflationary effect? Well, rents have gone up. So rents are very different. You know, if I tried to, you know, get our clients the rent we were getting in 2018 today, well, they come at me with, you know, pitchforks and torches, rightfully so, because why would I charge such a low rent? The inflationary effect is taking the rents up. So that’s a good thing that we have to look at as well. So that helps keep the fundamentals healthy. And again, the nice thing I’m seeing about Florida is our pricing, our overall pricing in our major markets is still so much more affordable than other markets that, you know, you see as availability, especially California investors, people in Salt Lake City, Boise, Idaho, these areas are just, their numbers are so out of whack. We’re still kind of an entry point. And now that we have this long build time down to a new system, I think that’s the most important thing. But getting back to your, your question, um, I think that the most important thing, Zach, is how close are the properties to completion? And that’s the clearest way to hedge the risk of what we all went through with delays in, uh, in the covid times. And, and that’s why, you know, the properties you guys are working with us on right now, they’re either done or just about done.

Zach

Some, some, um, people have a question. And this is like, I’ve realized that this never goes, this never goes away. This question just doesn’t go away, but it’s just <laugh>, um, like, oh, we’re in some sort of bubble, or we’re waiting for, um, we’re waiting for prices to drop and you know, we’re waiting for, you know, I mean, it’s, it’s crazy that we’re like, in my opinion right now, we’re at the peak of interest rates. And, and the feds have already mentioned that, like the goal, like our inflation, yes, it’s, it’s not to, you know, two, 2%. Um, but it’s close to it. And we’ve, you know, they’ve, they’ve had, um, some crazy rate hikes. Like we just went through the most dramatic increase in interest rates in the short period of time in, in history. Okay. Um, and we’re at a 25 year high for interest rates right now.

Zach

Um, and so over this next probably few months into 2024 and 2025, interest rates will probably start to settle down. I don’t think dramatically. No one should be waiting, thinking that rates are gonna go back down to two or 3%, hold out that 3% again. Yeah. And if they do, if they do guess what’s gonna happen to prices, right? You’re better off buying now and refinancing, right? Like, don’t, don’t wait, you know, never time your time. You’re investing around interest rates. That’s the most ridiculous way to try to build wealth ever. Um, but like, what, what’s your opinion on people that are questioning about bubbles or like what’s gonna happen in the future? Um, you know, I, I have my opinion and I always point to supply and demand ’cause that’s the number one driver for, for economics in an area. But how do you answer those questions, Jim, for someone that’s like, well, what’s, what’s gonna happen next year? Like, where are we in a bubble? Or, you know, here,

Jim

Here’s, here’s something that a lot of the doom and gloom news doesn’t talk about. And this cannot be argued. We have an inventory issue still in the US We, we, we are behind on the amount of housing we need and supply and demand. We were just talking about that before. And that’s gonna be different and more extreme in certain areas that are the highest growing. Like Florida, which is the fastest growing state in the nation right now, if you wait and try to time, and I was just talking to my 20 year old son who’s wanting to buy his first, uh, personal property to, to, to live it. And he’s like, well, dad, should I wait until next year with the rates? The problem with time trying to time the rates is when you have a supply issue that can become such a slippery slope of speed, where we’ve seen it before, where, where all of a sudden I think rates are about to go down, well, the limit inventory that’s there starts to get eaten up so quick.

Jim

That’s where you see that rapid price increase again. And in areas where Florida are still affordable, I could see that happening. So I think you wanna buy in front of the curve so that you’re not trying to race that when the price you’re saying, okay, our big saying is, you know, you marry the property, but you date the rate, marry the property today, and, and then you’re not in that, that, that, that struggle to get the properties that are available. Oh, they’re going up. ’cause you’ll, you can get caught in that next climb. And I don’t, I, I don’t wanna see that for, for, for anyone. If you can get in now and then look for the refinance strategy, that’s huge. And I believe, and I could be wrong, but we’ll go back and look at this right now. If you take advantage of inventory, then you’ll be taking advantage of pricing and then you’ll be able to take advantage of refinancing next year.

