James:
A boom in one corner of the economy can create a crisis in another. Today’s headlines show just how uneven the market has become. AI data centers are impacting housing across the country, commercial delinquencies are climbing sharply, and higher mortgage rates are putting more pressure on fix and flip investors. Today, these stories show why investors need to look beyond whether a market is simply good or bad and understand what’s actually driving demand, debt, and exit risk. I’m James Dainard with Kathy Fettke and Henry Washington. To break down these headlines and what they mean for investors, this is on the market. Let’s get into it. All right, Henry, what do you got for us today?

Henry:
Oh man, I have a local-ish story, but I think the headline carries weight for investors in particular. The story is out of Abilene, Texas. It’s from the Texas standard. And what it talks about is the surge in housing demand in Abilene, Texas. This was a part of Texas where demand has been down. It’s a small town population of 100,000 or less, but there’s a massive data center going in there. The Stargate AI facility is a four million square foot data center complex being built in Abilene. So it’s one of the largest AI infrastructure projects in the country. And to build something this size in the city with just a hundred thousand people, they had to bring in about 6,000 construction workers. Wow. So that’s a 6% increase in population essentially overnight. And those people need places to live. They need places to rent, they need hotels, so they need all this infrastructure.
So it created this demand and what they saw was that home prices went up 9.5% year over year in the market because of this and rents increased in the market because of this. But the problem that this creates is that once the facility is built, they don’t need 6,000 people. They need a few hundred people to run the facility. And so those 6,000 people don’t just stick around and live in town. They move, they go to wherever the next project is. And so you’re going to see an exodus in that town. And the reason I think investors need to be aware of this is because AI infrastructure projects are happening all over the country. There’s lots of data center projects, lots of warehouses being built, and the more AI demand increases, the more you’re going to see this. And investors just need to be aware, you need to study the trends and what’s happening.
This has happened before. It’s happened during the gold rush. It’s happened during the oil rush where people fly into areas where there’s infrastructure or where there’s resources. And then once the resources are tapped dry or the project is done, they leave and demand drops drastically after that. People get stuck holding the bag, especially if you’re buying to catch the boom and you pay an inflated price. When that boom is over, you end up stuck holding the bag. You could cost yourself a lot of money. But the upside is if you time it correctly, you can make a lot of money, but that’s a risky game. And so I just brought the article because all of us as investors, our job is to figure out how the real estate market’s going to pay us. We make a lot of money when we time something right, but it’s hard to time things right.
Sometimes you’re just in the right place at the right time. So you got to know when to get in and you definitely have to know when to get out.

Kathy:
Yeah, it’s a typical boom town and it is really inviting because you hear people say, “Oh my gosh, I have this house and now the rents have gone up and the value’s gone up and I made so much money.” And then people rush in thinking they’re going to get the same without really looking down the road. If you are thinking short term, you better think short term. You better have an exit plan and be very aware of when things are going to shift and get out before that, way before that. But most people don’t. They come in right at the top and then the carpet’s pulled from them and they don’t know what to do. So you’ve got to be so careful. If you’re thinking long term, make sure that there are jobs that are going to be there for the long term. I got caught in this in the oil boom, you guys.
There was no place for people to live. They were desperate. Builders were flocking there to bring on new supply. The belief was that it was going to be sustainable that those jobs were there to stay, but oil could be manipulated and it was, and those jobs just disappeared overnight and there was way too much housing. So I’ve been there, done that. Be in markets that have so much job diversity, that have so many different employers bringing jobs so that if one leaves, the community is not hurt by that.

