Why I Said “No” to This Real Estate Opportunity

Picture of by Dr David Phelps

by Dr David Phelps


 lot of people ask me, “How are you able to differentiate between a good and a bad real estate investment opportunity?

Based on the current economy and the marketplace, how do you filter out the bad deals?” 

With Freedom Founders, we have a lot of member capital that we're able to use as a leverage point. This means we can provide the capital that a lot of real estate investors and business owners need to make it in their market. 

Whether it's single family houses, multi-family, self storage, mobile home parks, retail centers, or whatever it might be, they need capital, and we provide that capital. That means we have a lot of potential suitors who want capital. 

New Deal Alert (Real Life Example): 

Let me give you a quick example. I'm on many mailing lists, and I got one the other day. It caught my eye and said the following: 

“Greetings from [XYZ] at [XYZ], Capital Investors. 

New deal alert! Build To Rent in one of the Nation's best MSAs (Metropolitan Statistical Areas) – Phoenix, AZ. One time investment. Lifetime cash flow. Register for the investor webinar…”

I'm sure if you're out there in the real estate space, you get something similar all the time but…


How to Filter Signal vs Noise – Finding the Right Needles in the Haystack.

I get so many requests that, over time, we have created filters. These are filters that allow the good stuff (actual signals) to come in while blocking out the bad stuff (all the noise). As you can imagine, there is way more noise than there is a signal or good opportunities. 

One of the ways to create filters is just to have the opportunity over many, many years, (in my case, 40+ years) to invest and learn, to be discerning and apply due diligence, asking the right questions and participating in the underwriting, so much so that it becomes part of your DNA. 

It becomes part of your vernacular. Just like anything you might do in life, when you do it over and over again, you just become accustomed to knowing what questions to ask. 

This is a new game for people who haven't invested in real estate. 

There's always a place to start learning, but this would be a bad market right now to be learning on your own.

What I'm saying is we've topped out in the market. 

Does that mean that there are no good investments? 

Of course not. 

There are always good investments, but the fact is. most people don't have a comparative advantage

I get to look at a myriad of investment opportunities over a month's period of time – hundreds of investments. But we have filters, so I don't have to look at all hundreds of them. 

We curate those down to the top few, meaning there might be four or five out of the several hundred that I feel are appropriate for the Freedom Founders group.

Even then, we do a deeper underwriting and due diligence. 

We invest a lot of money to ascertain for our members, does this particular investment meet the mark? 

Dr. David Phelps discusses real estate investment filters.
Dr. David Phelps, DDS of Freedom Founders

We do background checks on the principles of the operators, the managers of the investment opportunity. 

We have a securities attorney underwrite the entire offering to make sure it meets market clearance in terms of the legal documents themselves and of the economics of the deal. 

We find out, does it make sense to invest in this opportunity at all? 

Factors to Consider When Looking at a Real Estate Investment

Back to our quick example… 

“Greetings from [XYZ] at [XYZ], Capital Investors. 

New deal alert! Build To Rent in one of the Nation's best MSAs (Metropolitan Statistical Areas) – Phoenix, AZ. One time investment. Lifetime cash flow. Register for the investor webinar…”

How do you know if it’s a good investment? 

Most groups who are investing in different kinds of real estate, such as syndications or funds, if they have integrity, they've probably done decently if not pretty darn well in the last four to six years. 


Because we've had an up market. 

The problem is, what happens when we have a correction? 

What happens when we have headwinds like we have right now? 

Inflation, interest rates going up changing the cost of capital, the dynamics of the housing bubble.

The nice thing about real estate is it's very localized. 

You can't just have a national housing market. It doesn’t work that way. It's not like the national stock market. When the national stock market takes a big dip, everything goes down. If you're investing in index funds or mutual funds, you're pretty much just riding the volatility of the market.

In real estate, we can carve it up by demographics, geographics, asset class, by the capital stack, equity versus debt, etc. There’s a lot of terms you may not be familiar with, but trust me, we can slice and dice it. 


Because we have so much of a comparative advantage.

We get to look at a lot of deals and use the strength of our group to leverage the best of them. 

We can use the power of the community to underwrite and do the due diligence, which as an individual, you couldn't do. You wouldn't have the capacity, the cost factor of doing it yourself wouldn't work well, and you don’t know the right people.

Regarding this deal, what am I looking at? 

Well it’s in Phoenix, AZ. I just looked up some stats and this comes from realtor.com, Zillow, Redfin, and the Bureau of Labor Statistics. 

How do you know if it's a good real estate investment or not?
The members of Freedom Founders discuss real estate investment opportunities.

All this data is available to you, but while you can access it, do you know how to curate it? 

Do you know how to put it together? 

Do you know how to read the tea leaves? 

That's what it comes down to here.

So, what’s wrong with Phoenix? 

I think Phoenix has a lot of attributes, a little too hot for me, but there's people that like to live there for various reasons. Phoenix is typically a volatile market like California, like some parts of Florida, like Las Vegas. 

