October 2023

What’s got 38 trillion microorganisms and almost as many products to tame it? The microbiome.

It’s boom time for gut health. Or products aimed at the gut anyway, which is said to affect the immune system, inflammation and even our moods. If some of the claims these products make seem dubious, well, that’s by design says Seed Health co-founder (and co-CEO) Ara Katz. Her company aims to disrupt the $50 billion global probiotics market with their first consumer product, the DS-01 Daily Synbiotic, which is clinically validated and—in layman’s terms—makes you poop better.

Seed’s probiotic works on the microbiome, a community of 38 trillion microorganisms that live in and on the body, and perform critical functions like digesting food and synthesizing essential nutrients. Unlike other probiotics, this one arrives in a glass jar so chic you might actually leave it out on the counter. But the product, developed with co-founder Raja Dhir, is also something of a Trojan Horse. In 2021, Katz led a $40 million, Series A round for the company, which includes an environmental research arm called SeedLabs, which studies how to use microbes to tackle the impacts of climate change. (Gwyneth Paltrow, Karlie Kloss and Cameron Diaz are investors; Founders Fund, which has backed SpaceX and Stripe, also participated.) SeedLabs’s early work includes creating a probiotic for honeybees and sending microbes into space.

In a previous life, Katz was the co-founder and CMO of Spring—a mobile commerce platform backed by LVMH. (Spring helped launch ApplePay on the iPhone.) But a personal loss inspired her to pivot. Over breakfast for the new Forbes series “Cereal Entrepreneur,” Katz talks venture capital’s love-hate affair with the microbiome, working with Bob Dylan, and what she learned from her father-in-law, CAA founder (and one-time Disney CEO) Mike Ovitz.

MICKEY RAPKIN: What are we eating today?

ARA KATZ: It’s oatmeal with flax and wild blueberries. And a lot of cinnamon and fresh ginger. I make it for my kids all the time. (laughs) It’s my microbiome breakfast.

Planting A Seed

RAPKIN: Let’s start with Seed. Did the VCs you were pitching understand the microbiome? Or did their eyes glaze over?

KATZ: It was actually worse—contextually. You had this surge of capital. I always feel venture capital is a big immune response. It’s like there’s an infection and everyone goes to it. Then all of these companies didn’t end up yielding anything. We can go into why we think that happened. You almost didn’t want to say “microbiome.” Then it comes back. Basically, every time there’s a scientific discovery in microbiome that shows you can lose weight or look younger the field blows up again. Which is maybe human nature. But we actually had two decks.

ERIC RYAN: For different investors. Smart.

KATZ: We had to articulate things very differently when you’re speaking to the life science-tech investors and the CPG world.

RYAN: What ultimately sold investors on the product?

KATZ: All of these health and wellness brands were telling people that they do all these things—things that you would never be able to say on a package in Europe. Which is a big part of how I got into this. We’re working with scientists that never put their name on a consumer business before. When people think science they think cold, clinical, complex. They think pharma. We had that kind of schism. Who doesn’t want brands that are beautiful? Who doesn’t want that life on Instagram? It was really about reconciling those two worlds. There was an opportunity to re-brand science.

RYAN: Re-branding science. I love that. There is no greater marketing challenge than translating complex science into a simple expression for a package or Instagram.

RAPKIN: It’s almost like the beautiful, glass package was the Trojan horse so you could go deep on the R&D front. Is that how you see it?

KATZ: The world—particularly in business—likes to look at your LinkedIn and decide who you are. Which is a terrifying and dangerous proposition. Fundraising is like storytelling. What would I uniquely be able to take a check for? Where someone sitting in a partner meeting would be like, “That person gets money for this. That makes sense.” The pitch was primarily around DTC probiotics and even a subscription. Certainly there was some bigger vision to it but primarily it was: How are we going to create a differentiated product? The evangelism for the category was way ahead of the evidence. How could we package the movie differently?

RAPKIN: With the probiotic and consumers, is it as simple as telling people, “Hey, you’re gonna poop better?”

KATZ: You have to meet people where they are. Not to get into more gendered attributes of products, but I remember years ago we did a partnership with a media platform that was very focused on sports bros. And it was like, “Best shit of your life.” That’s what converted and that’s what people loved. But I can tell you all the biohackers and a lot of the practitioners in healthcare—both allopathic and integrated functional—they want to talk about gut barrier integrity, they want to talk about NRF2 expression. The best brands in the world provide 1,000 doorways for people to walk through.

A Personal Journey

RYAN: Entrepreneurs always talk about “moving fast and breaking things.” Has that been your path?

KATZ: Absolutely. I come from bro-tech world. Almost everything I did until Seed was move fast and figure it out while you’re going. Building digital products­—there’s user testing. But you really do push something out into the world and kind of don’t know. When I launched Spring we were breaking things with 420 of the world’s best brands who are not used to moving fast and breaking things.

RAPKIN: Spring was back by LVMH. You helped launch ApplePay on the iPhone. Then you left the company. Of that moment you once said, “As a woman in tech, it wasn’t cool to resign from a company.” Would you unpack that for us? Did you feel you were disappointing investors? The team?

KATZ: Resigning as an employee is one thing. Resigning when you’re a co-founder—when you are one of the faces of something, and you were named on all of these lists? I actually have a very different experience than a lot of women in tech. I’ve had great mentorship and support from so many of the men in my life. I did feel very deeply that I was letting my team down. A lot of us go through these moments of our life where work is entangled in our identity in a way we’re not aware of. Then we go through a lot of work and growing up to disentangle our identity—or just to redefine what the work means, which is more my story, and understand what it looked like to prioritize life and create a better source of alignment. The most truthful version of the letdown—it was probably feeling that I had let myself down. It was a heavy moment. I think what’s missing in your question is that it was catalyzed by a miscarriage.

RAPKIN: I had read that. But I wasn’t sure if you’d want to talk about it today.

KATZ: I talk about it very openly. I think they’re biological miracles, which is maybe a different podcast. That life wasn’t viable. And the life I was living is not viable. I don’t want to live on planes. At a certain part in your career you realize what you’re capable of building and creating. Then you have to say, Where am I going to point this? It happened very quickly and was a beautiful, pivotal moment.

RYAN: What a beautiful thought. Thank you for sharing that.

Like a Rolling Stone

RAPKIN: The through-line in your work really is creating. Before Spring, you worked in film, producing an adaption of Howard Zinn’s “The People’s History of the United States.” Bob Dylan was in it. Do you have a good Bob Dylan story?

KATZ: That book changed my life. It’s the history of our country—not told by the victors and cis white men. It’s one of the most profound moments where you realize that your reality, and in this case our history of this country, is perceived by who tells it. Chris Moore—if anyone remembers Project Greenlight—he had the option with Matt Damon and Ben Affleck. Chris asked me to come produce it with him. And it was a beautiful experience. But Bob Dylan—he’s impossible to schedule with. It was unclear when he was going to show up. That was weeks in a row where it was like, He’s coming. No, he’s not coming. He’s coming! No, he’s not coming. I would say that I did not expect him to be so particular. He has his hat in a very specific way, the lighting has to be very specific. But at the same time, he’s Bob Dylan. And he’s earned it.

RAPKIN: Your parents were both psychologists. When did you realize you had the entrepreneurial bug?

