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The Fargo Edge: Mastering Your Market
Kyle Reedstrom (00:00)
Hey, what is up? Kyle Reedstrom here. I'm back for another week of the Midwest Invest Report. We're glad to have you guys with us. You guys, of course, the Midwest Invest Report exists for you to learn more about your market, the Fargo -Moorhead West Fargo market. I don't know if I say FMWF or if I just stick with FM market, but you get the picture. We're learning about our market here in Fargo, North Dakota, the greater area. And you guys, I've been doing this a while.
been in the real estate game for 10 years, sold over a thousand houses. And I wanted to create this show for value for people that are out there that maybe don't do this every day. You can listen to this, get market insights and reporting from me on the Midwest Invest Report. So we're glad to have you here. Excited for today's show. As you guys know the rundown, we're going to get into a little market minute here in a bit. We're going to get into our deep dive topic, which is house hacking. I'm actually going to go over how to improve.
cashflow on a house hack or investment in general. That question came up recently and I want to touch base on that. And then we're going to end the podcast like you like we always do you guys welcoming you to in. We want to invite you to subscribe to our Midwest Invest Report newsletter. We are really excited about what we're putting out on that more and more resources, different deep dive topics. I think this topics this week was a challenge to do if you're a homeowner. The 90 day house challenge. You got to check out the newsletter to see it. There's some good tips and tricks.
and also other resources we're using on a daily basis to learn more about real estate in our market and even beyond. You know, that newsletter gets into real estate investing and other parts of real estate that you might be curious about. This is what we do. This is what we live and breathe. Our team Midwest Invest Realty Group, of course, helps buy, sell, build, or invest in property in this area. And if you're looking for a go -to, we'd love to talk to you. But let's get into it. I want to talk about our Market Minute.
current state of the market. I'm gonna try something new. I want to bring you into my screen here. Let's see if I can get this shaped up here. Boom. And hopefully you can see this.
Boom. Okay. This is, if you are listening to this, obviously this will not be applicable. I'll talk you through it, but I wanted to show you some quick market stats. I like to pull right from the source. I'm looking at January, 2024, the entire MLS, I go to closed sales to get a gauge of this. 182 closed sales in January, 2024. That doesn't mean anything to you yet, but if we look back on 23 stats, it was a 140. So as we see 140 to 182, we are.
up in closed sales in January. As you can see, January and February are usually the dip in the market each year, and then the market starts to pick up. So as you can expect, we're probably expecting this to spike up a little bit in February here. Already felt some more activity in the market as we're talking. So maybe this will turn upwards. But if you look 140 to 182, so we're up year over year. And 22 are
bottom of the market was actually not January. January was 235 closed listings and the bottom was 190 in February 2022. So compared to February 2022 in 24, we're down about eight closed sales, but we're up from last year. So you guys, this supports a little bit of what we were expecting. I'm going to get off the share here. This is export. This supports a little bit of what we were expecting for this market this year.
which is that it would be a little bit of an improvement as a market because interest rates are coming down a little bit. The hangover of the big interest rate push in 2022 and 2023 is kind of over and we're seeing the market get a little more active. And so those stats support that. I hope that helps you know a little bit about, hey, what's going on here? What are the actual facts of our market? What's that? 140 divided by, that's about 42 more homes.
divided by 140 if I'm a mathematician, that's up about 30 % from last month, from last year's January. You guys get the picture. So the other thing that happened with the market is I had a question of somebody that was asking me about special assessments. Now, special assessments are an interesting thing in our area. Hopefully you know what they are. If you don't, when a developer goes and puts together a development where they put homes in, there's a large cost of infrastructure, things like roadways, gutters,
sanitary sewer, storm sewer, electrical utilities in general. And there's a large cost involved with that. And in Fargo, our neck of the woods, lucky you, the developers assess those costs to the individual property owners and they're called special assessments. So each property has a lot cost. If you build a home on it, there's a home cost those together, but then there's also a special assessment balance tied to each property.