When the market goes up, the market in Phoenix typically goes up a lot. It's close to California. That's one of its attributes. There's a lot of money from California that moves into Phoenix to get away from the high taxes and a lot of the other things that people don't like about California. So, people move to Arizona, and many times, that’s Phoenix.

The Phoenix market is one of the top markets that has gone up appreciably in the last couple of years. 

Is that bad? 

No, not unless you're buying at the top of the market and thinking you’re making a great investment. That’s not a good idea. If you bought property earlier, like two years ago or earlier, then you had the benefit of riding that market up. Then you’d have to know when to take your chips off the table and where to put your money afterwards. That's a discussion for another day. 

There's been, in the last month or month and a half, a 123% increase in the housing inventory in Phoenix. A hundred points. That’s more than double. 

If there's more inventory on the market, more supply, what does that do to the supply demand ratio? 

Well, that means it's going to decrease some of the demand. It's going to cause a decrease in the listings. 

In fact, over 40% of current real estate listings in Phoenix are showing price reductions

What does that tell you? 

The market is cooling off. It's starting to come down.

The price to earnings ratio, the price of housing versus the annual average wages, of those in Phoenix are 8X. The average stability marker for Phoenix is 5X. That's a third more. A third higher on the affordability aspect.

In the U.S. listings of MSAs that have a higher propensity for a real estate market crash, Phoenix is up there near the top. It's going to take an overall price point reduction of probably somewhere between 26% and 33% to bring it down to what that market can afford.

Building permits are way up. The price to rent ratio is way up, meaning the price of housing relative to the cost of rents have gone way up. 

There are so many factors to consider in Phoenix, and there are other MSAs that are in a similar category. I'm just talking about Phoenix because it’s the one that came across my desk. 

An Update on The Build-To-Rent Model

Build-To-Rent has been the sexy model for the last four to five years. That is until the price points started getting out of hand the last two years. In general, Build-To-Rent has been a great model.

You get a brand new house built at the right price to rent ratio. 

There are a lot of benefits there, but the cost of these new construction houses are way higher with the supply chain issues, higher wage and labor costs, material costs have been going up, and the cost of capital has pretty much doubled in the last two months. 

All those factors mean the cost of new built construction has gone up and is still going up.

Rents can't keep pace with it forever. 

It goes back to the affordability factor. 

The baseline adjudication for if prices are too high is, what's the average wage base in a metropolitan area?

The big problem in some of these MSAs like Phoenix, Dallas, Austin, certain parts of Florida, and other, similar areas, there has been a lot of private equity hedge fund money that has come in to find good yields in real estate markets. 

As yields go up in other, less risky investments like bonds (if interest rates go up, bond yields go up) a lot of that hot money from private equities will move. 

In other words, it's going to leave the real estate market. 

When that hot money leaves the real estate market, who's going to be left to buy on the margin? 

If you take that away, then that market's going to drop.

All this to say, while Build-To-Rent has been a strong model, no matter if you've been doing it well like some of our people in Freedom Founders, you've got to know the market you're in right now

What market are they building in? 

Is that market going to sustain its price point and its rents? 

If we’re talking about Phoenix, no way Jose. It's not going to happen.

This particular investment is not part of our group. In fact, I happen to know something about the principles of this operator. 

We did a background check on them when they wanted to enter our group about a year and a half ago. They have some issues. I'll just say that. We wouldn't let them into our group, but that's not because of the Build-To-Rent model. It's just because they have issues. 

The Build-To-Rent Model itself, in the current market, does have real problems

I tell my members, “deals like this and the folks who invest with them are late to the game. In fact, they’re way late to the game.” 

What information are you missing?
Do you have the right information to make smart investment decisions?

You need to know that real estate syndicators and fund managers make plenty of money on the front end. 

They're taking acquisition cuts, and management fees right off the front end. Whether these deals go through or not and make the returns they're promoting, doesn't matter to them. They have to keep the money turning to keep their lights on, to keep money in their pockets. It's what they do. 

I'm not saying this is fraudulent at all. 

It's up to you, the investor, to dig down and understand how to underwrite and structure these deals. 

If you don't know how to do that, then what are you investing in? 

I see so much of that going on today, people throwing money at the wind just because some syndicator or fund manager has had a good run in the last four to six years. Good for them and good for you if you're riding with that, but how sustainable is that? 

That is the biggest problem I see in the marketplace today.

If you don't have the ability or the access points or the knowledge or experience to underwrite investments yourself, or have a team around you to underwrite – you're gambling. 

You're gambling in real estate just as much as you would be in the stock market right now. I think they'd be both gambles.

In Freedom Founders, we have a confidence factor built in because we curate. 

We have comparative abilities to look at a wide range of investments and we do the due diligence behind it.

That's what keeps our members safe.

If you're not doing anything like this, then you should not be playing ball in the markets right now. 

Don't get complacent. Don't buy into the exuberant market, if you're not sure what you're doing. Those are my words of caution for you.

To your freedom!

– David

P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) :

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