The biggest real estate mistakes you can make, according to the Property Brothers
Drew and Jonathan Scott of HGTV’s new series “Backed by the Bros” — also known as the Property Brothers — spoke with Quartz for the latest installment of our “What’s Next for…?” video series.
Watch the interview here and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): Interest rates are now above 7%. What effect is this having on the work you guys are doing and what do you see is next in the real estate industry?
DREW SCOTT (DS): A lot of crying. That’s what’s happening. Even the tough thing is anybody who’s looking to, you know, refi or anybody who’s looking to pull equity out of their home, it’s a tough time because you’re not getting what you wanted with the high rates. Granted, it looks like things are coming down a little bit, but this has been forcing people to try and find other ways to create more opportunity to get access to money like converting a garage into an ADU, having a renter in there. A lot of people are becoming landlords for the first time in their lives
JONATHAN SCOTT (JS): And in reality there’s still a huge opportunity for people if they’re looking to invest. They’re looking to, you know, pull a little bit of money out. 7% is not bad. It’s not great, but it’s not bad. But it is sort of at that tipping point where you want to be a little more cautious with what you’re putting your money toward and how much money, how much leveraging you’re doing. And so that’s what we say. There’s opportunity to do well. There’s opportunity to make money in real estate. You just have to be careful.
DS: I just cry for those people who had locked in at like 3% and now they’re coming back out and they’re like, oh God, it’s over doubling right now. But you know, c’est la vie, you just gotta be careful with real estate.
Read more: Mortgage rates are rising again as inflation fears mount
AM: Yeah. So for the folks that bought at 3%, they’re saying that they’re not selling. How will this or how is this affecting them?
DS: Well, that’s the thing. The people that can’t afford a seven or 8% interest rate, they’re gonna have to sell if they can’t afford it. Because you can’t just be like, ‘No, my term is up and I refuse to get a higher interest rate loan.’ You have to finance somehow, unless you have cash to-
JS: Or a money tree in your backyard.
DS: A money tree in your backyard. Yeah.
JS: We saw that happen back in 2008. We saw that happen. There are some people who just over-leverage and they don’t realize that this is when it becomes a problem when your mortgage is up for real and your rate is going up. And so you have to always give yourself that little bit of a pad to make sure that you’re covered.
DS: That’s what our whole new show Backed by the Bros, it’s all about this. It’s all about people who have wanted to try and get into real estate a little bit more. They want to invest, they want to try and provide more for their family. And they get in over their heads because they thought real estate investment is pretty straightforward. ‘I watched it on HGTV, I can do it.’ And so they jump in and all of a sudden they’re over leveraged and they need help to get out.
JS: One of the clients put a hundred grand on their credit card so that they could service the debt they needed to for this property. And we’re like, at what rate? And it was like insane double digits. I’m like, you’re, you are gonna lose everything. And literally it was one of the couples, they had already spent their kids’ college fund their own personal savings. They were totally beeped. Yeah. And so we had to come in and we really, we put our reputation on the line. We use all our resources and we get the project done so they can start having that money come back in.
AM: Yeah. Backed by the Bros on HGTV June 5th.
JS: Oh, wow. Yes. You’ve done research.
DS: You know that off the top of your head. June 5th, 9:00 PM HGTV. But it’s fun for us just to find different ways to inspire people. And I love that people want to get into real estate. I love that people want to try and create more opportunities for themselves. And I also like the idea, you know, with the housing crisis that if you’re looking, whatever city you’re in, there are usually incentives that are helping people get into additional revenue through an ADU through an auxiliary dwelling unit. Having tenants, it’s a great way to sort of offset the crisis as well as help people earn more money.
JS: And there’s a way to have a hell of a lot of fun while you’re doing it. We’re not in this business to use complicated design terms and just bore people that, look, we wanna have fun. We wanna show people that you can really find passion in real estate, but you also have to make sure you’re being smart.
DS: Wait, is ADU a complicated design term?
JS: Yeah. Marginal.
AM: What’s that mean?
DS: It’s like a rental suite if you have like an auxiliary dwelling unit.
AM: Oh yeah.
DS: But it’s a fancy way of saying having a renter turn your garage into something you can rent out.
AM: Gotcha. You guys are seeing people turn in their garages into apartments?
JS: There’s a huge housing crisis all across the country, particularly in the major metropolis cities. And so I do believe that the solution beside finding ways to build new projects, multi-family projects and affordable housing, converting your ADUs, so people putting in basement rental units, people putting in garage conversions, building above their garage for a rental unit. All of these things are incredibly helpful when it comes to solving the housing crisis. And you also like a lot of people, ‘cause real estate is so expensive today, especially in places like New York and Los Angeles, imagine having that additional income coming in for you, how it can offset your costs, your bills, your taxes, everything. It’s pretty incredible.
AM: In Backed by the Bros, you guys are looking at a lot of troubled investments. So you mentioned credit cards being one of the mistakes you can make. What’s another mistake you guys are seeing over and over again?
DS: Well, we constantly, with a lot of the different episodes that we have of different families and investors that we worked with, they’re jumping in before they have any sort of a plan. One homeowner bought all of the appliances and cabinets and everything she could use for a project before she even had the house and knew what she was doing with it. So in the end, she had stuff that was not ideal and she just tried to make it work. Well, you’re not gonna get your optimal rent if you have a suboptimal place for somebody to rent.
JS: Also, whenever I hear somebody say, I’m gonna run my own construction project, I’ll GC myself instantly, I’m like, red flag. Yeah. Because if you have never GC’d before, you have no clue what you’re doing. And as soon as one of your subs falls out, everything slows down, comes to a crashing halt. And so you got, you gotta be realistic. Hire professionals to come in. You’re gonna pay a little bit more for some of this stuff, but it’s worth it in the end because you will save money.