KATZ: I grew up probably lower middle class. I had a wonderful childhood in so many ways, and I certainly did not want for food or clothing. But I definitely grew up with this sense that a lot of kids around me had a lot more. I also saw that my parents had no financial acuity whatsoever. But I had hustle. I remember where I placed my lemonade-and-brownie stand on Martha’s Vineyard one summer. It was very strategic. It was at the end of the bike path and right where the beach access was. I just remember at eight years old being like, “That’s a more strategic place.”

RAPKIN: You’re now married to a serial entrepreneur, Chris Ovitz. What kind of challenges does that present? When you’re a founder, it can be all consuming.

KATZ: Interestingly, we’ve ridden different waves at different moments. Somehow our intensity has lined up pretty well. By the way, he’s started and sold three companies since I started Seed. Me and my co-founder are always like, “What are we doing wrong?”

Exit Strategy

RAPKIN: What is your off-ramp then? Do you hope to sell to, I don’t know, Pfizer? What’s the plan?

KATZ: I know what the plan is not. Right now I don’t think the plan is to go public—with Seed Health at least. The public markets don’t really understand the microbiome. Ultimately, it really comes down to distribution for us. There is a moment where you have to decide, Do I need to take more dilutive capital to go try and build the infrastructure to get what we’ve built out to more of the world? Or do I go partner with somebody who basically can turn that on overnight? We’ve been quietly building for so long. We’re such an iceberg. No one is like, Oh God, you guys have a great bioinformatics team. They’re like, “I love your Instagram.”

RAPKIN: I see that. SeedLabs worked on a probiotic to help save coral reefs. That’s the part of Seed’s story that we don’t often hear about.

KATZ: We also sent microbes to space with NASA and the MIT Media Lab to look at how microbes could degrade—and then upcycle—plastic in space. The team got to experience a launch and the launch getting delayed. Actually, it was very much like working with Bob Dylan. It was like, You’re launching. No, you’re not.

RYAN: (laughs) Bob Dylan in space.

KATZ: I got an email from my son’s science teacher yesterday. He’s in second grade. And she said, “I just want you to know that we’ve been learning about this recent astronaut who went up to space, Francisco Rubio, and your company was featured in a news clip. And Pax told me about the microbes that you’re sending up to space to degrade plastic and create new biomaterials.” And I’m like, My son told you that? But yeah, that one was very exciting because it really is the embodiment of everything I didn’t put in those first decks when we were raising capital. But it’s something our whole team felt was a really historic moment in our journey.

RAPKIN: Your father-in-law is Mike Ovitz, the founder of CAA. What’s the best advice he ever gave you?

KATZ: I’ll say one funny story and one thing that I take away from it. We were negotiating something and he said, “This is what you do. You sit down with them and you say, Look, this can go one of two ways.” (laughs) I was like, “Michael, I am not in the mafia.” He goes, “I want you to just call them. And you tell them, This is what we’re going to do.” And from that, we raised the whole rest of the round. But it was very much, like, you just tell people what you want to do. Don’t waste time. Tell them exactly what you want. And that’s how you’re going to do it.

RAPKIN: Meaning we want X amount of money and this is what we’re going to do with it?

KATZ: No, these are the terms on which we’re going to take the money. Michael is known for creating the package—packaging the movie. He fundamentally understood that one plus one is three. When you put this actor with this director and this piece, that’s how you create these beautiful constellations of value and also how you get a lot of shit done. That’s how Raja and I have been packaging the movie since day zero.

RYAN: It’s so interesting. Because I always talk about myself as a showrunner—where I create concepts, bring together capital and a team. But I’ve never heard it articulated in that way.

RAPKIN: Coming back to cereal, what gets you out of bed in the morning?

KATZ: Well, literally, I have a seven-year old and an 18-month old. But existentially? I f— love what I do every day. I love the impact we make.

This conversation has been edited and condensed for clarity. In episode four, Vela co-founder Justin Kosmides talked about the luxury e-bike market, his company’s sudden move to Detroit, and why losing a fight with Walmart was the best thing to happen to his business.

Rob:
Welcome to the BiggerPockets Podcast show, 835.

Jamie:
That was definitely one of the predictions that we expected to come in for 2023 and to be a tailwind for demand. But for large city urban areas, they’re still seeing some of those slowest demand growth across the country. And those markets are really highly dependent on international travelers. It’s really still a function of the strength of the dollar and dollar is still really strong. We had expected it to weaken some as we got towards the summer travel season and that didn’t happen.

Rob:
Welcome back, everyone, every week, bringing you stories, how-to’s and the answers you need in order to make smart real estate decisions now in the current market and in the future markets. And today, we are taking over bigger news. So move aside Dave Meyer because it’s me, Rob Abasolo, and my good friend Tony Robinson. Tony, how you doing, man?

Tony:
I’m doing good, Rob. It’s always good when we get to share the mic together, man. Our producers called us the power couple. I’m going to embrace that. I’m going to embrace that title, man. We got a good conversation teed up for today, Rob. We’re talking to none other than Jamie Lane. Jamie’s official title is SVP of Analytics and he’s the chief economist for AirDNA. This guy is just like an encyclopedia of all things Airbnb. So every time we get to chat with him, I totally love it. Rob and I go over, what about those bust rumors? Are they real? How did Jamie’s predictions from when we interviewed him back on episode 712 hold up, and what markets are on track for growth this year?

Rob:
Yeah. We’re also going to be covering how you can stay one step ahead and hack your growth in the ever-changing market. Look, a lot of stuff has changed since he came on the show back in January, and he’s just giving us good insights on really how to look at your overall short-term rental investment. He talked about how investors should be looking at their investments in the long-term, which makes a lot of sense. So even if you’re not in the short-term rental game, I do want to say if you’re a midterm or a long-term rental investor, keep listening to get ahead of how new short-term rental regulations might impact your market. And we’re also going to be talking about Jamie’s predictions for the overall economy or potential recession and everything in between. But before we get into it, we’re going to do a quick tip brought to you by our good friend, Tony Robinson.

Tony:
Oh, we are? Okay. All right. Quick tip number one, head over to biggerpockets.com-

Rob:
I know how it feels.

Tony:
Quick tip number one, head over to biggerpockets.com/tools. You guys will find an Airbnb or short-term calculator that’s there. It’s a free tool to help you figure out how much money your property could earn on Airbnb. And second quick tip, I want you guys all to go to Rob’s upcoming event Host Con. Rob, give them details. Where can they go? How can they find out more about that?

Rob:
Wow. You can go to hostcon.com and it’s October 28th through the 30th. It’s right after BP Con, so I’m going to meet all of you there. And then we’ll migrate over to Houston, Texas to hear from a lot of the people we’ve heard on the podcast, Pace Morby, Avery Carl. Would’ve been Tony, but you’re having a baby. That’s all right. You’ll catch the next one.

Tony:
Yeah. I’ll be there in spirit.

Rob:
You will. You will. All right, well let’s get into it. Jamie Lane, welcome back to the show. Glad to have you.

Jamie:
Thank you so much for having me back.

Rob:
You brought up just right before this that the last time you were on the show was actually Tony and I’s first duo together on the BiggerPockets Podcast.

Jamie:
Yeah. I was so happy that I could be the reason to bring you guys together and now we get to chat again. It’s been, what, nine or 10 months since we chatted last?

Rob:
Yeah.

Tony:
Yeah.

Rob:
That’s crazy. That’s crazy. Well, we know you and it’s great to have you back, but can you tell all the new listeners a little about yourself for those of the listeners that didn’t catch the episode about nine months ago?

