Be very careful right now
You may not know this, but we lost the very first real estate investment deal I was ever a part of to foreclosure. How’s that for a credential?
It wasn’t a house we had bought to flip or rent out. It was a house my family was building to live in for a few years and then sell to bolster my parent’s retirement. The year was 2005, and I was still living at home. I worked with my brother-in-law, Michael, at the time building custom houses for different clients in a gated community on a mountain.
My parents loved the idea of living on a mountain and saw how the real estate market was appreciating rapidly. They found a lot with amazing views for a killer deal. They decided to buy it, build a house on it and enjoy the views until they resold it for a profit.
It was a great idea. My parents knew that Michael had the ability to get houses built cheaper because of his low overhead. They also saw that the houses we had completed were appraising for nearly double what the construction loans were on those projects. They knew they could trust Michael, they saw the opportunity, and they jumped in on a good deal.
We had no idea what was about to happen.
On the day we started breaking ground, the foundation man approached my dad and said that the concrete supplier was going to try to give us the 2005 price. My dad thought that was an odd statement since it was 2005. That’s when the foundation guy gave us our first signal. He said, “Don’t you know? Concrete is going up. Actually, everything is going up.”
You see, Hurricane Katrina had just hit and there was a huge demand for material to help in the rebuild effort. And because of that fact, prices on building supplies shot up. We saw things like OSB, Advantech and copper triple in price almost overnight. But by the time we could see what was happening, it was too late.
And according to our construction loan, once we started the project, we couldn’t just stop. We had to complete it. And because of the rising prices, we had to apply for a larger loan to compensate. The first loan to build our house was $125,000. But to actually build it, we had to get a total of $350,000. And the house barely appraised for it.
To make a long story short, we couldn’t sale the house for what we had in it, the mortgage payment was more than we could afford, and we lost the property to foreclosure.
So why am I telling you this story today?
We have two pretty big projects right now. Yesterday I went to go pick up OSB for one, and when I saw the price of it, my jaw literally dropped. OSB had been running about $8 a sheet. Yesterday it was nearly $22. Does that scenario sound familiar? Is it a signal?
That’s not the only thing I saw that had gone up. A 16-foot pressure treated 6x6 post that was recently $38 is $71 now, and regular 8-foot 2x4s that were $3.50 are now $5.50.
We have two hurricanes hitting Texas and Louisiana as I write this. With an already low supply of building materials nationwide, I have no idea how high that’s going to drive prices.
As an investor, I would be very, very careful of taking on larger projects right now because your rehab projections are already off. You can’t compare your numbers to last year or even last month’s rehabs. They just changed dramatically!
Next, you may want to do what we are doing if you already have projects going. I’m trying to buy as much of my materials as I can right now for our two large projects and am even considering renting storage space for it. Don’t over buy. We don’t want a run on materials like we did on toilet paper. But you need to be able to get your projects done.
Also, be overly conservative with your rehab numbers. You may find for the next few months that your over estimation may be close to your final figures.
And finally, if you are new to investing and thinking of taking on a big project because it has a juicy profit margin, right now would be the time to wait until things normalizes — which is what my family wished we would’ve done in 2005.