Jim

And the reason I’m pretty confident on refinancing next year, people like getting elected. We have an election next year. And so it’s magic that it seems that anytime there’s an election, you know, no matter what side it’s coming from, rates seem to go down. Um, and the fed also, like you said, you know, it, it cannot, uh, it, it, it just cannot keep going up like this. They’re going to have to trail downwards and they have a history of trailing downwards, but once that trailing starts, if we’re low on inventory, you’re gonna say, damn, I got the rate, but I’m getting caught in these bidding wars on the property. And I’m saying, get ahead of that. That’s kinda what I’m saying to people.

Zach

We always look at it and I, I mean, there’s one or two things that are gonna happen. Well, one thing’s for sure right now is we have inventory availability to the point, not, not crazy amount of it, of availability, but more so than we did over the past few years. And so there’s buying opportunity right now, and it, and it’s a good time. I mean, for the investor, do you get some incentives, you know, and there’s um, I guess attractive price points and, and also access to inventory where you don’t have to try to reserve a property a year out. Um, and so now is a good time where you can make a smart purchase on an investment. But one of two things is going to happen in the future. Rates are gonna stay the same or go up as as option one. And if that happens, well great, you locked, you know, a lower interest rate and the property’s still cash flowing now ’cause you bought it appropriately based on fundamentals or the other option, more than likely rates are gonna come down.

Zach

And when that happens, yes, you can refinance your property and all of a sudden increase cash flow dramatically, but you would’ve bought a property, um, when you actually had inventory availability. You don’t have to compete and you don’t get caught in these escalating prices, you know, you’re actually building equity, right? Like that’s a good thing either way. Um, but if rates do come down and you start to get this kind of appreciation because demand picks up even more so, um, you know, you’ll be pat yourself on the back for owning a property prior to that. So,

Jim

Yeah. Well, and and also that’s the general market. I mean, the reason that we’re together is ’cause we try to solve problems that the majority of investors out there don’t get. As you know, when we were like, what’s the biggest issue? Biggest issues are our interest rates right now. Really they’re finding programs and we’re offering in-house financing. You know, we’re pre-buying mortgage for your clients and we’re getting it down to 4.75.

Zach

Let’s talk about that. Can you, can you go into details on that please? Um, and I’m glad you brought that up ’cause I completely forgot about that, but that’s something that is a huge benefit for investors right now.

Jim

Yeah, I mean, what, what’s what’s blocking people? It’s not the fundamentals of the, the area or the quality of, of the property. It’s what has happened is this interest rate has taken off, like you said, the biggest spurts upwards in several years. That’s the, the, the thing that’s outta whack. So we said, well let’s, let’s fix that part. And it’s not cheap to fix it. We are pre-buying mortgages where we have to buy money. We’re now in the business of buying money and luckily our balance sheet is this size. The banks will look at us, we can pre-buy mortgages, um, and then pass that cheaper rate onto our clients, you know, and right now we have a program 4.75, which is 30 year am 10 year fixed, you know, and that is a really solid way to get your thing going. We also have a program that’s, if you say, oh, I don’t like 30 year fixed, great, we have a 30 year fixed that’s 5.5%.

Jim

So you’re still looking about 2% below the market, and that’s what you pay no points. If you wanna pay a little bit of points, maybe a point or two, you can get down to 4.9% on a 30 year fixed. So when you’re getting into the fours, a lot of people didn’t believe us. They’re like, and how many times do you guys say, ah, I wish I had locked in two years ago. And they say, what are you doing? How are you doing this? It’s very expensive to buy money, but we know that we are a volume builder, we’re a low margin volume builder. If we can help our people get into the right rates, then they’re gonna build successful portfolios by multiple properties with us, and we’ll make up for it in volume. That’s why we buy mortgages so that we can all keep growing and investing.