Jamie:
Yeah. So I work at AirDNA. We are a short-term rental and data analytics company. I’m the chief economist and SVP of analytics at AirDNA. And it’s my job to dig into the data and help interpret what’s happening in our industry and make sure everyone stays informed on how the industry is performing, how do we expect it to perform going forward so you guys can all plan your next investments, figure out your strategy, and hopefully make good investments going forward.

Rob:
Well, like I said, glad to have you back, man. I think the last time you sat down with us was the start of the year and the Airbnb bust rumors were flying and it was doom and gloom. Sky is falling. You came in and you broke down the data on short-term rental so our listeners could keep their edge and I think we gave a lot of good useful data for everybody. I think the market now is a little different and we’d love to have your insights again. So if it’s cool with you, let’s get into it and sort of talk about the actual general pulse for the short-term market in 2023.

Jamie:
Yeah, so when we talked last and we were calling for a recession in 2023, and I think I was a little bearish on the outlook for the year ahead. We haven’t had a recession. It’s actually held up pretty strong on both the economy and the short-term rental industry. It’s part of the reasons why we actually talk about multiple scenarios when we forecast. So we have our baseline, we have our upside, and downside. And so we had an upside forecast that essentially called for 13% demand growth and it’s ended up about 11%. And our baseline was below that about 9%.
So I’ve actually felt really good of how the years played out. It’s outperformed our expectations. The economy has outperformed our expectations. We’re still at 3.5% Unemployment. We’re adding 150, 200,000 jobs every month. And that’s sort of the key metric for me when I look at the economy is what’s happening in the job market is if people have jobs, they’re going to keep traveling. And that’s what we’ve been seeing. So our outlook did call for some weakness this year. As of the beginning year we were expecting RevPAR, that’s revenue per available rental to be down about 1.5%.
Rates are ADRs up about 1.5% and that implicitly means occupancy is going to be down 3%. And that’s what happened. That essentially has perfectly pegged what the industry has performed, how the industry’s performed through October. So not great given that everyone is earning a little bit less money this year, but not a catastrophic collapse in revenue. Maybe some of the things we’ve been hearing on Twitter these past few months.

Rob:
There was a very viral tweet that was Phoenix and Austin are they’re half down and something like that. I believe you responded to it.

Jamie:
Yeah. Did you guys see that tweet? Did people Tweet it at you?

Tony:
Of course, yeah.

Rob:
Yeah. All the naysayers and haters were so quick to jump on that one.

Tony:
Yeah. We ended up doing a whole YouTube video as a response to that tweet also. So there was a lot of folks that were riled up by that one.

Rob:
Well, let me ask you this, Jamie, because I believe… And refresh me. I mean I don’t expect you to remember exactly what happened back in January, but I thought there was some trend where maybe occupancy was down, but ADR, which is average daily rate was up. Was that what it was back in January.

Jamie:
Yeah. And that’s what we are seeing in January and that’s continued throughout the year. So for the first… And through August. So back up, we break up the US in a lot of different markets. There’s 265 markets for the country and of those 265, 218 of them have seen declining occupancies through August. And essentially everywhere is seeing declines. Nationally, we’re seeing about essentially flat ADR. So no one is really increasing rates, but how that breaks out among the markets is just over half of them are seeing ADR declines or you’re not able to charge as much for the same property this year as you were last year.
You’re getting a little bit less revenue per night and that’s pushing and resulting in weaker RevPAR. At the beginning of January, we’re seeing slightly higher rates. Now rates have clearly gone into the flat to negative realm.

Tony:
Jamie, I want to just touch on something really quickly because there’s a lot of debate not just as real estate investors, but just as people in the United States and really I guess across the globe about what exactly is a recession. I just want to sidebar here quickly because I think it’s an important thing to call out out because you have this consensus idea that a recession is two consecutive quarters of declining GDP, which has happened, but there’s a more… Educate me and the rest of the listeners here, but there’s a more formal education of what an actual recession is. Can you just talk about the nuances? Why are we not already in a recession even though we’ve had two quarters of declining GDP?

Jamie:
Yeah. So that two quarters of declining GDP, that’s like a rule of thumb that people are taught in high school, but it’s not actually how we define recessions. And there’s this whole economic board, the National Bureau of Economic Analysis, and they actually look at the data and decide whether or not we’re a recession or not. It’s mostly PhD economists and the definition gets into that. We have to see broad based economic decline.
What we saw last year with the two consecutive quarters was not a broad-based economic decline. We saw some weird things happening with inventories around the pandemic, and we are at record below unemployment. We are seeing 300,000 new jobs being added every month. We are seeing five, 6% increases in wages each month. We are in no ways in a recession by really any different way you define it.
There are certain aspects of the economy that might’ve been in recession, like manufacturing tech industry saw a really strong pullback and actually saw some layoffs. But in terms of overall economic decline, we weren’t there. And even in the real estate industry and with rising interest rates and sort of a pullback in transactions, we’ve seen quite a few real estate companies go under because of the lack of transactions, but it is in no way sort of a broad base economic decline.

Rob:
Interesting. So relatively, do you have a POV, a point of view on what the next year or two looks like in terms of recession? Do you think it’s looming? Is there something big coming up or do you think we’re just going to kind of, “Tell us everything”? No, I’m just kidding. Do you think we’re going to hold this pace?

Tony:
And, Jamie, if I can just add one piece to that, because the goal of the Fed, what you keep hearing is that they want this “soft landing” where they’re able to tame inflation without causing massive unemployment. But I mean, there’s some things happening. You have student loans that are kicking back in October 1st. There’s the strike that’s going on. There’s potential government shutdown. So with all these things happening, I guess to Rob’s point, do you think that soft landing is even possible still?

Jamie:
Yeah. It’s still possible. It’s still highly likely that we go into recession over the next year. And with what the feds had to do in terms of raising interest rates so high so quickly, and there’s just such a high likelihood that something could break, and then you add on top of that, all those things that you mentioned, the government shut down, which more than likely could happen, and we’re recording here at the end of September, and at the end of the week, the government could shut down.
Now, expectations are that that’s a two or three week shutdown. If it pushes through the end of the year, that could have a meaningful impact and overall economic output. To the short-term rental industry too, if you’ve got a rental in and around a national park, that national park is more than likely going to be shut down, and that could really impact the earnings through fall.
So if you think you’ve got a property in Gatlinburg, and the biggest driver to that market is people going to visit the national park seeing lease change, and that could have an impact on that market. And then resuming student loan payments sort of impacting consumer spending. The UAW strike, actor writer strike impacting specific markets like LA and Atlanta. All these things have both direct impacts to the economy and our industry.

Rob:
Wow. I hadn’t really considered that, but that’s so true because national parks have always felt we’re sort of protected in the sense that… I call them Mother Nature’s Disneyland. You don’t have to market the Smokies. You don’t have to market Joshua Tree. You don’t have to make a billboard for the Grand Canyon. People are going to go by the millions. But yes, if they shut down due to government regulation, that’s going to hurt a lot of hosts.
So maybe that changes some of the POVs on the government shutdown, because I see both sides of it pretty much every single day at this point. Now, that we have a general understanding of where the economy stands, I sort of want to punch in a little bit and talk more on the municipal or even on the state level because we’re seeing a lot of regulations come in. I’m sure you’ve heard about Dallas and New York, all the big bands, and that is definitely shaking up the short-term rental market for a lot of those operators. Which markets are being most impacted by regulations and what impacts are you seeing?

