Frequently Asked Questions
Is it better to buy established or build?
There are Pros and Cons to both buildings or buying existing homes. Building a home can increase the chances of receiving exactly what you want with less maintenance in the first 10 years. However, the process can take longer than expected and the cost can be higher. Purchasing an existing home may cause you to compromise on a few items but can typically be accomplished faster and with less work involved. Many believe the best compromise is to purchase a new existing home from a reputable home builder.
What does a 7.5% cap rate mean?
Utilizing the capitalization rate value is a great method for evaluating an income property as it takes into account the property’s operational expenses as well as its current vacancy rate. In addition, the Cap Rate value can reveal whether the income property has the ability to pay off a mortgage or not. Cap Rate = Annual NOI / Market Value
How long does it really take to build a house?
The typical home build period in Shasta County can average 6-8 months. The process can be extended depending upon the amount of land development involved and engineering that may be required to facilitate the build.
The transcription is auto-generated by a program and may not be accurate to the conversation. In order to ensure you get all the information from the video properly, you must watch the video.
Joey: Joey Gartin here with Josh Barker. Again, laughing off-screen before rolling. It's bad stuff, man.
Josh: Keeping it real here. Yeah, keeping it real.
Joey: So last time we got together...
Joey: The big topic was Zillow. The fact that Zillow had stopped their purchasing of homes, they were laying off a quarter of their employees, and what impact did that have. And you said, "Hey, not really because they weren't buying anything here."
Joey: So I kind of segued into, "Okay, well, how much inventory do we have? What does the market look like?" And one of the topics that arise in that is, we don't see a lot of new construction, or at least, I guess that's very subjective, I don't see a lot of new construction for inventory. Why is that?
Josh: Well, I think what you're probably getting to there is like there's no meaningful level of construction that makes everybody go, "Wow, everybody's building everywhere," and it's really a loaded question because it's really a question of, is it the chicken before the egg, or the egg before the chicken, kind of thing, where if we build a lot of new additional homes to add to the housing inventory, do we have enough people to buy those homes that the contractors can keep building them quickly? Or is it a situation where if we build them, the people will come? And that's what makes it really hard is that I think if you get too far ahead of yourself, there's this little doubles in the details kind of thing where absorption rate is really the guiding factor on how many homes are actually sold each month.
Josh: And if you add too many homes to the housing supply and you don't have enough people to buy them, they sit. And if you're a contractor building new homes, that's a major problem. We have seen over the last couple of years with the Carr Fire and the fire that was there in Paradise, that that really caused us to have this pretty big construction boom here, because the homes that were burnt down, that were rebuilt, that added to our construction here in the marketplace, but it also gave an opportunity for contractors to buy vacant lots too and build homes as well. So we're starting to see some construction. It's not all bad. It's definitely getting better.
Joey: It's starting to trickle in as far as like final production hitting the market.
Josh: Oh yeah, yeah, a lot of the Carr rebuilds have already been done, and the homeowners, most of those have already rebuilt at this point. Some of the vacant lots that were sitting out there in the inventory were homes that were burnt down, that was purchased by contractors, most of those have been rebuilt. There are still some vacancy lots out there, but a lot of it has been done, a majority of it has.
Joey: Do we have... My next thought is like our volume. How many contractors do we have? 'Cause I can only think of a couple of larger names of actual subdivision developers, right?
Josh: Yeah, yeah.
Joey: Versus individual contractors.
Josh: Yep. I'm not gonna go into the names of them because that would be disrespectful to anybody I didn't mention.
Josh: But there's four or five larger ones in town. We have a large national home builder that just came in and acquired a subdivision in West Redding that's gonna be building, in my understanding, in the spring, but as far as contractors, there's a lot. I don't even know how many. I mean it would be over 100, because a lot of them just do one home or maybe two homes a year, and they do it for that reason. They only wanna do one or two a year, so there's a lot of people who do that. And then there's some that are actually more productive and volume-minded, and those are the ones that we normally see running around on the market.
Joey: So in your opinion, do you think we have enough new construction in Shasta County? I don't even know what the inventory numbers would be for that, but it seems like there's almost nothing.