Adam

Yeah, and I know people might hear that, you know, 30 year amortized, 10 year fixed and be a little concerned, but let’s be honest with, with what we’re talking about in Florida, you’re not gonna be holding onto that mortgage for 10 years. I mean, you’re gonna be pulling cash out, you’re gonna be utilizing your property to do other, you’re gonna be selling it potentially. There’s so many things that you’re going to be doing with that mortgage that the likelihood of the people buying today still having this exact same mortgage and 10 or 11 years is extremely unlikely unless you just let your portfolio sit and never utilize it for, for anything. So I would not let a, an adjustable rate mortgage that scares some people, you know, change, uh, change your mindset off of that. But one of the things I I wanted to touch on was, you know, you, me, you’ve mentioned it several times that Florida is the fastest growing state in the, in the country.

Adam

And some of the concerns that I’ve seen on online are people saying, well, this is just because of covid. People are just moving there ’cause of covid and remote work. And the one thing I I wanna point out to every single person here is remote work is either here or it’s not. Companies have come to a decision about whether they’re going to make people come into the office or not. They’ve either said, you can work, work remote all the time, or you have to be here one day, two days, three days a week. However, they’re gonna do it. Their remote schedule is now set. So I want people to know people are now moving to Florida because they wanna move to Florida and they’re going to to stay there <laugh>. So have you seen and uh, any big difference in kind of the areas around there about, has it slowed down a little bit? Are you still seeing a massive increase in your markets? Kind of what is your kind of on the ground gauge of people moving to it? Are you just seeing more and more neighbors moving in, or what are you seeing there? It,

Jim

It, it’s still a monstrous amount. It’s, I think we looked up the other day was some, some, uh, stat of like almost 1700 people a day moving here. It’s just, there’s, there’s constant growth happening here. And, and the thing I want, remember when I talked about before that the municipality of Fort Myers area released that report before covid and they were three years behind expected inventory for rentals. We already had growth patterns here for baby boomers, for just people of migration patterns to the southeast. This was well before covid covid just was an extra, uh, steroid booster that hasn’t changed. And the reason why it, it hasn’t gone down is people like warm weather, people like no state income tax. So like me being an ex Californian for years investing there, I save 13.3% leaving there. That’s a big amount of money that people look at.

Jim

The affordability index is really good and businesses want to be here for the same, it’s a business friendly environment. Uh, so people want to be here. So we have not seen that slowdown, um, at all, to be honest with you. I, I’m, I’m, I’m a former Jersey boy. I grew up in New Jersey, and if you guys know the jokes about the New Jersey D M V, it’s true. It was the worst. You used to, when you get your driver’s license, you’d walk in, you’re like, ah, shit, I’m here the whole day. You know, you were there for hours to get a a, a license renewal. Well, when I got down to Florida, you walk in in like 15 minutes, the people are nice. You are in and out in 15 minutes. Well, I told friends about this, you know, and I had friends move down here, um, to, to our area and they called me, they’re like, man, I was in the D M V for two and a half hours. I was like, oh no, I’m so sorry <laugh>, because it’s like these little signs that I I see just in, in general, um, aren’t going away.

Adam

The new D M V index, that’s where we’re gonna have to. Yeah,

Jim

Right. That’s a new one. But it, it, it is a real one that I’ve lived unfortunately. So, um, so we’re not seeing a slowdown guys and we’re still behind on housing and that’s a really encouraging thing. So even without the, the take covid out, the growth patterns in Florida had covid never happened. We’re just starting to really take off around that 2019, uh, era. So that’s just an extra thing that gave us attention that’s still gonna get us extra.

Zach

Yeah, we used to, um, kind of track the population migration. It was really from like the northeast to southeast was a big part of it, as you just mentioned. Um, but now we can trace migration from, from all across the country and a large portion of it is, is West coast. Um, you know, and just, I think a lot of it has to do with nice weather, but also affordability as, as you mentioned, and certainly the, the tax structure is beneficial. Speaking about the migration, um, like, and I know this is a wide spectrum, Jim, but a lot of people have questions about like tenant demographics, like are these just retirees looking into, like can you give us an idea about what type of tenant demographics you’re generally seeing?