Jamie:
Yeah. It’s funny how that’s now turned into that conversation that you have with your cab driver of when they ask you what you do and I say I analyze the short-term rental industry. They’re like, “Ooh, regulations must be really impacting you guys.” And it’s true. The New York regulation has really brought it into the forefront of essentially a defacto ban on Airbnb as the beginning of the month when it started going into effect. We saw almost an 80% decline in short-term rental listings in New York. And that was one of Airbnb’s biggest markets essentially decimated.
Now, the listings didn’t leave. They’re not off of Airbnb. It’s essentially people moving from a short-term rental strategy to a mid to long-term rental strategy. So they’ve changed their minimum stay requirements from short-term stays to 30 plus stays or longer, which we’ll see how much demand there is to support that strategy for 17,000 listings all moving to long-term stays at once. I suspect that there’s quite a bit of demand to support it, and we see that in a lot of other cities, but that is playing out and we saw it play out or will play out in Dallas.
We’re seeing that change or a part of that change in Atlanta. We’ve seen it in other large cities like Los Angeles, Boston, Chicago, that have put into place pretty onerous laws going after short-term rentals. But on the flip side, there’s also been significant pushback from the host community sort of banning together working with the local municipalities. We saw that in Atlanta essentially getting the ordinance going to effect delayed and delayed, and delayed, and delayed.
We saw there was a lawsuit on the Austin laws back in 2016 that just sort of came to fruition where they overturned the ban on short-term rentals. And I’m distinctly saying that there cannot be a distinction between different kinds of homeowners and how they can use their property.

Rob:
This is a huge one. That was a big one.

Jamie:
That was huge.

Rob:
I saw that that article came out because Austin has been… They’ve never really enforced it, and there were ways to get the permits and everything, but I saw an article, it was back at the beginning of August that said federal court strikes down Austin short-term rental laws and basically called them unconstitutional. And so it’s interesting because it’s like if that’s a federal court striking down an Austin one, I mean, how does that actually affect the rest of the country?

Tony:
You think about Dallas, right? Dallas just effectively banned single family short-term rentals also and now you have this neighboring major city. It’s like how does that impact Dallas short-term rental plan and all these other places?

Rob:
Exactly. Same states.

Tony:
Yeah. But one thing I’m curious, and Rob, I want to get your insights on this too, because what I’ve shared with people is that regulations are coming. It’s a definitive thing. It’s just how is each city and municipality going to choose to regulate short-term rentals? But they are coming. So my focus has always been on investing in true vacation markets where the primary economic driver is vacation and tourism because I feel like there’s a little bit more insulation there. And if you do choose to go into markets that are more residential, call them suburban cities, major metros.
My thought has always been, “If I’m going to go into that market, I need to make sure that either one of two things are true.” Either first, I can still cashflow on this deal as either a midterm or a long-term rental. Or second, it should be a strategy that I can get out of relatively easily, which is arbitrage or co-hosting. Actively, we’re launching three units in Dallas next week through arbitrage, but I’m not worried about those because, A, it’s arbitrage. I can get out of those with breaking the lease and walking away, or B, I can flip them over to midterm and they still make sense.
So Rob, what’s your take on that, man? A lot of people are afraid of regulations. What’s your advice to folks who want to navigate that the right way?

Rob:
Totally. Yeah, I mean there is a lot to cover there. I think most of the time I am trying to find a city or a municipality that has some level of regulations because at least they’ve had the conversation and we know that they’ve already voted on it. And if there’s a process like getting a permit that’s been put in place, I usually feel a lot better than that, better about that than going to a place that’s like, “Well, what is that?” I don’t know. You can just list it. And then one day it gets-

Tony:
[inaudible 00:18:35]

Rob:
Yeah, exactly. Which that’s how it was back when I started in 2017 or whatever. But I have really accidentally stumbled onto the midterm market back during the pandemic because everything shut down and then travel nurses needed to stay at my place in LA. And so I was like, “Yeah, sure, why not?” And then they stayed and I never heard from them. They were mega clean and I made just about as much money as short-terms. And so I fell in love with that from the get-go.
I would say most of the time, you’re going to do yourself a disservice if you’re not trying to actively create a hybrid midterm rental and short-term rental strategy. My personal preference, and again, this isn’t going to work in vacation rental markets like Gatlinburg, but if I could mostly have a midterm rental strategy and fill in the gaps with short-term rentals, oh man, I would do that all day.
Really what it is, it’s mostly a short-term rental and then midterm rentals come in and I have to work around that. So I honestly think that 2023, for any host that’s scared of regulations, they’re coming, but you really do have to actively be working on those contracts with housing companies and relocation specialists and travel agencies, nursing relocation specialists, all that kind of stuff. You want to be working on your rapport with them and your relationships with them so that, yeah, if a regulation hits, you don’t have to shut down your business. You can just pivot straight into midterm rental.

Tony:
Jamie, one last follow-up for me on the regulation piece. As some of these cities become more regulated, what do you think the impact will be on actual property values of short-term rentals in those markets? Do you think that presents an opportunity for short-term rental hosts to get into this game, or is it more of a disadvantage?

Jamie:
Yeah. So there’s actually been a lot of academic research on the impact on property values and what regulation and means for it, and what a lot of it shows is that the option to be able to do short-term rentals is very valuable when you go to resell the home. So if you’re in a neighborhood, let’s say that has an HOA that you vote as your neighborhood to restrict short-term rentals in that neighborhood, you’re going to severely restrict the value of homes in that neighborhood compared to the rest of the market because now future buyers know that they cannot, even if they never even thought about doing short-term rentals, but the fact that they couldn’t now sort of reduces the option value there that they could go and do it in the future. So I think that’s one of the downstream implications of these laws going into effect is that you can overall reduce home values in specific areas of cities and specific neighborhoods with restrictions like that going into place.

Tony:
And Rob, you and I both we’re in the Smokies, we’re in JT and I can’t imagine what would happen to home values in those two cities if they severely limited. The economy, I think would collapse. That would be a forced wave of selling if they really limited short-term rentals in those markets.

Rob:
Big time. Interestingly, there’s so many people in those markets that want the short-term rentals out, but those specific markets, the economy is propped up by the short-term rentals, not just by occupancy taxes, transient taxes, all that stuff, but also the actual employment of the Airbnb Avengers, like pest control pool, maintenance cleaners, handyman contractors, all of them make a significant portion of their livelihood from the short-term rentals side of things. So I don’t know what would happen, but I hope to never find out.

Jamie:
We did a study looking at both short-term rental and hotel revenue for different markets, and Joshua Tree was number three in terms of short-term rental revenue compared to hotel revenue where there’s six times more revenue being generated by short-term rentals in that market than hotels. It just shows a market that is so dependent on tourism and it’s almost 6X and coming from short-term rentals to the hotels. So if short-term rentals went away, it would just decimate that market.

Tony:
Jamie, what was number one and two? Because you said Josh Tree was number three.

Jamie:
Yeah. So number one was Broken Bow Lake, a great market in Oklahoma.

Rob:
Oklahoma?

Jamie:
Yeah.

Rob:
Okay.

Jamie:
And then number two was Santa Rosa, Rosemary Beach area, so 30A in Florida.

