Ep 36: How do Construction Costs Factor Into the 2022 Market?

The equation is simple.

Navigating our 2022 market is a whole nother thing!

Financing
Supply
Demand
Labor
Materials

Each one of these variables is dynamic in its own right. If one of the 5 changes course, however, it will impact the other 4.

The “how” is not always known at first.

Over the course of time, the answer will reveal itself.

When it does, the best will be able to pivot and the weak will struggle to survive.

Let's dive into each variable and how you should look at them in relation to one another.

Before we do, I want all of my listeners to know that this is how I see it.

The beauty of real estate and being an investor is we can all see things differently and there are countless equations that can lead you to profits or to ruin.

That's just part of the game.

Let's get started

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Full Transcript

Welcome back to the value driven investor podcast where we forge value driven investors on a mission to live life on their terms. No matter where you have come from or where you are going, becoming a value driven investor is in all our best interests. Because becoming financially free allows us to focus on what matters most fulfilling our purpose, our community of value driven investors is committed to showing you the way with the support of this community, you are sure to reach your goals for all of us in the value of an investor community, there is no greater gift than the gift of giving because together, anything is possible. We're back on the value of an investor podcast and today, we are going to talk about how do construction costs factor into the 2022. Market? I will tell you this construction costs are one of the leading indicators of inflation. Construction costs consists of a couple different things. Number one labor, what does it cost for someone to show up on the worksite and build the product that you're going after? Number two materials? What are the material costs? What are the material costs for the foundation for the flooring, for the framing, for the cabinets, for the floors, for the lights for the appliances, I mean, the number of materials that go into building a home is mind boggling. And all of that is going up like a rocket. The costs are ridiculous, people are having a hard time builders are having a hard time. subcontractors are having a hard time suppliers are having a hard time. Everyone's having a hard time grasping what we probably haven't seen in a long time, which is just to me an obvious indicator of inflation, inflation in everything, everything costs more. And everybody feels like they have more money. So the big question is, as a builder, as an investor, as a developer, how are construction costs factored into the 2022? Market? How do you know if you're making good decision? How do you know where things are going to head? And how do you position yourself? Now, I don't sit here and think that I have the perfect answer. Because I truly don't believe that there is one perfect answer to this question. And there's so many different variables that go into thinking through your position as an investor, as a developer, as a builder in today's market, but I do know that there's some fundamental things that you need to think through, no matter what position you're in, or what equation you're using, to navigate today's waters. And that's what I want to talk about today. And really, today's conversation is a conversation that I'm having with myself. Because when you hit markets like this, which I believe, you know, we're at the top of a market now, how far does it keep going up? I have no idea. What I do know is I just saw Bitcoin hit $69,000 A coin. And right now it's touching 40 and sometimes going under $40,000 A coin. And that's a huge stumble. Now, the next question I asked is, is our real estate market? Is our construction market? Is our development market at 69,000? Is it going to keep going up to 100,000? Like Bitcoin? Everybody thought Bitcoin was gonna go to 100,000? Or is it going to tumble? All the way down? 40% 50%? And how are we going to handle that? How are we going to survive that? Because everybody in cryptocurrency, everybody in Bitcoin is wondering how am I going to survive this 50% loss in value. And that's what you always have to be thinking about. When you're an investor, you always have to be thinking about, okay, the times are fantastic right now. feels almost too good to be true. material costs are going up, labor costs are going up, financing costs are possibly going to go up because interest rates are gonna go up. Supply is short, can barely find any of it and the demand is through the rough.

What do I do? How do I navigate? And these are things that you have to be thinking about literally every single day. If you're a builder, if you're a developer if you're running a business You have to be thinking about these key fundamentals. And what are they? The key fundamentals that you always had to think about are financing? How are you getting your financing? How does your financing position you for the future? And for today, the next thing you have to think about is supply. What is the supply? Like the supply for housing in general, since that's my market, that's what I developed. That's what I'm going to talk about the supply in commercial real estate, the number of multifamily houses, industrial, all the different asset classes in commercial real estate, what is the supply? Like? What is the demand for that supply? Right now, in single family residential, I think across the country across North America, demand is through the roof for single family residential homes. Now, that can be single family rentals, or that can be single family owner occupied residents. Either way, people want to be in a single family property, that can even be apartments, the demand is through the roof, and the supply is tight. But now if you're a developer, you're a builder. You have to go even deeper, deeper into the equation. And the fundamental is labor. What is it like to get labor to build these products? How expensive is that labor? How reliable is that labor? And then finally, materials, materials, lumber? How hard is it to get lumber? And how expensive is it? How hard is it to get? countertops? How hard is it to get? Lighting? How hard is it to get appliances, and Windows, and garage doors? All these things are difficult right now. But these five pillars are five things that I'm thinking about all the time. So let's go over financing, supply, demand, labor, and materials. These are five things that you always need to be thinking about, no matter what if you're in the real estate industry, especially. And you're an investor. So each one of these variables is dynamic, though in its own right. If one of the five changes course, it will impact the other four. How is not always known at first, over the course of time, the answer will reveal itself. When it does the best investors, the best entrepreneurs will be able to pivot while the weak will struggle to survive. Let's dive into each variable and how we should look at them in relation to one another. I think this is really important. But before we do, I want you to understand that this is just how I see it.