If you don't know what I'm talking about, a real estate agent is a perfect resource for you to talk to more about this. And I always like to say there's nothing special about specials because it's extra money we have to pay to kind of pay off that development. And as that balance goes down, it's eliminated. Now the question that came to me was, should I pay off my special assessments, my special assessment balance? Now, generally when a home is transacted,
that special assessment balance just stays with the property. So the next buyer assumes that. And as that gets down, you know, some people consider, Hey, should I just pay this off? Yes, it does help your monthly payment go down because now you're not paying that installment on those special balance, that special balance every year. Um, but generally speaking, the homes in our area are valued with a special assessment balance tied to them.
And let me walk you through this example with you. Let's say there's a house for 250 ,000 that was built in a neighborhood. And most of the time, those neighborhoods, all the houses are kind of built around the same time within a five -year period generally, okay? And so this house has $250 ,000. This is a $250 ,000 house and has about $30 ,000 in specials. We like to just kind of call that, hey, let's call that 280, because that's that price plus specials. Now, if you're the homeowner that goes,
And wants to pay off your specials. Technically, right? Your value, the consumer would say, Hey, that, that house is more valuable because the specials are paid off, but we don't always see that be the case. The way it looks is much more kind of the sticker price on the market, because all of a sudden you're going to expect that that your house with zero specials is, Hey, can I be worth 280, 285? And while all the, all these other properties are listed at 250, 255, 260.
with special balances, it's just gonna go ahead and look like your house is more, is the same house for just more money. And unless you're real estate agent or you are doing a lot of marketing around getting that word out that there's no specials on this property, sometimes it can detract from the activity or even miss filters of the activity on this. And so we've seen this with different homeowners that have paid off specials, rolled them into the loan at the time of purchase.
It makes a lot of sense if you're going to live in the home for a long time, you guys. So that the, so as the other houses pay off their specials, those price points kind of creep together and they end up being the same. But if you're creating a big difference in the price of your house versus the others with specials and without specials, it can be a little bit negative. And I know I got in the weeds a little bit there on special assessments. I hope you tracked with me, but it's just a cool conversation to have and strategy.
with homeowners and that came up recently. So I wanted to bring you into that, but without further ado, let's get into what we want to talk about today, which is house hack strategy. We're back on that topic. We're talking about that all quarter one. And I got a question that came up on improving cashflow for my investment. Okay. And so this could really apply to any investment that you have out there, but we're going to talk about this specifically in the house hack realm and.
This example would be, Hey, I house hacked a three plex. I moved into one unit and I've got two other units with tenants. This could be a four plex. This could be a duplex, or even if you have a rental property that's currently has tenants in it and it's just, uh, it's just being rented normally. Um, this has that applicability. How do I improve my cashflow? So first I want to take you back to the, the easy math here. We know what cashflow is income minus all your expenses. What's left after that as cashflow.
Okay, so there's two components to improving that cashflow and simply put it's lowering expenses or improving your rents, which is going to be your income. And so improving income overall. And so if we're going to dive in to how I answered this, I love to start with expenses. And I like the analogy someone uses of, you if you have a bridge, you can either raise the bridge or lower the water or do both. There's a gap that you create in between.
And so what can you do when it comes to lowering expenses for your investment? And you guys, I want to side note here, so many investors that are out there, when they see an investment, they just put it on the shelf exactly what it is. But if you're a real investor, you look at a property and you start to ask yourself these questions. How would I lower expenses on that specific investment? How would I improve income on that specific investment?
because that's how you're going to be successful at investing. You might buy a house hack property that on day one or even year one, you're not making any gain. You're not making any cashflow, positive cashflow each month. But as you execute a three -year plan to lower expenses and improve rents, then you can get that investment to where you want it to go. By the way, improving an investment has exponential...
value for you when it comes to home values later on. It's worth the effort and the ROI when it comes time to sell or pass that investment along because it's set up, right? You've been doing the work. So I really love this conversation. Let's get back into lowering expenses. When it comes to lowering expenses, I kind of have three down that I wanted to share with you. And that goes, the first one is insurance.