Rob:
Wow. Man, that’s super interesting. Okay. Can we talk a little bit about international short-term rentals as well? Because I think the last time we had you on the hypothesis or the thesis in general was that the pandemic basically slowed down a ton of international traffic and we were going to start seeing the floodgates reopen. And seeing a lot more international travelers coming to the US, how has that held up? Where are we at in that specific regard?

Jamie:
So I was totally wrong on that one.

Rob:
Sorry. I wish I could have given you a softball.

Jamie:
Yeah. That was definitely one of the predictions that we expected to come in for 2023 and to be a tailwind for demand. But for large city urban areas, they’re still seeing some of the slowest demand growth across the country. And those markets are really highly dependent on international travelers. So you think areas like Miami, Boston, San Francisco, even going out to Oahu, as much as 40% of demand is coming from international travelers into those markets and staying in short-term rentals.
It’s really still a function of the strength of the dollar and the dollar is still really strong. We had expected it to weaken some as we got towards the summer travel season, and that didn’t happen. We have seen overall international travel being really strong, but it’s just everyone leaving the US and traveling within Europe.

Rob:
I mean, that makes sense. A lot of trips were canceled. A lot of marriages postponed. A lot of anniversary trips. I mean, there’s so much. I think it’s going to be a trickle effect of people that their lives carried on, they had kids, everything is delayed. I haven’t traveled internationally really since the… I plan on going international as soon, as I can as soon as my kids are just a little older because being on a plane with a two and a three-year-old is very difficult. But I want to travel a lot internationally. So it does make sense that a lot of people in the US are sort of going to these destinations or these dream vacations that they had to push pause on.

Jamie:
We’re actually seeing that impact now in the data where some weakness in demand and occupancy that we’re seeing is those destinations that people were maybe going to because it was a domestic destination. I live in Atlanta. Everyone was driving down to 30A in 2020, 2021. Now friends, they’re flying to Nice, and Cannes, and Greece, and they’re not driving down to 30A anymore. You’re definitely seeing some weakness in that market because of that.

Tony:
Jamie, let me ask. So I don’t own anything internationally, but do you think that this kind of exodus of American travelers overseas presents an opportunity for folks stateside to look internationally? And if so, maybe what are… And I know obviously the world is a big place, but if so, what are some international markets that you feel are good spots for folks to get started in?

Jamie:
Yeah. There’s great options out there. It is a little bit more difficult to sort of navigate deploying capital in different countries. It’s not just buying a house in North Carolina, but there are opportunities. Demand is now fully back across Europe. It’s playing into different areas, just like in the US where some cities are still really impacted negatively. They’re seeing even more regulation than we’re seeing in the US, especially in some of those major cities.
So in Amsterdam, there’s 80% fewer listings now than pre-pandemic, and a big piece of that is restrictions. So Dave Meyer is not going to be getting a short-term rental in Amsterdam, though it is a great location to travel to. So there’s all the same sort of dynamics you have to work with in the US of seasonality, I be it more so. Essentially all of Europe takes off August. There’s some demand in July from Americans, but it is very much a July and August dominated market where if you’re not getting the majority of your revenue during those two months and you’re not going to be profitable. It’s like owning a short-term rental in Maine or Cape Cod.
It’s like there’s a very short season you have to optimize for that short season. So it’s a little different than some of the markets maybe we’re used to investing in.

Rob:
Yeah. It’s definitely a different territory. Tony, what’s your appetite for investing internationally? Is that something that you want to do? Is that something you dream to do?

Tony:
Absolutely, man. I love Costa Rica. Sarah, my wife, she’s like a Mexican citizen, so we always think about buying something in Tulum or Playa Del Carmen. So I would love to go international, but to your point, Jamie, I just haven’t taken the time to really figure out the financing portion of it, like how to make that piece work. But once I do, I would love to do something out there.

Rob:
Just buy it all cash, dude.

Tony:
Easier said than done, huh?

Rob:
Yeah. A lot of people ask me and everyone always asks me with the hope of being like, “I love it, let’s do it.” And I’m always like, “I mean, it’s hard enough to run a business in the US.” I mean, long distance investing, you can build your dream team, I believe all that. But I have other places in the US that I would prefer to buy anyways. I’ll just rent Airbnbs if I ever want to travel. But that’s really interesting you say that, Jamie, because I don’t really think about the risks, I think. Or not the risks, but the risks of regulation in the US.
It’s hard to keep up with regulation in the US because there’s so many cities and counties and neighborhoods that restrict differently. You go to an entirely different set of countries and it’s like, “You don’t really know what you’re getting into unless you’re doing a ton of research.” So let’s segue a little bit here because we’re talking to international. We talked economy. We talked regulation in general.
Now, I also want to talk about another component of the short-term rental market, and that’s natural disasters and how they’ve impacted short-term rentals this year, because that’s not something we really cover all that often on the show.

Jamie:
And it’s I think a growing and growing risk. We’ve seen it really specifically in certain destinations this year. The fires in Maui were devastating. We saw it essentially wipe out entire towns. We’ve seen hurricanes over the past few years. We saw Cape Coral, Fort Myers last year, Sanibel Island, and really get hit hard. We saw infrastructure being knocked out, the bridges there where you couldn’t even access your short-term rental if it even still existed.
We saw more hurricanes hit Florida, and we’re still in the middle of hurricane season. So no telling what’s going to happen. You’re seeing insurance rates continue to go up. So even if you have a short-term rental in these markets, one, can you insure a new investment? And then secondarily is your existing investment, are you going to be able to continue to get insurance on it?
So there’s more and more risk happening. And back through the years, we saw fires in Gatlinburg, we saw fires in Tahoe. We’ve seen more wind events like tornadoes hit the Midwest, I think, than any other recent year. So all sorts of… My parents have four short-term rentals in Maine, and they got impacted by the hurricane that came up there that caused I think two weeks to essentially be canceled out because of guests didn’t feel comfortable getting up there with the hurricane coming.
So it definitely impacts different markets in different ways. And I think most importantly for investors is getting a sense of the type of markets you’re going in. What is that risk? And if you were going to be shut down for a month or two and you think about… And people now avoiding traveling to Maui, even though most of the island is up and running, and we saw I think 30% decline in occupancy in August.
We’re seeing another 20% through the first half of September. So even though the islands are telling people, tourists, please come and people are avoiding that area just because. Any number of reasons, yeah.

Rob:
Yeah. I mean, I think perception is probably going to… I think whether or not it’s okay to travel there, I know that Hawaii was… The governor was like please keep coming. But I think a lot of people in their head are probably like, “Oh, I’m not going to go. Obviously, everything is closed or whatever.” So I think that’ll probably be a lasting effect.

Tony:
Yeah. I want to transition, Jamie, if that’s okay, to talk a little bit more just about supply and demand. You’ve mentioned before that supply has slowed in terms of the rate of increase. Post pandemic, you saw a massive boom in the number of people that were listing their properties in Airbnb, and it seems like that slowed down a little bit. Demand though seems to continue to be kind of growing at a healthy pace as well. So we’re waiting for that balance between supply and demand.
I guess let me take a step back first. My first question is how do you know if a market is unquote saturated? How do you know if a market has too many Airbnbs to support the demand in that market? What data point should I be looking at? Where inside of AirDNA can I even go to see that?