Jim

Yeah, um, we’ll, we’ll rent to retirees, but I can tell you a lot of our, the retirees coming here are creating jobs that the people that these jobs are for, that’s who lives in our property. Younger family, replaceable income. Um, we, so do you guys have heard of replaceable income? If talk

Zach

About that. Yeah.

Jim

If a senior vice president of a marketing company or a financial company loses their job, it’s, it’s hard to, to replace that job. It’s more niche, they’re more elite. Um, and that’s, that’s called, uh, that’s not replaceable income. Replaceable income is someone who is, you know, in the service industry. Um, is is a, is a nurse, is a, um, a construction worker is, you know, like works at the port industry here in Jacksonville. Their job is easier to replace the amount of income and the position that they’re in. It’s, that’s where who we try to rent to because they usually make a, a good household income to afford one of our houses. And if they lost one of their jobs, it’s been statistically proven it’s easier for them to find a new job.

Adam

So you’re like we mentioned working in a lot of different areas, you’ve touched on several of them. You’re gonna get the question that everybody always asks here when it comes to appreciation and when it comes to cash flow, which are your current favorite markets, uh, for those, which one are people gonna get priced out the most quickly on? And which one do you see as if you were gonna hold for four years strictly for cash flow, would you go into right now?

Jim

Yeah, all the markets have both, you know, and, and, and again, something we didn’t talk about is have a, a simple menu of single family duplexes and quads. Um, and each of them has a, a a a greater strength. And, you know, normally historically single family homes have some of the best appreciation when they’re in a good area, um, available, but they’ll have lower cash flow than, let’s say a quad. So if you’re gonna buy a quad, you’re going to yield a higher cash flow, but it might not appreciate in the percentages that a single family home does. Um, and a duplex is kind of right in between. You’re gonna yield a, a, a higher rent yield, but you’re, you’re, you might have a little less appreciation, although those are kind of a, a nice little unicorn in the middle because if they’re in single family home neighborhoods, they can do just as well.

Jim

So first thing we have to look at, Adam, is, is the menu. You know, a quad is gonna yield you a higher cash flow. I believe a single family home for the way we’re getting you into ’em is going to yield you a higher equity percentage growth. Um, and it’s also a cheaper buy-in, obviously. Um, and then there’s gonna be markets that are more affordable buy-ins. The more affordable buy-ins are going to start with a higher cash flow, um, and could have less equity growth. The the problem with me saying that is I’ve been proven wrong, like Ocala proven wrong, like it outperformed Jacksonville for two years. And so, but, but the more most affordable to buy-in into are gonna be those central markets, the Ocala, the citrus springs, the Inverness, and then Jacksonville’s gonna kind of be at a median level and then at our higher level, which will probably have the lower cash flow fundamentals.

Jim

Um, but the higher equity growth potential would be like a Palm Coast in, in a lot of southwest Florida. Again, southwest Florida, Lehigh Acres, which is a little more inland, can be a little bit more like an Ocala. Um, but uh, because it’s more inland. But again, that Fort Myers area, if you’re gonna be investing in the fastest growing area in the nation, it’s gonna be a more expensive buy-in. Um, and probably a little lower cash flow, but has, you know, easy fundamentals to see why it might have better equity growth. So hopefully that kind of breaks it down.

Zach

Yeah, and, and again, going back to that, like we’re talking about year one analysis, when you’re looking at a pro forma, uh, I would, I would argue that an area like Southwest Florida, even though first year, like you may not be double digit cash on cash return, but you probably will have stronger rental increase year after year. Um, where yeah, year three and four can cash flow more so than maybe one of these affordable markets. Um, so just something to keep in mind. You always wanna be forward thinking. Remember when we look at a pro forma, that’s a year one analysis. And we always need to be conscious about like, okay, what does year 2, 3, 4 look like? Uh, all the time We have newer investors that are like running numbers and this is good. Like this is good practice. What we work with people on, um, to look at, well, you know, this is where I anticipate my property’s going to be or, uh, you know, in three or four years.