James:
Do you remember, Kathy, in 2007, eight and nine when there was these gold mine boom towns in the
Dakotas and everybody was going to build up these little towns, I remember. And it’s reminding me of the same thing because what Henry talked about on this article is really, really important because these structures, the housing’s for the electricians, the plumbers, the framers, the construction companies, and they will pay you a big – A premium. Premium. And so you can go out and buy a traditional unit and just run your rents on your normal rents. And it’s kind of like this enhancer for three to four years because if you do want to invest in these areas, there’s nothing wrong with it because you can hit a huge payday, it’s just going to slow down. But you want to look at how many permits are in the area. What’s the timeline for construction? What companies are building out there because they’re usually the big ones too. So they’ll pay you a premium rent.
And then what hotels and amenities are in the area too? Because a lot of times they’ll go to short-term housing because there’s just no hotels. A client of mine bought four fourplexes. It was in 2016 out in Quincy, Washington. Same type of thing, very low utilities, some of the lowest utilities in the nation. They’re building these data centers and she absolutely crushed it. And she brought it to me and was like, “What do you think?” And I’m like, “Well, I mean this looks good, but we ran it on traditional rents.” She bought it at a five and a half cap at the time, which is a little bit low for that area, but she has been doubling up and now she actually just sold them all.

Kathy:
Oh my goodness. Great timing.

James:
And I wish I was the broker that gave her this magical plan. So there is that time and window. You just got to run all your math a traditional way and then you can enhance it. I mean, but it is a good two to three year cash flow run, if not longer.

Henry:
That’s a great point. But I think when people see this boom, they’re thinking quick money. How do I get in? How do I do it easily and make quick money? That’s not the play. If you want to make money, it’s going to take time, effort, and work. If I was going to do it, I’d be looking for properties that I could get at a discount in the path of progress, meaning that it’s either a place in that town that people wanted to live before the data center was built or a property that’s going to be close to the data center. It’s going to be one that I probably get off market so that I can get it at a 40% discount so that it cash flows at current traditional rents, not inflated rents, cash flows at current traditional rents. And then I would be looking to get that thing filled with rents.
Obviously I’m going to try to get the higher rents and then I’m going to be looking to sell that thing because I want to sell before the project is over so that I can capitalize. But if you get stuck holding it, you want to make sure that this thing was cash flowing before the boom, you would hope that it could cash flow after the boom, but you still don’t know because you don’t know how many people are going to leave. So it’s still a little risky, but that’s how I would take it. You got to buy off market. You got to get it at 60 cents on the dollar, 50 cents on the dollar, and it has to make money at pre-boom rents. Then I’d consider it.

James:
If you really do want to jump into this, I think it’s like you have to research before it’s already been announced. That’s when you want to buy

Henry:
It. You need insider information.

James:
And so track permits, track locations, track public proposals, then get into it and just know it’s a very short term thing. But I mean, you can always make money and right away, just don’t, like Kathy says, don’t be the last one to jump in and you’re not making any money.

Kathy:
You want to be the one selling when people are buying, honestly.

James:
We’re taking a quick break. When we return, Kathy’s breaking down the sharp rise in commercial real estate delinquencies and what it could signal for investors. Welcome back to On the Market. Kathy, what do you got for us today?

Kathy:
Oh boy, this is from CreditIQ. There’s some great data on that website. Property Types Feeling the August Heat is the name of the article. It says where distress is showing up outside of office and multifamily. We know a lot of people in multifamily who are in a lot of pain right now, and my heart goes to them. I know just a few years ago they were super stoked. Just exactly what we were just talking about, Henry. It’s like jumping in at the very last minute like so-and-so made all this money and so-and-so made all this money. I’m going in. And it was just too late. So industrial, hospitality, retail and self-storage post 14, $6 billion in new distress. So it’s not just multifamily. It says the maturity wall is getting taller and there’s lots of bricks, big bricks in it. So doesn’t sound great. Doesn’t sound great.
Office still being the most distressed. 10 of the 371 metro areas account for 57% of the full 87 billion balance. New York, New Jersey City, then Los Angeles and San Francisco.

Henry:
Lots of empty high rises.

Kathy:
Yeah, but I bet some smart investors with deep pockets are going to go in and buy those.

James:
Yeah. If there’s runway, Seattle becomes more and more vacant by the quarter. The office, it is not – Really? It’s eerie with how much vacancies there. I mean, Seattle is up 28.2% in vacancies, is the highest rate in the Puget Sound region.

