When Is Real Estate Too Expensive? | How to Know | Tim Hubbard

Prices seem a little out of control, don't they? I'm sure if you've been looking for property recently, you probably feel the same. I've been looking for property recently and I feel the same way. But are prices actually really out of control? That's what I want to talk about this week and some metrics to really help you make a better decision. Let's jump right in.

Welcome to short term rental riches. We'll discuss investing in real estate, but with a specific focus on short term rentals. Quick, actionable items to acquire, manage and scale your portfolio. I'm your host, Tim Hubbard. So I was back in the US recently doing some property searches, trying to add to the portfolio. Did find some. Fortunately, those ones are moving forward, but there were a couple others that, gosh, it was just so hard to make an offer because I had bought property in the same area before. I'm like, there's. This is just. These prices are out of control. These prices are crazy. They're so high.

But does that really matter? It doesn't actually matter as much if we're investing for cash flow. Right? But it's still hard to make that decision. And I was listening to another friend's presentation on the multifamily market nationwide recently, recently, and he brought up this idea of having past prejudices, you know, like past ideas and past perspectives of an area where we maybe knew what the property prices used to be. And now we're currently looking there. But the reality is we can't, we're not valuing these properties the same we shouldn't be. Right. The rent growths are different, the population growths are different, interest rates are different, and there's other options available. So all of those things affect our payments. Right. And if you've been listening to the podcast for a while, you know that we invest for cash flow. I invest for cash flow long term. And so to me, that is the biggest, biggest piece. If all of my expenses are covered by my income and I've got a loan that's fixed for a long time, 30 years, then I feel pretty comfortable moving forward with that property. But it's still hard to make that decision. Sometimes you're like, gosh, the same property one year ago was 25% less or 30% less, or, gosh, five years ago I could have. This was basically free. You know, I mean, it's just, it's hard to do that. So there's one other metric that I want to talk about this week, and that is price per square foot. So it's a good metric to compare two similar properties together. Now, it is a slightly complicated metric because there's not just one average cost per square foot that's gonna work across the board. The reality is, is that the cost per square foot, the cost to build a property essentially is different everywhere. And it's different for a lot of reasons. But I was with a group that I've been part of for a while. It's another mastermind group, a lot of people with different backgrounds and different businesses. There are a lot of real estate investors there, and I feel really lucky to be friends with one of the gentlemen in runs. Owns manages a portfolio of over $400 million in real estate. A big, big one, mainly multifamily properties. And they are building their own properties now because.

Properties have gotten. They're at a point where they can build cheaper than they can buy, at least in the areas where they are. So when there is money to be made, developers move in. When you can build for less than you can buy, well, then that's when you see more and more developers going up. Now, the price per square foot. So there's a couple ways you can do this, right? If, if I'm buying a property, I can simply take the cost of the property and divide it by the building or the home size, and that'll give me a cost per square foot, including land. Now, if I had to give you just like general ballpark cost per square foot, maybe an average, and this could be way off, depending on what market you're in. I'll go into that in a little detail. What, what can affect this price per square foot, but let's just say 150 to $250 a square foot to build new construction. Now, that wouldn't include the land, right? So if you're buying a home that has the land included and you're at $150 square foot, man, that's, that's pretty good deal. Of course, you got to do your research. You got to know what things are selling for in that area. So price per square foot. I think it can be a really good metric to help compare other properties. And I remember a time right after the last recession that I was buying properties, some that were essentially less than the cost to build. Now I was buying older properties. So that doesn't necessarily mean it's going to be a good deal. Right. But if you're in a good market that your confident in and the property is in good shape and you're buying for less than you think these Properties can be built for. Well, then that should help reassure you. That should help you pull the trigger and get into a new property. Now, there are places where, you know, Detroit, for a while, you couldn't give property away for free, right? Certain areas of certain cities, that metric isn't as valuable because that area has maybe fallen off. You know, they're losing population. So if we're in a market that we're comfortable with, that's in a good market, that's, you know, population's growing and it's got good fundamentals. A lot of things we talk about on the show like landlord friendliness and job growth, and we're able to buy a property that we think is like near construction costs. Well, then that. That's going to be a pretty good deal. So there I'm going to give you a couple of places where you can go to try to find what the price per square foot or the new construction cost per square foot is in your area. I'll give you a few of those here shortly. But I want to talk about the reason why we can't just use an average price per square foot or average price per square foot to build. Because everywhere is different, right? So take California versus Tennessee, for example. You're gonna have different licensing requirements, different permitting requirements. Supply costs could be different. So there isn't one price per square foot just across the board. But I think the more you start paying attention to this metric, you'll realize, oh my gosh, the price per square foot for a downhouse, downtown Manhattan condo versus the price per square foot for a, a condo and in Louisville is way different. Way different. Right. So it is a good metric, but it does take a little thinking through a couple other things that can affect price per square foot to build as well. Weather. So if you look at Medellin, for example, in Colombia, where I spent a lot of time, it's really nice weather there. They actually don't even install heaters. They don't need heaters there. So that's going to make their construction costs lower. Right. They don't need air conditionings in a lot of these places. Actually, a lot of these brand new places don't have air conditioning. If someone wants it just a tad bit cooler, well, then they install their own. But that's a considerable cost that you could save. So if you were comparing one market that didn't need heavy H vac, for example, to one that did well, you wouldn't be able to use that metric. So it's better for looking at properties and comparing properties in the same area. So hopefully that gave you a little insight. There are a lot of good metrics to evaluate property. One of the most common ones we use is cash on cash return rate, how much cash I'm getting back from my investment. But price per square foot can be helpful for comparing properties in the same area. And if you go a little bit further and you discover an average of what the price per square foot to build in your area might be, and you're finding a property that's less than that, well, that should give you the confidence to move forward on that property. That sounds like a good deal, right? Just remember that the market today is much different than it was a long time ago. We shouldn't be underwriting it. Or that's another way for saying evaluating a property. We shouldn't be evaluating it based on information from years ago. Everything's different. Rents are different and they're going up. Interest rates are different, growth rates are different, all of that. And building costs are different. So use that metric, do a little exploration and see if you might be able to find what a typical new build price per square foot construction cost is in your area and compare that to some of the properties that you're looking at that are already built and that'll, that'll give you a little more confidence. So one place you might want to check out to find some of this information, well, of course you can always go to Google. You can google your area and, and get some information there. But there's another one called New Home Source, which I think has some good data. Now again, make sure you're comparing apples to apples when you're using this price per square foot metric. And if you're trying to come up with the price per square foot to build, remember, a custom home is gonna have a much higher price per square foot than an apartment building. Right. Because apartments can have a whole bunch economies that scale a whole bunch of apartments in the same place versus one single family home that maybe has higher end finishes. So just make sure you're comparing apples to apples. Dig a little deeper into that metric and don't let your past prejudices or your past ideas or your past perspectives on the real estate market affect your decisions today, because today is much different than it was five years ago. I hope that helped. I hope that wasn't too confusing. And I want to thank you again for joining in and tuning in to the podcast. I like doing these. If you've got something that you want us to talk about, you can go to strict request a topic, and I will definitely be looking through all of those. I want to make sure that I'm providing some value with this podcast. I hope I have if I have if you could leave me a review, I'd really appreciate that. And until next time, hope you're having a wonderful day. Talk to you soon. Ciao. If you're looking for a ton of free resources, well, you can check out the links in the show notes or head to our website restmethods.com where you'll find free guides, help, House Rules, and my ebook on finding the best short term rental properties. Thanks for tuning in.