Josh: It feels that way, but there is. And do we have enough? Probably a little light but for good reason, right? So right now you've got some challenges with contractors. What they're dealing with right now is you have the labor shortage itself. So that plays into this. Can I find enough people to... So that if I go out, make promises and bids on different projects, can I fulfill those promises and bids with people? And then you have the wage piece of it, where some of these folks or the wages are... They're competing against each other a little bit, some contractors are taking labor from other contractors. And so, that's causing wages to go up because one way to lure them over is wage.
Josh: And so, we're seeing some of that happening. We talked about in our last video about the disruption of the supply chain, and when it's harder to get access to those products that you need, home products like appliances and even paint. I was talking to my friend yesterday and he said that they ordered their paint and it took him like 60 days to get the paint.
Josh: And I don't know if that has anything to do with the supply chain, maybe there was a warehouse that burnt down somewhere, I don't know, but I just know that there's major issues with supplies, and I think that's putting its own pressure on the ability to supply the market. And you know what, honestly, that might be a good thing because it's certainly keeping us from over-building in our market. We've heard of times in the past where other markets have overbuilt big time and it dragged the whole market down because they over-supplied. We haven't done that here.
Joey: We're going through a remodel right now, I mean like a major remodel, we almost doubled the size of our house, and at every point it seems like there's been a supply issue, just product... We have a really good general contractor, I guess I won't name him because we gotta name everybody, but he talked about how juggling the projects, but it was... He would make comments like, he was surprised how long... How many weeks out with just a simple product.
Joey: Like a toilet.
Joey: Something like... I think my wife picked a couple of sinks and I went down and picked them out, and then they called back and they said, "Oh yeah, we can have those about seven months." And she's like, "What?"
Josh: What's my other option?
Joey: Yeah, it's like "Show me sinks that we can have within the next few weeks." So we're a few weeks behind, but we also dealt with issues with permits and stuff like that. It just seemed like every step of the way was pushed back a little bit, and I really don't think it was the contractor, 'cause his communication level was so high, and so I just think you're right, there's a lot of supply chains that are disrupted. And we had an issue with the paint too, where they're just like, "Oh no, that one will be months out." So when she went to choose the paint, they gave her guidelines and she said, "Hey, what can I get now?" "Oh, okay, well, then only look at these." The same thing with appliances, and we even got a couple of furniture pieces, I was shocked. We went in there and they're like, "Oh yeah, you can have that in a year." What?
Josh: And put that at scale. Imagine you are a contractor that has to develop 40, 50 homes in a year. I mean, think about all those disruptions where you have a great supplier, but all of a sudden that supplier's supplier is now disrupted, and so now your go-to supplier is no longer reliable and it's just... It's a challenge.
Josh: I think if we go forward and look at the next two, three, four years, I do see there's an opportunity for us to see some construction here at a meaningful level. And I suspect that with the demand that we have coming from Sacramento, the Bay area in Southern California, that a lot of that is justified. I think we'll be able to fill it. I think there's a lot of homeowners that are currently living in homes now, that they're looking around going, "Well, I have to make a decision to remodel my home, or if we want, we can go pick a new one." And if there was enough of those new ones out there for them to choose from, they might make that choice instead, and so they buy a new home that now provides a resale home to the market as well. And it's a healthy, healthy thing when new construction is being added to the existing housing supply. If anything, it's gonna help us to stabilize the appreciation piece, because seeing appreciation jump as fast as it has is gonna price our children out of a market that we don't want them to leave.
Joey: That's one of the things I think about is that everyone is very excited... Well, if you're a home owner, you get very excited when rate...
Josh: Home appreciation.
Joey: Yeah, it goes up. Thank you. But as the younger home buyers, that's not... Or even people that are thinking about... I've heard a couple of people, like, "Well, I was thinking about selling. But then what do I buy?"
Joey: They wanna downsize...
Joey: They wanna... The kids have gone off to college and they're like, I kinda want a smaller home...
Joey: But they're like, You sell, but there's really no inventory. I know there's inventory, but as far as like, numbers go, I think in your market update, you were talking about, our numbers are pretty much...
Josh: Just over 600 homes right now.
Joey: And last year it was just over...