So what are the things we can change? Generally taxes, we're not going to do anything with taxes. Can't do anything with taxes that pay them on time so that you're not paying extra, right? But insurance has been a wild world lately. Insurance rates have gone crazy in different areas. Different carriers have jumped where others have gone down. So you want to be dynamic in keeping relevant quotes and relevant carriers covering your property. If you're just set it and forget it with your insurance,
I definitely think this might be your prompt to look into getting some different quotes from different carriers, because a lot has changed in the last 12 months. And so check out your insurance, understand what's covered. Do you need everything that it covers or not? That's number one. So many people just go blind with this stuff. And then also check and see if your insurance agent would look into other carriers that could be applicable and even change the price.
There's a situation that recently happened where my insurance agent looked into this and saved us 500 bucks a year. Now that's not like crazy, but when you start doing a multiple of these tactics, that definitely adds up. Okay. Number two for lowering expenses is gotta be utilities. The number one thing on our expense sheet for rental properties is how do the utilities work in a perfect world? You guys, your tenants that are living at the property are going to be paying most of their own utilities.
Now, not every property is set up that way where the heating system can be controlled or is separately metered for every person to pay their own bill. And so it's easy for owners to get stuck into, I'm paying the bills. Most common is I'm paying the heat, I'm paying the electricity, and I'm paying the water. And we recently learned about something called rubs ratio, ratio utility billback system. I might be getting that wrong.
Just wanna make sure, I won't look it up now, but rubs, look up that when it comes to owning property, larger complexes use rubs in order to bill back the utility costs to the tenants that are using the utilities. If you set the correct expectation with your tenants, this is a really easy thing to execute, especially with new leases coming on board. And you guys, this one is a major way you can lower expenses. There's a certain property, a fourplex that I own where,
When it comes to utilities, we were spending about $150 a month on water. We were spending about $60 to $70 a month on electricity. And then we were spending probably close to $200 to $300 in the cold months on heat. Guys, that range that I just described is like three, $400 to $600 a month that we could be now moving on to the people that are living in the property. You might be one of them for a house hack.
but at least that's getting ratioed and splitted between the people that actually are paying that. Now, if they came in knowing that I'm gonna pay rent and my utilities are included, that's hard to change that up mid -lease sometimes, but definitely an expectation you can set for the next lease that's coming in and could be a really great part of your game plan. That's probably the fastest way I've seen people get to cashflow really quickly is switching up how the utilities are paid. Okay, that's even with garbage, by the way.
garbage, you know, we have a dumpster at one of the buildings and that's 500 bucks a year. I think it's even more now and that's gets split because everybody's using that. You guys, this is such a dynamic way for you to think through how you can do this. And the last one is kind of a intentional tactic and that's budgeting for capital expenses. Each property you're going to buy. If you're in this real estate investing game is going to have capital requirements. It's going to have capital.
Uh, things that need to be improved on the property. These properties are slowly wearing down. It's just part of the game. And so how can you not let the capital expenses drive the bus all the time? I want you to ask yourself that question the way that we do it, the way we wrangle that capital cap X is what we call it. That cap X monster into its cage is when something comes up, if it's not an emergency, now a furnace goes out. That's an emergency. There's water in a unit. That's an emergency.
But hey, if we have an electrical item that needs to get taken care of, that's working okay now, how can we budget for that in the future and put that on into our expense model for later on? How can you say yes, when, when it comes to capital repairs? I think what people get caught into, especially early real estate investors is when something comes up and your property manager lets you know, or you figure it out, you just go to the hardware store and fix it immediately. Instead of prioritizing it to,
I need to do this now, or this needs to be done in the next 90 days, or this needs to be done in the next six months. And I'm going to allow for a certain amount of capital improvements on the property each month, instead of having that one month where all of a sudden we spent $1 ,000 on improving the property and we weren't planning on it and there goes our cashflow. You can plan to cashflow first on this stuff if you have intentionality with it. I hope that one hit.
Okay. So lowering expenses, I'm just giving you three, but insurance quotes. Definitely check that out. Utilities, check out rubs ratio, utility, billback system. I want to say it's something like that, right? That's a really quality, cool thing. Um, and then budgeting for your capex budgeting for your capital expenses that the property requires. Okay. Okay. Let's move into the other part, which is maybe more of a fun part, not looking at your bills and your expenses, but trying to improve the income of the property. Okay.