Kathy:
Yeah. And then I love this. It says to air is human, to mod is to bank basically. So loan modifications are pretty massive. It looks like mostly in multifamily, they’ve done the most loan modifications. But what’s interesting about multifamily is the amount of delinquencies have gone up six times in the last couple of years. Not 6%, six times, 600%. I mean, it’s nuts. And I know, again, a lot of our listeners, I don’t say that lightly because I know our listeners are in pain and it’s nothing to laugh about. They are in the thick of it. So you’re not alone, let’s just put it that way.

James:
No, and it’s very consistent across most asset classes right now, right? I mean, I can’t really think of one that’s just like, oh, this thing’s on fire. Everyone’s making money on it.

Kathy:
I would say mine is. I mean, one to four unit is doing pretty good. Right, Henry?

Henry:
Yeah, absolutely. I was just sitting here thinking, I’ve got to go sign docs today for a loan renewal. I bought a duplex five years ago, one bed, one bath units. It was 4% interest rate. Interest rate’s going up to 7%. It’s still going to make money. Obviously not as much as it was making, but it just got me thinking compound that to the people that have these three, four, 500 unit buildings going from 4% to seven, 8% and their cashflow drastically decreasing the value of that property goes down because it doesn’t make as much money anymore. Whereas two units, it’s still valued based on comps and it’s still going to cash flow and it’s not going to kill me. I’m going from five to $700 a month cash flow to three to four. It’s not a big deal. But the larger that project, the more impact that that has, and that’s the crunch people are feeling with a lot of these deals.

Kathy:
One to four units, most people are on fixed rate loans. They’re solid. $18 trillion in equity, in home equity. So one to four unit housing is doing pretty good in my opinion. And the values keep going up.

James:
Yeah. And it’s all the same. It’s like if you get into expensive flips and you have a market correction, it’s like the bigger the deal you get into, if you have a 5% correction on income, value, when you’re talking about million dollar properties, 5% turns into a very big number. And so going big is not always good, right? I mean, if it’s up to me and I could do a bunch of $300,000 flips, I would, I just can’t in my market.

Kathy:
James, are you saying big is not always better?

Henry:
I don’t know that I’ve ever heard you say that. Did you not have a rockstar this morning?

James:
Our multifamily portfolio is smaller units. I mean, they’re 10 to 20 unit instead. And the reason we buy that is because we can actually create value on those because they’re heavy fixers, right? We’re construction guys. So it’s like no one wants to fix a hundred unit building that you have to take to studs. It is a nightmare. And so the construction alone keeps us out of that. But the 10 to 20 have been fine because you can refinance and pull things around. Or when you’re buying heavy value add, your basis is lower. And so the construction is where you’re earning your equity and your basis goes down so you can kind of stomach it a little bit more. But to Henry’s point with the refinance, one thing everyone should do who’s a listener, if you have a commercial loan, call your bank and see what options they have for you because I was shocked.
I had a 12 unit building and this building since day one has been my nightmare building. We bought it, COVID hit, we can’t get people out for a year. We’re eating the rent, the hard money cost, heavy value add, very bad building. Now it turned around, we finally got it renovated, we’re cash flowing, and then my rate just reset to the sevens.
But I called my banker and I’m like, “Hey, look, what are the…” And what we did is we just did, it was a very light low mod. It was like an instant approval. We gave them $3,400 and they fixed my rate at six for the remaining five years of the term. Wow.

Henry:
Done.

James:
I was like, “That’s all I got to do?” And we had to send updated financials on the building. I couldn’t refinance it for that rate. Or if I did, it was going to cost me a lot more. And so you got to communicate with your

Kathy:
Bank. Talk to your bank. Yeah. Anyone who’s listening who’s in pain, just talk to your bank. I had a doozy of a deal back in, I don’t know, 2014. I could go into the details, but a hundred unit building and it just had so many issues that I just literally went to the bank and said, “Here’s the keys. I don’t want it anymore.” And they were like, “Well, we don’t either.” So they took a million dollars off the loan balance and worked with me and were like, “Fix it.” So you’d be surprised at how. And again, in this article, it shows that multifamily, they’re having the most modifications. Talk to your bank. They don’t want it back. They learned. Banks learned in 2009 that it was not good for them to just foreclose. It’s not good. They might do better by modifying the loan with you.