Josh: Well, it was a little higher. About 700, but yeah, it's pretty similar. The whole last 12 months... 18 months since COVID has been... The inventory has been depleted.
Joey: Yeah, so is 600 a healthy inventory or...
Josh: No. No, not at all.
Joey: What do you think a healthy a inventory is?
Josh: Probably a 1000 to 1100. And we talk that right now based on sales volumes.
Joey: And we talked about how there could be, with the forbearance programs and things that are happening, that we might see some inventory hit the market, a large volume of homes hit the market, so.
Josh: Yeah, in one form or another, they might be just regular sales 'cause they have equity. Or they might be a short sell if they didn't have it, any equity, and worse case scenario, foreclosure. And there's gonna be a portion of those, that distressed property from our last video that's gonna be there. I don't think it's gonna have a massive drag on the market because, even if half of them came to the market, it's not large enough to be life-changing in terms of what prices will be. But if you were to describe this perfect housing price appreciation in the market, it would be really 2%, 3%. It would be a...
Joey: You track inflation?
Josh: Yeah, stay ahead of inflation just a little bit... Not today's inflation. [chuckle] But normal historical inflation, because if prices go up about 2% or 3% a year, after about three or four years, you could choose, if you wanted to, to sell your home. You'd have the equity necessary and probably have enough money to, We'll put something down on the next home. And that's what you really would want, is... 'Cause then people every three or four years have options if they choose to take them. You know what I mean?
Josh: That'd be perfect. You wouldn't wanna be too much faster than had an appreciation, because, like we talked about, you want your children to have the capacity to purchase a home and stay in the community that they grew up in, right? You want the person who provides professional services, and even just regular blue-collar services in a marketplace, you want them to be able to own a home as well, so they stay. You want everybody to have some level of an American dream, and it's based on merit, of course, but you still wanna provide some ability that when you do the right things and you work hard, you should be able to own a home. And that's what I love about Redding right now, is that we still, for the most part can do that.
Joey: It's still affordable.
Josh: It is. I don't mean to disregard anybody that's not able to afford a home, because we feel for that too, and we wanna see that gets solved. But the only way that's gonna get solved as if we add homes to the inventory.
Joey: So if someone was coming to you and said, "Hey, we're thinking about building versus buying." Do you point him in a certain direction?
Josh: Well, right now, building versus buying is interesting. I would suspect that... You can obviously build and for equal to what you can buy an existing home for. And the only proof of that is in the fact that builders right now can build a home and sell it on the market, right?
Joey: Got it.
Josh: So you can do it, but there is time involved. So if you're thinking today, I might wanna build a home. It's probably... If you even got started today, it's probably gonna be about a year out, and it could be as even as far as maybe a year and a half. And that's what most people doing all the things right the whole way through. And that's because of the things we talked about. The supply chain disruptions, the lack of labor, how long it takes to get things done. So first thing to think about is, how long will it take, right? The next thing you're gonna be looking at is, a lot acquisition. Are you buying in an existing neighborhood with a lot sitting there waiting for you? Or have the developers got the plans already ready for you? Or are you gonna go out and find a lot on your own? That takes time. And so it's totally doable, but if you haven't done it before, you're definitely gonna wanna pair up with a really reputable builder. They should be able to help you through the process of designing a floor plan... Share with him what your budget is, so you can design a plan where you get what you want for the price you want. All those pieces are gonna be a big part of it, if you're gonna make that decision, but it takes a while.
Joey: Do you think it's a good investment right now? Do you think that... 'cause I...
Joey: One thing would be, Hey, I wanna do this because I have my dream home in my mind. And so I want this exact home.
Joey: And you go, "Okay, then you gotta build it." Or the other would be like, "Well, I'll make equity, because I'm building, even with a general contractor, I should... "
Joey: That certain percentage, right?
Josh: Yeah, [chuckle] the word "Yield spread premium" comes to my mind, but that's not a great way to describe it. But are you saying, Is there a clear benefit to building over purchasing existing homes? No. There is no financial clear benefit.
Josh: No, it's probably slightly more expensive to build a new home, than it is to buy an existing one.