Jamie:
And saturation point is all going to be around occupancy, right? So is there enough demand to support the listings that are out there in a profitable way? So when I’m thinking about saturation, I’m looking at both year over year change in occupancy. So is the market that I am in absorbing the supply that has come into that market? If it’s absorbing it, we’re going to see occupancy maintaining or increasing. If it’s not able to absorb it fully, and you’re going to see occupancy decreasing.
Now, one year of occupancy decreasing is not a market sort of oversaturated. Most properties take some time to ramp up and it takes time to get bookings. It takes time to and sort of figure out your niche in the market. I tend to not like to look at this on a very short-term basis of like, “Oh no, we saw one month of occupancy down four or five, 10%.” This market is way oversaturated. You’ve got to be looking at it over time.
So I do like to look at it on a sort of 12-month average. And then also looking at it relative to prior years. So 2018, 2019 is indexing off the high of 2021. I think we talked about this last time is not fair. And maybe if you underwrote it in 2021 and had that expectations to continue, that’s a different conversation. But in terms of market saturation, there’s a lot of demand coming into this industry. There’s a lot more listings that need to be able to come in to support the growing demand.
I’d argue that very few markets are actually oversaturated. It might take one or two years of slow supply growth, which we’re seeing now for that supply to get fully absorbed. But if you’re investing for a five, 10 year hold, just because a weak patch in occupancy today doesn’t mean that that’s going to not be a great investment long-term.

Rob:
Wow. That’s interesting. I feel like most of the short-term rental peeps, we expect it to kind of hit when we list. So is the case that… I would say, I guess underwrite conservatively and expect growth from there. Because it does seem like if you’re telling someone, “Hey, yeah, get into the short-term rental, but it’s going to take you two to three years to really start hitting good revenue,” that’s an interesting conversation to have because I think a lot of people just wouldn’t do it.

Jamie:
Yeah. When I’m helping people underwrite properties, I maybe don’t do a three-year ramp, but I definitely do a two-year ramp that it’s going to take you one year to figure out your market, to figure out to get good reviews. Reviews definitely help get bookings. And it’s going to take you a few months, six months to get a bunch of good reviews so you can start raising rates and really profit maximizing that property. I came from the hotel industry 10 years helping people underwrite hotel investments, and there we typically did a three-year ramp of getting occupancy from when you first open the property to when you’re going to stabilize that in terms of occupancy. It does take time to grow into that market.

Rob:
That makes sense. I mean, our Scottsdale property, we bought one and it opened up a little slower than we had thought a year in everything is up pretty considerably. I mean, the reviews I’m sure have helped. We’ve also added amenities like a pickleball court and that pickleball court has increased revenues by, I don’t know, 60 to 80,000 at this point. So it’s paid for itself two or three times at this point. So I think it’s the profit maximizing that you’re talking about. That’s really the thing that I’m focusing on with my current portfolio where a lot of people keep asking themselves, “How do I get into my next property after they’ve purchased one?”
What I’m trying to steer people towards is instead of trying to get into your next property, how can you maximize the revenue of the current property that you have or the portfolio that you have? Because if you can invest, let’s say $20,000 back into your property and increase your revenue by 10,000 bucks, that’s a 50% ROI. That’s so much better than what you could get if you just go and buy a new property. So this year, I’m trying to still buy just because I’d like to consistently purchase, but really I’m putting a large majority of my capital back into my portfolio, which gets me a little impatient because all I want to do is buy.
But I do think there is a case to be made for reinvesting back into the property. Tony, have you guys gone in and ever optimized a property with amenities or have you added anything after the fact?

Tony:
Absolutely, man. Actually, I’m going to Joshua Tree on Thursday because our newest listing, we’re adding a really cool in-ground pool with a rock slide and just really trying to beef up the amenities because I feel like we’re out of space right now where because so many new hosts have come onto the platform, the table stakes have increased, right? And what it takes to be a good listing today is significantly higher than what it took to be a good listing in 2019, 2020, even 2021.
Like you said, Rob, we haven’t purchased a ton this year, but we’ve been going back to our entire portfolio, adding new game rooms, adding the pools, adding hot tubs, adding whatever we can to make those listings stand out. And it’s crazy, man. I have three properties in 29 Palms, which is the city adjacent to Joshua Tree and the one property where we invested a lot into the game room is doing 3X the monthly revenue of the other two properties that don’t, which is crazy, and it’s the smallest one. So it really just goes to prove the point that reinvesting into your current properties might be a better investment, like you said, Rob.

Rob:
Definitely. Wait, what was the amenity that you said you added to the 29 Palm ones?

Tony:
It was just a really cool game room. We’ve got a really cool game room as an extension of the house.

Rob:
Yeah, for sure. I built a epic tree house deck at my Gatlinburg property. I built a mini golf course in my backyard in Crystal Beach. I did a pickleball in Scottsdale. I’m adding a pickleball court to a property in Austin, Texas right now. I’m probably going to add pickleball to my tiny house in Joshua Tree. So for me, again, it does suck to not be buying, but I do think it’s going to be a much better return for me overall. So with that, Jamie, can you just tell us a little bit… I mean, since we’re kind of talking about Joshua Tree, how have established tourist markets fared this year? Are they holding strong? Has it been pretty consistent compared to some of the other areas out there, like a metropolitan area?

Jamie:
Yeah. So there’s definitely more weakness there in some of the established destination markets. I thought it’d be fun to sort of do in sort of an exercise where we walked through what we were seeing in one of the markets, and I actually pulled out a Gatlinburg, Pigeon Forge area, just to give you a sense of… It was also one of the ones called out in that sort of doom tweet by the Doom Squad of revenues dropping 40%.
So in the Gatlinburg, Pigeon Forge market year over year, we’re showing RevPAR down about seven and a half percent. But these markets, especially market like Gatlinburg where supply is growing 20%, you have churn, listings leaving, it’s really hard to get a sense of what is the average host actually increasing or decreasing the revenue. So we took it down further. So there’s 23,000 listings with the lease one night sold in Gatlinburg over the past year.
Only 12,000 of those were available full-time. So 270 nights of the year, and then only 7,500 of those were available both full-time this year and last year. So a small subset of the 22, 23,000 listings out there. And when we look at just those 7,500, overall RevPAR was down about 9%. And it was down most at the budget and luxury end. So the middle tiers were held up the best. What I thought was really interesting was for individual hosts, so those with just one to five properties, RevPAR was only down 7% where the large property managers in that market saw 13% decline in RevPAR.

Tony:
Interesting. Why do you think that is, Jamie, just out of curiosity?

Jamie:
Yeah. So that same question. So large property managers did such a better job of increasing occupancy in 2021 and 2022 in raising rates. And now they’re seeing bigger declines. But if you look at what they’re earning relative to 2019, they’re still well outpacing individual hosts. So it tells me that most of those individual hosts are not using revenue management software. They weren’t able and didn’t push rates when the times are good. Now, they’re not seeing as much declines when the times aren’t as good, but they’re still not earning as much as some of the larger PMs are in that market.

Tony:
And Jim, you hit on a really interesting point because I’ve kind of in my heart felt that that was part of what’s driving some of the decreases is that because so many of these hosts are new and they’re not leveraging dynamic pricing tools, and they don’t understand what their average booking window is in their market, if they’re not fully booked out every 30 days, they’re just dramatically dropping their prices.
And now it’s impacting the entire market because now you have guests that are able to choose a $60 listing that’s brand new versus the more mature host that’s charging a hundred bucks per night. So I’m literally launching a property management company right now because I feel that there are so many hosts that don’t know what they’re doing that overall they’re pulling down the revenue potential for the market. So that’s why Rob and I are both so focused on educating people about how to do this the right way, because if more people understand the basics of dynamic pricing, how to do it correctly, then as a host community, we all end up winning.