The beauty of real estate, the beauty of investing, and being an investor is that we can all see things differently, we can all create our own equations. And there's countless different equations. It's It's the beauty of real estate, it's the beauty of investing, investing is that it's unlimited, the number of equations and the number of ways you can get from point A to point B. But what proves a good investor, from a not so good investor is how they navigate the waters what equation they use. Because a great investor, their equation leads to profits. And a not so great investor, their equation leads to ruin. But that's just part of the game. So let's dig in here. Financing. What do you have to think about in today's market, when it comes to construction costs and financing, you have to be able to think about financing, I believe in a short window, because one of the best assets you can have his control. If you can control your financing, which allows you to control your material costs and your labor, then you are in a good position. If you are not able to control your financing, and you're using high leverage, and you're using expensive money like hard money with high interest rates and short terms, then what it doesn't allow you to do is be flexible. And what you need to do right now is you need to be flexible because a lot of people a lot of developers and builders right now are trying to manage materials and they're using their financing to manage materials. What do I mean because materials It's a moving target, literally, lumber can be down 15%, up 20%, down 10%, up 25%. All the materials can be all over the board. And they're always changing right now, and builders are going nuts because they've never seen an environment like this, where material costs within 3060 90 days can fluctuate in such a great way. I mean, it's just it's mind blowing. Because when you build a property, especially in commercial or even residential, you're talking 369 months. Well, if things are if you bid a house, and then three months later, you go to buy the product, and the price isn't the same and it's gone up, what are you going to do, what you have to do is you have to try to control your material costs. And that means, just like airlines like delta, they buy gas in bulk, because they know that they can buy a large bulk of gas, they can store it, and they know what their fixed cost will be for a duration of time. That's just what a builder is trying to do as well is they're trying to buy the materials when they bid them so that they can lock in their pricing. And then they can give that pricing over to the client. Now, if they don't do that, if they don't lock in their pricing, if they don't buy the materials at the time, when they bid the materials, then what happens is they leave themselves open to fluctuation in pricing. And if they leave themselves open a fluctuation in pricing, then in three months, six months, nine months, when they actually need to order the materials to get the project done. That cost might have gone up 10% 15%. Now, the problem with that is, yes, you can have a contract that states, the customer needs to absorb those costs up to a certain point, like let's say, if the cost goes over 5%, more than what you bid it at, then the customer needs to bear that. But the problem with that is not every customer can bear that cost either. So if all of a sudden, their cost goes up 10 15%. And they shut the project down, you as the builder, or you as a developer, are in trouble. And so you have to think about all the different variables. When you think about materials and financing, they're very closely correlated. On top of that is labor, obviously, your labor needs to get paid, and then you get paid on a regular basis. Most of the subcontractors are living paycheck to paycheck, or they're overextended. If they have 567 jobs going right now. And they need to get they need to get paid. So you need to have the financing, and you need to be able to have the means to pay them after the work is completed. Now, this happens in multiple different ways.

If you have draws on bigger projects, then you're going to pay your subs on a monthly or on a predetermined basis when those draws are requested, they then get paid. And that's usually within a 30 or 60 day window of work being completed. Now there's a lot of different things that we can do in order to work things out with subcontractors, so that they get paid in different ways, meaning like maybe a subcontractor will carry some of their costs, maybe okay, they want 50% upfront, but then they'll carry some of their costs until you get closer to the end. Maybe some subcontractors can afford to do that. And they need to get paid immediately after the work is completed. You know, so there's a lot of different variables that you need to think about when it comes to financing and labor. Now when it comes to supply and demand, obviously, supply and demand are huge supply and financing isn't really as big of a deal. But it does play a role. Because if the supply is tight, you need to make sure that you have your financing set up to be able to act fast. Now not a lot of investors are able to do this because the quickest way to act on an opportunity when the supply is tight is cash. Now cash can be $100,000. It can be $500,000. It can be a million, it can be 50 million, it could be $100 million, depending on what scale you're working at. But cash will always be the quickest way to capture an opportunity when supply is low. Man How does find financing and demand correlate when demand is exceptionally high like it is right now. Being able to to leverage your financing, so that you have less carry, so that maybe you have less skin in the game. Because the biggest thing you have to think about when it comes to financing is risk. If you're borrowing money from someone, or if you're using your own money, what is the risk that you're going to get that money back. And the reward is a profit on top of the actually just getting the money back. So when the demand is high, and supply is tight, like we're in right now and 2022 market, you know that if you get your hands on something, an opportunity, and it's the right opportunity, and you have the right equation, and the demand is high, odds are, you're gonna be able to sell that product in a reasonable amount of time. So you're might be able to negotiate more reasonable terms with your lender. Because they know that now you have an accepted contract, you have people buying the product before you've even started building it. And you can get better leverage. Now, hopefully, I haven't lost you. Because I truly went through this the best way that I could, and I could talk about this, I could take these five variables. And I could paint different equations and attach them in 100 different ways. But this is just some of the things that you need to think about. How does your financing affect your supply, which affects your demand, which is impacted by labor, which is also impacted by materials? These are the five things you always have to be thinking about. And you always have to think about how do they relate with one another? How do they impact one another? What can you do? What pivots can you make in order to leverage your financing, take advantage of opportunities when they're tight. Find Buyers before you even build the product because the demand is high. Depend on great Labor's because you have great relationships. And shop the heck out of materials. So you can find the best materials at the best cost in a inflationary market. Just thinking about this is overwhelming. Now imagine thinking about this, when you have 1236 12 projects, when each variable could be $1,000 $10,000 $100,000 millions of dollars. That's where the stress comes in. That's where the risk comes in.

That's how construction costs. And these five variables factor in the 2022 market. If you have questions, if you have specific questions about these five variables and how you're thinking through them, hit me up. I want to know the equation that you're coming up with, I want to know the perspective that you have. Because together we can think through this and we can come up with one of the best equations to lead the profits not ruin. Thanks for listening to the value driven investor podcast where we lead by giving for more information about our community and what's new visit value driven investor.com

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