Zach

But it’s like, well, did you account for any rental increase? Did you account for, you know, in the same thing, you gotta account for expense increase, which probably would be minimal on, on new construction, but you need to account for appreciation and rental increases. And that’s one of the things people forget about. Jim, last question I have for you is, um, working with a builder that is specifically in the build to rent model versus just a random, um, you know, large scale builder that sells mainly retail. And what are the advantages to work with someone? Um, I mean the, all the builders in our network, which you were one of ’em, like, that you have to apply to be a part of our trusted network. You have to, to have a track record, we have to go through a whole vetting process. Um, you have to, like, the numbers have to make sense.

Zach

Um, so we go through a long, a long vetting process and you know, we’ve had to fire builders and same thing with property managers in the past. It’s just, you know, we’ve had to divorce them. It hasn’t been nice. If, if things change over time, if business has changed, you guys have been in business for a long time. Um, you’ve always catered to investors, you built your business around that. So can you talk a little bit about like why work with investors versus selling retail and what are some of the advantages to the investor to work with a specific build to rent builder like yourself versus just going to some random large scale builder? You talked about the interest rate buy down, like, you know, national builders aren’t offering that, but I’d love to hear from you on that.

Jim

Yeah, that, and that’s a great question. It is a very niche, um, position in the market for being a build to rent builder. I mean, this term didn’t even exist 10 years ago. And so National Home Builders, for example, they’re not wanting to build affordable housing ’cause they make their money in upgrades and they take, they want a way bigger profit margin than we do. So most of the stuff they’re gonna build is going to be out of that cashflow range, um, which starts you off on the wrong foot right away. And another thing is national home builders, the bigger builders, they have zero interest and I I less than zero interest in building duplexes and quads <laugh>. I mean they, that’s like, why would we ever do something like that? That makes no sense. And our job is to build a portfolio. You know, we’re not looking at, at, at, uh, one property.

Jim

You know, our most successful investors usually own five to eight properties. And when they’re able to build a portfolio within the menu of single family, a duplex quads, and, and they combine those together, well, this is like a well-oiled machine getting the benefits of the equity growth and cashflow growth and, you know, using one of our loan programs to get them, like if they buy a quad, four units with one loan. So that really helps jump that rent to retirement goal, uh, a lot cleaner. We also know the difference between what’s nice and what’s nice and durable. Remember we’re building these where we want these, you know, aesthetically pleasing. So if you decide to sell seven and 10 down years down the road, you can, but we also need a durable and laid out well for the tenant where your property’s gonna live the best for tenants with the least amount of wear and tear.

Jim

Um, again, that’s not really something in the mindset of a large or a custom builder. They’re building something nice and they’re moving on. Um, and, and that is, that’s been a big distinction. We’ve seen Zach, you know, you go to a builder and say, build me a house that I can rent. Well, the warranties are normally different and so is the durability. And they’re certainly, they haven’t looked at it from saying, okay, we’ve managed long term, what’s gonna make this easier to manage for us and for the landlord owner. And so the way that we approach it is completely different. Um, and one of our most important things is, yes, it has to be nice, but we’re gonna go into a zone that is designed for cash flow, but also to keep you out of the trenches. It, it’s, I know it’s controversial, but we just don’t like going to those tough bottom of the barrel neighborhoods. I can build you a new house there, but I think I’d be doing you a disservice. Try it for myself years ago, didn’t work. Well, I’m not gonna do it for our clients.

Zach

So just to summarize what you said, um, in bullet point format, uh, working with the builder, rent builder like yourself, I mean, you have the investor in mind end goal. So fundamentally you’re inve you’re specifically building in areas where the cashflow numbers make sense. Yep. Right? Like you’re being conscious of that, but you’re also building in areas that are growing. They have strong rental demand. You guys are involved in the managerial aspect of it post-closing. So you, you have that long-term relationship and you have oversight on management, which that’s something we didn’t really talk about, but that is an important thing to notice. Yeah. You are volume builder aware and because of the numbers you’re building below market prices. Like it’s not uncommon for people to have appraisals probably that come in above the purchase price, but fundamentally, like you’re building a house where you can have lower margins, whereas, you know, retail builders going to try to, you know, maximize the market. People are buying emotionally, right? They’re selling to their retail versus looking at the numbers. Um, and I think, so those are probably the key points that, that you mentioned, right, Jim? If anything. Yeah. Yeah.