James:
We’ll be right back after the break. We’re going to look at the growing pressure on fix and flip investors as higher mortgage rates slow sales and challenge project returns. Welcome back to On the Market. We’ll finish with my article. Let’s talk about fix and flip. The article I brought in is fix and flip market shows signs of strains as mortgage rates climb. And what this talks about is a survey of 270 home flippers revealed that 59% of them reported an increased days on market compared to the first quarter, including 83% of flippers in the Northwest and 75% of Texas all say they’ve had longer market times. 17% of those flippers said they sold it below their ARV. And honestly, I know it was more than 17%, but the market is shifting around and this article’s from HousingWire. The thing that I’m seeing is just like you were talking about, Kathy, with the commercial, it’s the same thing.
We saw a little jump in the market in the first quarter. Henry, didn’t you feel this little jump in the first quarter of the year?

Henry:
Yeah, everything was selling fairly reasonably, and now it just feels different. Things are still selling. It’s just, A, it’s got to be the right product for the right buyer. It’s got to be done extremely well, and you better have some margin. I think a lot of investors that are flipping houses across the country, I would be willing to bet that over half of them are probably new to the business in the last one to three years. And unless you’re doing volume like 20, 30, 40, 50 a year, it’s hard to gather up that experience. I think people are losing money because they’re buying very thin deals. I am not making as much profit as I used to before, but that’s because I underwrite so, so conservatively. I was averaging at one point during the time you were mentioning, James, I was averaging about $50,000 net profit per flip.
Now that’s probably gone down by 10 to 15 grand, the average, because you’re right, if the article’s correct, we’re not selling at our underwritten ARVs. We’re selling, we’re taking lower offers and we’re giving concessions and all that’s cutting into profits, but we are maintaining profitability because we’re so conservative in underwriting.

Kathy:
I know some pretty experienced flippers who are getting it handed to them right now. They are losing a lot of money and I would guess that they know how to do their due diligence. I don’t know. Maybe it’s your market is more stable and other markets are less stable.

Henry:
That’s fair.

James:
But it also comes down to price points too. Henry’s average flip is what, like 350 to 400 on the dispo?

Henry:
It’s lower. Yeah.

James:
When you’re flipping a house, it’s typically you’re four to seven months in that project. And so for a housing market to slide five to 10% in that is usually aggressive underwriting or you bought something off peak. But when you’re dealing with something, and let’s say Henry’s selling it for 300 grand and it sells for two and a half percent off, that’s going to be about his margin on the deal. Whereas on more expensive markets, the two and a half to 5%, the more expensive stuff swings a little bit more. Oh,

Kathy:
It fluctuates

James:
Dramatically.

Kathy:
Yes.

James:
I mean, because you saw it even San Francisco or Malibu, right? It jumps and goes through these cycles. And that’s where flippers get in trouble is because we’re short-term operators. We’re in and out of a deal. We’re hitting a market cycle and timing is everything in this business. And the seasonal slowdown is a real thing.
People forgot about the seasonal slowdown after COVID because there was none. But before it was always this slow, steady market and you had to adjust your comps when you’re buying something in the beginning of the year, you would know that you’re going to sell it for a little bit less in the middle of the summer. And now it’s a little bit more than a little bit less. The swing’s like 5% when you’re dispoing out and now you have to pay attention to when you’re buying and when you’re dispoing. Those are two of the most important things right now. Are you selling in the season that’s hot? And that’s what happened is the market was slow after the tariffs. We started seeing it pick up in December, January. Everyone gets FOMO and the FOMO will crush you.