Rob:
It’s always so annoying, dude, when you’re comping out a property in a place like Gatlinburg and you’re looking at the neighborhood and this person has this insane 20,000 square foot placed with a helicopter pad and it’s like $70. It’s like, “What are you doing, man? What are you doing? You’re ruining this for us.”

Tony:
Well, Jamie, I want to ask you one last question before we start to wrap things up here. And for all of our listeners that are thinking of buying that first Airbnb, that first short-term rental right now at the tail end of 2023, what would your advice be to that person?

Jamie:
One, it’s make sure you’re leveraging data to find the right market to invest in. I don’t love the old adage of invest in a market that, you know, that you grew up going to. Find markets that make sense to invest in because they may not be the right market. It might not have been in the same market as a year ago, two years ago, on the cost basis of investing in homes right now has shifted dramatically over the past five years. And then the opportunity to grow revenues in these different markets has shifted dramatically.
So, one, I do a lot of research on finding the market, and then I think some of the conversations we’ve had on amenities are going to be really important for the type of property you can invest in going forward is don’t just look for current cashflow, look for that property that you can actually evolve and sort of grow into a good long-term investment. I try to help people think longer term like five to 10 years on that investment. Like Tony, that property you’re going to in Joshua Tree, if you didn’t have the ability to put in that in-ground pool, that would totally change that investment thesis for that property. Right?

Tony:
Yeah, absolutely.

Rob:
Sure. Yeah, that makes a ton of sense, man. So for people that, if you could give some advice on where people could find some of these markets, I agree. Going to a place where you grew up, not necessarily, I do like the familiarity… Oh gosh, let’s not try this on air. How familiar it is. How about that? How about that? How familiar? How familiar it is should not necessarily be the driver for why you buy it. I think that’s a way you can do it, but finding good markets that work, I think that’s what you’re saying. How can people find some of these good markets?

Jamie:
Yeah. So thanks for the tee up. We just rereleased AirDNA this past month, and one of the tools is all around market discovery. So you can look at a list of all markets across the US, filter down to the type of investment you’re looking in. So if you’re looking for, in one bedroom, unique listings, you want to go in on the luxury tier and you want to find markets with the highest occupancy, highest ADRs, highest investability, we now give you that ability to dig, filter in, find the right comps, rank markets against each other, and where you can find those hidden gem markets.
We actually did a piece recently where we talked about hidden gem markets. Maybe low percent of property managers, relatively small markets, like a 100 to 500 listings where you could go in and really dominate that market by running a property well. And all that can now be done with the new tools. So you can really customize it, find markets that really fit your investment strategy, your risk tolerance, and the type of markets, mountain, coastal, urban, suburban, and find those type of cities, find those good investment opportunities.

Rob:
Well, awesome, man. Well, thank you so much, Jamie. For people that don’t have familiarity into how to find you on the internet… See, I knew I could say it. I knew I just had to think it through a little bit. How can people find you and connect with you?

Jamie:
Yeah. So I’m active on Twitter @Jamie_Lane on LinkedIn and AirDNA. I host a podcast called the STR Data Lab where we talk about data and interview professional managers hosts on the data that they use to run their business.

Rob:
Super cool, man. Well, maybe Tony and I can be guests one day, the power duo, the power couple here in the short-term rental market. Well, awesome, man. Well, thank you so much, man. I do love getting into this and talking about the data with you. I think this makes me feel really good, honestly, just being armed with the proper data. So we appreciate you coming in and speaking some of these truth bombs. Tony, for anyone that wants to reach out or connect with you, how can they find you online?

Tony:
Yeah. First, Real Estate Rookie Podcast. We put out episodes every Wednesday and Saturday. And then personally, you guys can find me on Instagram @tonyjrobinson. And if you’re on YouTube @therealestaterobinsons.

Rob:
Dang. All right, man. That was like three of them. All right. Well, I’ll do four. You can find me on YouTube @robuilt, on Instagram @robuilt, on MySpace @robuilt, and TikTok on Robuilt. How about that? Well, thank you so much, Jamie. We appreciate it. Tony, thanks for doing this with me, man. It’s always fun to share the mic with you. And for everyone at home, if you like this episode, if this inspired you, if this make you feel better, feel free to go and leave us a review on the Apple Podcast platform or wherever you download your podcasts.
This is Rob Abasolo. I’m not going to do the David thing because I know I’ll mess it up. But thanks everyone and we’ll catch you on the next episode of BiggerPockets.

In many democracies, growing wealth inequality is showing up as a destabilizing force. What happens when we shift a sole focus on individual prosperity and broaden our lens to community wealth? To walk us through what this shift looks like, Ashoka’s Asier Ansorena spoke with Ashoka Fellow Joaquim de Melo, founder of Banco Palmas, Brazil’s first community bank that opened its doors 25 years ago. He talks about how they pioneered an alternative currency to build and retain community wealth in Fortaleza, and how they have since grown into a national movement of 150 community banks, which mobilizes and redistributes 1.5 billion reais (nearly 300 million USD) yearly in local economies.

Asier Ansorena: Joaquim, you were living in the favelas in the northeast of Brazil, training to be a priest, when a question occurred to you that changed your life. Tell us about this question.

Joaquim de Melo: When I arrived in Conjunto Palmeiras in 1974, the military dictatorship had displaced the whole neighborhood. So we began by building schools, day-care centers, and local markets from scratch. But even after all that development, year by year, the neighborhood stayed very poor.

The turning point came when we asked, “Why?” Why weren’t we managing to consolidate wealth, with so many hardworking people, schools, a daycare center, and sanitation? And we realized that it was because all our money was leaving the neighborhood. We were giving it to big box stores and big banks instead of producing locally. We realized that the key to defeating poverty was to start investing in ourselves. And that was how Banco Palmas, our community bank, was born.

Ansorena: What is a community bank?

De Melo: It’s a non-profit bank that invests in the creation of local businesses and a local currency. We charge interest on loans at a very low rate, and any profit gets reinvested in more loans for local businesses. In short, Banco Palmas is a new economic circuit that takes the wealth we generate as a community and uses it to strengthen the local economy.

Ansorena: Why create a community bank when you can just request a local branch of a public bank?

De Melo: The big problem in Brazil is that the commercial banks suck up wealth like a vacuum cleaner, and I’ll tell you how. Initially, credit cards were seen as a resource in poor communities. When local companies went under and people weren’t able to get loans, they needed to buy on credit. However, because the banks charged very high interest rates, up to 20%, people became indebted as well as impoverished.

When you buy using a credit card, they charge merchants a 2-3% fee. Then they take that money and invest it in big corporations and affluent neighborhoods. Local merchants lose money, and the big corporations get richer. So why not have our own bank, where you lend at very low interest rates in order to reinvest locally?

Ansorena: This reminds me of the European financial crisis of 2008. The European Central Bank did not put money into people’s accounts or lend directly to governments. No, 800 billion euros went to private banks, and practically none of that money was invested in small and medium-sized enterprises that would have grown the local economies. Banks are meant to fulfill a social function, but they are not doing that, right?

De Melo: Right. That’s because most banks are pursuing increasingly large profits rather than focusing on building productive capital. A company that wants to go to the bank to take out a loan to produce clothes, shoes, food, can’t do it because the bank prefers to put money in the stock exchange.