Josh: So you don't think you're saving in a ton of money in that way... But look what you get in the trade-off for it? You get a little bit of a house that's more along the lines of exactly what you wanted. It's new. So it comes with the benefits of less maintenance and repair in the next 10 years.
Joey: Roof, HVAC system...
Joey: All that stuff...
Joey: Doesn't need to be replaced in five years.
Josh: So there's... Exactly, so there's some built-in conveniences that you get by buying new. And so, maybe on paper it's slightly more expensive, but maybe over the 10-year period, it's not. But I wouldn't say that it's a no-brainer to build right now versus buy.
Joey: Are we seeing anything, outside of single-family home construction going on, I've always heard that Redding doesn't have enough... I don't know if the term is low-income housing or what the proper term is, but basically like multi-unit. That's always been a big dig on Redding, that there's... I don't know what that percentage is that they use, where they say, "Hey, this is a certain percentage... "
Josh: Higher density.
Joey: Higher density. There you go.
Joey: We're not seeing any of that, right? I don't even know if we have enough zoning?
Josh: Well, the zoning isn't an issue anymore. The state of California passed a couple of laws where they're basically for pushing back on the cities and saying, You have to actually increase your density for the housing, because they don't wanna be in a situation where the housing market gets too out of control. So it's now giving the cities the flexibility to increase their density zoning, even when the general plan originally didn't outline for it. So that's been a change that's taken place. We are seeing some higher density here. We have four or five major apartment complexes that are being built right now just on the west side of town, so. One of them just got completed. There are several more going up. So, there are some higher density units that are coming in. We have some cluster home developments that are coming in. This is where they're like attached living, so you have your nice townhouse and it's attached... One wall is common with the town house next door. And so we see a lot of those cluster homes coming up as well. There's one that's coming up on the west side of town as well right now. There's a couple of bigger ones on the east side of town. And so I do see that happening now. And really the general plan kinda looks like, imagine a large arterial road. Is that the way to say that word?
Josh: Arterial. Thank you. And so you see that road coming through. So that first layer is higher density, right along with that road. When you get further back, it starts to drop into a lower priced single family dwelling. And then in the back of that area, would be a higher-end single-family dwelling. And so we're starting to see that kind of pattern up and down the state. So arterial road, higher density right next to it, then smaller single family, and then larger homes behind that. And I think that, that's kind of the game plan I see at a lot of the general plan looking like.
Joey: I wasn't aware of all that. The multi-unit... I just notice that... I always check multi-units for sale. So it's one of those things I like to check and you see almost nothing for sale.
Josh: They're not selling 'em.
Joey: Yeah, they're not selling them.
Josh: Yeah, no, no, they're being built to hold... Some of them are using state money, and so a portion of it maybe will be like a low rent a scenario, whatever that means, 'cause I'm not gonna [chuckle] talk about the project, but I'm looked at one recently, I'm like, "That's called low rent? Wow, okay." But [chuckle] there's some people are tapping government money to do that, but a lot of those bigger ones that I'm referring to, they're not being built on speculation and then sold to the market. They're being built and held, and probably will get occupied, establish a cap rate, and then maybe at that point, if they decide to, they might sell it at that point and exchange somewhere else, but no, I think the people you're seeing right now building are holding them.
Joey: So, do you wanna talk about the cap rain at all? Is there like a cap rate that you'd say is that the Shasta county cap rate?
Josh: I talk to folks that are down in the Bay Area, in Southern California. And it seems like their cap rates are averaging on the really low end, and I don't know why they do it other than future appreciation, but 1% and I see them as high as maybe 3, 3.5%. And that's pretty normal. For them to find more than that, it's that highly educated investor that knows how to find the deal, right? But for average investors, I'd say 1-3% down there. Up here, you're seeing cap rates that are about 5%. And they go up from there. You see them 7%, 8%, 9%. But it really depends on the condition of the property. So our newer inventory, the newer stuff that you're gonna find... And if you get a good buy on it, you might find a cap rate at 4.5%, 5% on new stuff or newer stuff. As it gets older though, that cap rate starts to go up and it looks like a better return on paper, but that's because it's gonna come down the road with more maintenance and repairing and stuff like that. We have investors looking up here, because the cap rates are more attractive than bigger cities. And if they're expecting a return, a place like Redding is an option.