Jim

And on just the menu, you know, when you’re building a portfolio, single family duplexes and quads, putting the three of them into, into your strategy can be a very powerful way. We have enough case studies to show, using that menu of options is very powerful and most other builders don’t even look at the duplexes or the quads, and we kind of specialize in them.

Adam

Yeah. Uh, the last thing I want to touch on is the thing that we get asked a lot about, and that is, you know, people always ask us, is there a warranty to this? Yeah. And I know y’all do have a warranty on this, so can you touch a little bit about what kind of builder warranty y’all are offering and kinda what it covers?

Jim

Yeah, so it, we can get out more information obviously that you guys can share, but, but you have to have a state mandated two 10 warranty. And a two 10 warranty basically means two years coverage on the little stuff, 10 years coverage on the more structural stuff. And you know, when we used to do older houses, we could just get a one year warranty and that was it. So now with the new construction, it does extend you into more things. So it’s just to give the, the 20,000 foot view. Two years is for the smaller things, 10 years for bigger structural things.

Zach

How does that come into play though? Like with, um, because a lot of times when we’re running numbers, we’re reducing the maintenance amount for, for new construction, um, be because of warranties in place. Mm-hmm. <affirmative> and it’s, it’s new construction, but like, you know, if, does that mean that the two year warranty covers like general maintenance stuff or can we clarify what it covers and what it doesn’t cover? Well,

Jim

It’s, it’s, it’s not going to cover a tenant issue. If a tenant does something that’s obviously the warranty doesn’t kick in. So the good thing is sometimes when you would build a property without a warranty and then the manager is completely separate, how do you, you know, it’s, it, it’s like one hand doesn’t talk to the other. Obviously our building department finishes a home and brings it right over to the property management department. They have the warranty on file, so they have to look up to see the things that it is. One of the things it is not Zach, is if a tenant flushes a toy down the toilet, you know, the, the classic joke one, obviously the warranty wouldn’t cover that, but what does cover that is we get the toy out of the toilet and then we charge back the tenant. Um, but, but, so I don’t know if that makes sense, but it’s not gonna cover tenant damage or tenant neglect if that was to happen. It’s gonna cover more the build out of things that, that we have been responsible for.

Zach

So there’s functionality things like if the house, like, you know, there’s a warranty with that, uh, you know, if the wind something with the windows not operating or the electrical system or something like that, like that’s all warrantied.

Jim

Yeah. I, I remember one time in Palm Coast, uh, two, three years ago, we actually had a roofer, um, that put on a roof wrong. And so when it came out and there was problems where they were going, what the heck? It’s 14 months old. This isn’t making any sense. We went out and placed a roof completely. I mean, these things can happen, but this is why we have warranties. This is why we have inspections up front. And that’s why you want that. You always, no matter who you work with, you wanna make sure your property manager understands your warranty, if that makes sense. And since our builder is related to our property manager, that’s a very fluid communication.

Adam

Fantastic. Well, Jim, thank you so much for joining us today. Really appreciate it. And I know Zach and I personally investing in Florida, love the state. A lot of our investors investing in Florida are gonna love the state once they close on their properties, the one who have, you know, already do love it. So really appreciate you coming to talk to us about these properties. You can find all of those [email protected]. That’s rent to retirement.com. Just head over to our inventory page and you’ll see all the properties we have listed right there. Jim, again, thank you so much for educating us about this today. Don’t forget if you have an interest in Zach’s report of the Top 20 Markets to invest in email [email protected]. That’s [email protected]. Really appreciate the time you spent educating yourself today, and we’ll talk to you on the next episode.