So the first time I moved into a property, Fourplex, it was underperforming. And the easiest thing for me to do when I looked at it was say, Hey, these are the units are under rented. The person that owned it just didn't raise rents for a long time. When you have really quality tenants that might make sense, but if your property is not performing, it might be time for you to have those hard conversations. And when I moved into that property, we actually created an 18 month rental increase program that I had to let everybody know about.
and let them react to it, where we raised rent three times in 18 months. So essentially we raised rent right away. We raised it six, no, we raised it six months from when I sent the letter, then at 12 months and then at 18 months to get the rents where we wanted them. And it was aggressive. It was like 70 to a hundred dollars a unit.
That's shocking. A lot of tenants didn't love that, but as I was having conversations with people, they understood that there hadn't been increased in a while and they understood that this property need to perform for me to be successful at that. So like I said, you might have to have those hard conversations, but boy did that investment look different after we were able to raise that income, right? And partner with doing some of these other tactics. The other part of...
how to raise revenue or income for a property. I've seen people get creative with separating out amenities. What do I mean by that? Certain properties have amenities like garages and storage and laundry. Okay. If these are common items around, I've seen people monetize these. I don't love this tactic, but it can be a tactic, especially if you set expectation for upcoming people. So could the garage just be a separate item if you have other parking where?
You can rent this unit for this price, but if you want the garage, it's an extra $75 a month. Okay. Or if you want the extra larger garage, it's more right. There's sometimes storage on properties. This doesn't have to be guaranteed for the people that are renting it. You can keep that locked and say, Hey, we do have storage down the hall. If you need to use that, that's an extra $40 a month or $70 a month. And then laundry is if you can get the coin operated machines or more modern machines where there's pay that stuff actually stacks up for the right.
if you're in the right building, right? Right. Opportunity for an investment. So check into separating out amenities to create more income. The last one is the one, the last one for income increases is the one we've been doing a lot, which is we've actually been taking units that are empty and furnishing them and turning them into midterm rentals and short -term rentals. That's a whole nother topic that I'd be excited to talk about and we will get to, but you guys, this is an amazing way pivot a pivot that.
investors are using to take their current units and really increase the cash flow on these. And usually it's just the pain of getting furniture, getting amenities to put in these, getting furnishings, getting all the little things in the kitchen, doing all those things to get a unit fully furnished. And then you can speak to a different audience, which is midterm renters, 60 to more contract style work or nightly stays through Airbnb and short -term rentals.
So you guys, that's the rundown on how to increase cashflow. These are just a few ideas, but I hope it got your mind working. Again, if you're getting into that house hack and it's not where you want it to be as an investor, I want you thinking about these
Okay, gang, I want to get into the last part of today's show, which is our journal prompt. I always love us being thoughtful about what's going on in our world. And you guys, sometimes I think we get inundated with information. And so my question to you is, what are you reading right now? And what are you listening to right now? Hopefully it's this, right? But I also want to challenge you and say, I don't want you just skipping around and listening to a bunch of things.
that aren't applicable to your current goals. One of the best things I've heard as advice was when you're focused on something specifically in your world, something you're focused on, you need to be making sure you're reading and you're listening to podcasts and YouTube videos, whatever is aligned with that. For example, if I'm really curious about budgeting and I'm in a budget phase of my life, I don't need to be listening to a multifamily real estate podcast necessarily.
I love it, it's cool, it's fun, but it's not gonna be applicable to my exact goals right now with budgeting. I have a sticky note on my desk here that says my word of the year in 2024 is habits. So when I'm thinking about what should I listen to, I don't just wanna pull out of the bag and see what comes up. I wanna try to read books and listen to podcasts around habits because that's the word I'm feeding on this year. So I want you to ask yourself, are the things I'm listening to and reading in alignment with my goals that I have set for myself?
Okay, that's the question. I hope you feed on that. I hope you tweak your game based on that. You guys, I'm gonna end the show saying, hey, I'm glad you're listening, but I really want you to subscribe to our Midwest Invest Report newsletter. We're super excited with the value that we're packing in there. We're asking questions. We wanna hear from you on that newsletter because we wanna keep bringing the topics that matter to you. The Midwest Invest Report exists for you to know more about your market. You guys, it's been a pleasure being your host.
Again, I'm Kyle Reedstrom. This is the Midwest Invest Report. See you next week.