Kathy:
Because yeah, you come in when the timing good, not thinking about what it’s going to be like in six months or a year. I have a really close friend in the San Francisco Bay Area who is doing a massive flip, wanted me to invest in it, and he just got a million over what he expected. So I would’ve just, oh God, I would’ve made a good return on that. But if it was last year, maybe not. Maybe it would’ve been a loss. It’s just so volatile and it freaks me out.

Henry:
I mean, you’re right about my market. There is demand here. It’s not great. It’s not like it used to be, but I’m also very strict about not doing deals that don’t have more than one exit strategy. And so yes, most of our flips are selling and they’re making money. I do have two on the market right now that have been on the market for a long period of time, but they still are within my underwriting window because I add two to three months to my hold time for every deal above what I would normally add just for situations like this. Both of these houses, I could throw a tenant in it and it would either cash flow or break even and I could hold it until the time it’s better. And so having multiple exits in a tough market when you’re a flipper is huge.

James:
It is key because I can tell you right now, Kevin, you only have two on the market.

Henry:
I only have two on the market that aren’t selling. The rest are selling.

James:
I got 15. My average payment is $8,000 a month on when you blend it all together. And so what do you do when you get in that situation though? And that’s where I really wanted to bring this article in, is how do you weather that storm? Because –

Henry:
Cash. You need cash.

James:
Cash and debt. Structuring your debt and reducing your costs so you don’t have to make an irrational decision. And so what are we doing right now? Well, ones that aren’t selling that we know are below market, we’re going to refinance them and get our rate down from 10 and a half percent down to 7.5%. We can also go from construction insurance into rental insurance at that point. So there’s things that you can do to knock your cost down and other things that the question you always want to ask as you’re refinancing this with any lender, whether you go into a DSDR or you’re refinancing into another hard money loan is, can you get an interest reserve if your deal is still good enough? Because a lot of where people are feeling the pinch is they still have equity in these properties because they put money down, the market maybe has slid, but they’re running out of cash and the cash is what’s really beating them up and they’re cutting price and they’re not seeing the movement still.
And so as for that interest reserve, it’s a really important question to ask when you’re refinancing because right now I’m refinancing one property. It’s been a problematic property. It’s the most expensive one I have. We’re almost through it and the lender is actually giving me an extra five months of interest reserve refinance into that loan. So now I don’t have to make that payment for another five months because the equity position’s so good. And things like that can release the pressure and pressure is what makes us make bad decisions. And so if you have scaled out, just like the multifamily flippers, they started scaling too. They’re doing one or two and they went to five or six, and then that’s where you’re feeling the pain and you got to refinance, cut the bleed. And then also the best way for you to offset this is to keep buying.
That is the number one lesson I’ve learned in real estate. You have to always be buying because the deals you’re buying now are a lot different than they were 12 months ago. I have this many homes and I just closed on one yesterday. And as weird as that sounds because you’re like, oh, I just want to get through it. The deal was just so much better. I got to do it.

Henry:
It’s not weird. Real estate’s a cycle. Everybody says it, but nobody thinks about it. And when it’s hard to sell, it’s typically easy to buy. So if you’re not buying in this time where you’re struggling to sell, then you’re killing your profitability six to eight months from now. You have to be buying because you’re going to get better deals now. If you hold off because you’re bleeding right now, in six to eight months you start buying again and that’s going to be the time when it’s good to sell. So then you’re going to be paying more. You’ve got to buy now.

James:
Well, you guys, I know the market’s been shifting. There’s a lot of things moving around, but I think the most important thing is you just want to look at how can you structure your debt, communicate, communicate, communicate. It’s not just one plan. You can shift your plan around, but you got to ask the question. And the question is, bank, what can you do for me on money and how can I reduce my expenses? Those are the two most important questions to ask right now. Then how can I get more money to go buy these great deals? We’ll leave it here today. Kathy Henry, it’s always good to chop up with you on the latest headlines. Follow On the Market wherever you get your podcasts and subscribe to our YouTube channel for more real estate news, analysis and investor strategy. I’m James Dainard. Thanks for joining us and we’ll see you next time on On the Market.