Joey: Does the cap rate usually rise by the number of doors in the units?
Josh: It could. But it really has to do with how much money are you putting into this project, right? And then what is your net taxable income when it's done and the reconciliation between those two numbers essentially is how you're gonna establish your cap rate.
Joey: What about that whole four-unit to five-unit step, because a four-unit or less is a residential loan. So it just looks like the four unit... Oftentimes, I see a fourplex, that's more expensive than a fiveplex.
Joey: And I think it's because...
Josh: Quadplex tax credit.
Joey: Yeah, the availability to finance it versus the second you go to five doors, it becomes a commercial loan...
Joey: Rates go up...
Joey: You have to put a much larger down.
Joey: A young person... You don't have to be a young person, but a young person starting out could... Their first purchase could be a fourplex. They live in one of the units and say, "Yeah, this is my primary residence."
Josh: Yeah. I've met clients over there that have done that.
Joey: It's genius. It's brilliant.
Josh: Yeah, it actually is, because you're getting it with less money out of your pocket. You're... 'Cause you can buy them for much less than what you buy an investment property for. And then when you go and you purchase it, now you're renting out the other three, usually almost always covers your own personal rent, so now there's no expense to your living expenses at all. And you're building equity. It's pretty incredible that but your point there is really well-taken that up to four units, you can use FHA financing, which means that you can increase the amount of buyer demand for your property. As soon as you go to five, the down payment goes way up, it shoots way up, because now you're into a non-conforming product. And when you're in that zone, the investor pool, you're getting rid of all the other folks. And now you're only with investors, essentially, that can purchase that property. So it narrows the market. And that's why you could see a fourplex selling for more than a fiveplex.
Joey: I don't know how commercial loans work, but in the past, when I've dealt with them, it's like they also want a much larger down payment. You know what I mean? I think it's 30% maybe? You might...
Josh: On average. Yeah.
Joey: Yeah. And then on top of that, as I said, the interest rates are... I think when residential rates were in the low threes, I still think the commercial was five...
Josh: It was.
Joey: It was five-plus?
Joey: And I think in our last episode, you talked about 1% interest rate reduces your buying power by 10%. So you can see why right? Is that about right?
Josh: Yeah, so for every 1% the interest rate goes up, the purchasing power goes down by 10%. So if you qualify at $400,000 at 3%, if that rate then goes to 4%, now you only qualify for a $360,000.
Joey: Now, it makes sense why you'll go in and you'll see a property that's four fourplexes parked...
Joey: Side by side and they're like, why didn't you just build a 16-plex?
Joey: It's like, 'Cause I can sell these four, four...
Joey: The amount I put...
Josh: Yeah, they're probably on four separate lots and have the ability to be financed differently. You have access to credits a lot differently. And that's probably a smart move. Absolutely.
Joey: So you're comfortable with the level of new construction. It's buying it, staying just a little bit underneath it, kind of as a safety net for those builders to not over-build. You're comfortable with the level of commercial building that, with the projects we have, what is the marketplace moving forward if we're underneath our inventory, isn't that just gonna cause the appreciation rate to be much higher than you think? If we do get to where inventory meets and exceeds, we're gonna see a drop, right?
Josh: Yup. And I think the best way to describe it would be... 'Cause absorption rate is really what it is. A healthy market's gonna be about a healthy market, about four to six months supply of homes, meaning that it would take four to six months to sell the existing inventory if nothing else came up for sale on the market. Our inventories are too low right now, 'cause our absorption rate right now is probably sitting at 2.5 months supply, that's why we're appreciating so fast. But as people start to get moving again, as the supply chain starts to get moving, as people start going back to work, as people feel more comfortable with whatever this pandemic thing is now, whatever that looks like, you'll start to see our inventories begin to grow out of this. I expect this spring that we're gonna see our inventory grow.
Josh: Will it grow really fast? It's hard to tell. But if it does grow, that means our appreciation is gonna begin to taper off, and that's not a bad thing. For those that are thinking, "Oh that means the crash", it's like no, it just means that we're hopefully transitioning back to a more stable and slow steady growth real estate market. We don't like big swings in real estate, it affects people's lives too much. It's much safer, it's much more comfortable for people when there's just slow predictable, steady growth.
Joey: When was the last time we had that?
Josh: Not very often man, 20 years. I think I saw the tail end of it in 2000, 2001, 2002, and then by 2003, started to turn into a pretty crazy market, and it's been bouncing really bad ever since. But prior to that, if you looked it looked actually pretty stable. It's interesting, I wonder if it has anything to do with policy too because it seems like the more that the state has implemented a policy in the housing market, it's really begun to disrupt inventory. And if the Bay area in Southern California were able to increase their housing supply or have some more flexibility with expanding out to other areas in places like Redding could do it with a little lower cost, the housing issue could probably solve itself. For example, I talked to somebody before and I said, "You know if we went back to the building standards of 1992, and just did that for homes up to 1500 square feet, and we said we're gonna do that for the next 36 months. Do you have any idea how many homes would be built on the lower end?
Joey: A lot.
Josh: A ton, because the cost would be so much lower, right? They wouldn't be dealing with all that out of regulation. And so within 36 months, you could have... Not saying it would solve all the problems but it would be to be a meaningful contribution to solving that housing issue. But I'm not going into the weeds there, I'm just saying that the way that the government has an impact on a policy does have an impact on how many homes get built.
Joey: Well, I think a perfect example of policy impacting the market was the capital gains laws that changed in the late 90s which said a married couple can wave up to $500,000, a single person can wave $250,000 on your primary residence if it's been your primary residence 2 of the last 5 years and you can do that unlimited number of times. At that point, you really turned up the flipping of buying a new house every three years.
Joey: Especially when you combine that with an appreciation market and easy money, the next word that went to my mind was a casino.
Joey: I said, "Wait, did they just make a casino? Three sevens, yes." So, I think that had a huge impact, right?
Josh: Well, in all these things, there are so many different variables now that have an impact on market valuations. And I think that's part of the challenge is now when I look at what the government's doing... I'm not taking a position left or right or in the middle or anything. I'm literally in a policy and going, "Okay, with that policy this is probably how it's gonna play out on Main Street so that it can be well advised on how to both help our clients but also for our own investment portfolio, what moves we need to make."
Joey: Well, can you imagine if all primary residents, had to pay 15% capital gains? You don't think that would slow...
Josh: That'd slow the market down.
Joey: Slow the market down. Versus, "Hey, let's sell it and buy a boat and buy another house." I think that absolutely has nothing to do with left or right either, it has everything to do with just the policy and...
Josh: Yeah, it controls behavior, it has an impact on behavior.
Joey: Absolutely. And our access to money, and I wonder how that's gonna play out. I bought my first house, I think in 2001, and I think I got 7% and that was really good at the time. And money has been so cheap for so long, and I don't see any really stopping that. It's almost like it's the new norm, right?
Josh: I think so. We're not wise enough and old enough not now to see 80 years into the past. But when I got in the business interest rates for FHA were over 9%, and right now they're in the low 3s. So, and I've seen it this low for a long time now. For them to raise rates is actually a pretty scary thought for me, because most people purchase homes based on what they can afford for a monthly payment. And so, whatever the rate has an impact on what the purchase price is gonna be. So if rates went up to the 9% that I'm saying that I had 20 years ago, that would have a significant impact on what people can qualify to purchase and that would immediately drag the market down. So, no idea. All I know is that if they really can't raise the rates back to the old days. It's just not something that can be done without having a significant consequence.
Joey: Yeah, no. And that's another example of policy and that's something that's transcended whoever's been in the White House or whatever that's been for almost 15 years now, it's been super low. Well, Josh, thank you so much...
Josh: You bet.
Joey: Today, I appreciate that. So, if someone's thinking about building or buying, that your phone number is gonna be listed. They can call you directly and ask to get your advice.
Josh: Yeah, just type it into Google or go to reddinghomes.com if you wanna see any of that stuff.
Joey: Awesome, thank you, Josh.
Josh: Yeah, you bet, and thank you.
Joey: You have a good one.