The Brazilian Central Bank actually sued us twice, saying our community bank was illegal. My colleagues and I were arrested. We had to go to court to win the right to operate. In 2010, the Central Bank recognized that it had made a mistake and issued two technical notes to the country, saying that our bank was important for Brazil and improved lives.

Ansorena: How do the vast economic disparities in different regions of Brazil come into play? Reports show that private banks, including some public ones, regularly take the savings of poorer Northerners and reinvest in the affluent South.

De Melo: This is exactly what happens. But community banks are challenging their model. In 2022, community banks circulated billions of Reals. We had 1.5 billions reals (USD 300 million) in revenue, and that money was re-invested in production and distributed throughout 152 community banks, paying for everything from solar panels to loans for local businesses, like barbers or clothing stores. This is no longer a utopia; this is working.

Ansorena: Twenty-five years ago, you created the first tangible social currency, the Palmas, and now it’s gone digital. Tell us about that.

De Melo: We originally invented the Palmas currency to stimulate local spending. It was backed by Reals, so if a merchant wanted to, he or she could convert this social currency back into Reals for a small fee, which fed into the bank’s investment fund. Then in 2013, we converted to a digital platform, e-Dinheiro Social, which translates to Social e-Money.

What’s fundamental to our methodology is that each bank remains hyperlocal. Each community bank works in a territory or neighborhood. You download the app, search within your municipality, and if there is a bank there, you can register, make a transfer and start buying from merchants. But if you leave your municipality, your balance shuts down, because the currency is designed to stimulate a specific geographical area. The goal is to encourage you to buy local.

Starting around 2017, we’ve been hearing Brazilian mayors say, “Boy, the municipal economy is really developing, we are seeing much more prosperity.” So, some mayors have partnered with us, and, through municipal laws, mayors are creating community banks and social currencies. There are already ten municipalities in Brazil that have taken their money out of the big traditional banks and are creating social currencies, using our digital platform.

Ansorena: How do community banks empower people to become prosumers, i.e. people who both produce and consume to stimulate the local economy? What financial education is still needed in historically marginalized communities?

De Melo: The world tells poor people that they should feel lucky to buy products from big corporations, to be an employee, and to have a boss. The Community Bank offers another way forward: being an entrepreneur and a prosumer.

Financial education should teach people how to organize their finances, but also how to make money by producing, consuming and generating resources in their own community. Entrepreneurship is a good thing. As long as people get it into their heads that it should be done in service of the collective. Don’t think about it from an individualist perspective.

Ansorena: As a playwright, you also use theater as a vector of financial education. Why is culture so important?

De Melo: All change, all collective consensus, comes from culture. At Palmeiras, we do puppet theater, dance, photography, comics, and community radio to educate people about the local economy. Culture is also what fuels our mission: eating, socializing, dancing, beer, and pagode music. It’s that local culture that inspires me.

Ansorena: This move towards a different economic culture isn’t just an objective of Community Banks or a Brazilian issue, is it?

De Melo: Thankfully, it’s an objective shared by many across Brazil and the world who are building new economic alternatives – be they leaders of the solidarity economy, the green economy, the circular economy, community banking and more. Just last week I was in Brasilia for the launch of a new national initiative: the National Strategic Committee for the Impact Economy. Our mission is to bring all those movements together to coordinate national actions and new public policies with leaders from business, civil society and government. I met with Muhammad Yunus there, the Bangladeshi Nobel Peace Prize winner, and global architect for micro-credit. He stressed the importance of building a new global economic model and praised Brazil for its leadership. We have a unique opportunity to build this future.

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer. Today, I have an excellent interview on tap for you. Andy Walden, who is the vice president of enterprise research and strategy at ICE, is going to be joining us again on the show. Andy was first on On The Market, I think it was back in May or June, and he was working for a company that, at that point, was called the Black Knight. They have since been acquired by a company called ICE, or I-C-E, and so you might hear both of those during the course of our conversation. But Andy and his team are experts on all things in the housing market, but what they really focus on is what is going on in the lending market. As we all know, we are all subject to the whims of interest rates these days.
Andy has some insights for us about what is going on with foreclosures, purchase originations, where he thinks rates are going, how different parts of the country are going to be affected. He just released this amazing Mortgage Monitor report, which we’ll put a link to in the show notes. I am super excited to talk to him about it, because there’s just chock-full of insights that are extremely actionable for real estate investors just like you and I. With no further ado, we’re going to welcome on Andy Walden from ICE.
Andy Walden, welcome back to On The Market. Thanks for joining us.

Andy:
You bet. Thank you for having me again.

Dave:
For those of our listeners who didn’t listen to your first appearance on this show, can you tell us a little bit about yourself and what you do at ICE?

Andy:
Yeah. I am the vice president of enterprise research and strategy at ICE, and so effectively, what that means is I get my little hands in all of the data that we have available to us, whether it’s housing market data, or mortgage performance, or anything around the mortgage life cycle, really getting to play into all those different data sets. Now, in being acquired by ICE, we have even more data at our fingertips. We’re more heavily in the origination space. We’ve got some rate lock data that can tell us what borrowers are doing out there in the market, so really excited to get to share some of that data today.

Dave:
Well, I’m very excited. I was looking through your mortgage report, which we’re going to be talking about a lot today, and I was very jealous that you have access to all this data. There’s just so much information that’s extremely pertinent to the housing market, and everything that’s going on with housing right now. With that said, can you just tell us a little bit about the October ’23 mortgage report and what’s contained in it?

Andy:
Yeah. We did a little bit of everything, and we try every month to put, as you mentioned, the most pertinent data in there, so we’ll go everywhere from mortgage performance to mortgage originations. We’ll get into the housing market very specifically, and look what’s going on at a macro level, and look into specific geographies in terms of what’s going on. I think in terms of nuance, this month, we had some data around the Super Bowl mortgages. They’re becoming a bigger and bigger topic of conversation. We looked at the market from a mortgage lender standpoint, obviously, a very challenging market right now. We gave some pointers around where we see the market going throughout 2023 and ’24, how to best capitalize, how to understand who’s transacting in the market, why are they transacting in the market, and then as I mentioned, a lot around the housing market, and the dynamics going on right now, which are very interesting.

Dave:
What are some of the most important takeaways that you think our audience of small to medium-sized real estate investors should know about?

Andy:
Yeah. I think a couple different things, right? One is when you look at the mortgage performance landscape, it remains extremely strong, right? Folks that are looking into that foreclosure arena, or looking for any distress coming out of the mortgage market, it’s about as low as we’ve ever seen it. That being said, we’re nearing this inflection point. We’re seeing some signals from the market that we may be reaching kind of a cycle low in terms of mortgage delinquencies, and mortgage performance. Just if you look at those annualized rates of improvement, they’re starting to slow down, and flatten out a little bit.
But we’re seeing delinquencies one percentage point below both their pre-pandemic, and their pre-great financial crisis era, which may not sound like a lot, but that’s roughly 25% fewer delinquencies than they traditionally are even in good times. So performance overall is very, very strong. If you look at it from the housing market, I think that’s probably where a lot of your listeners are focused in, it was an extremely hot August, right? We got our ICE Home Price Index data in for the month of August. Very strong numbers across the board, right? We saw the fourth consecutive month, where we’ve hit a record high in terms of home prices in the US, home prices up two and a half percent from where they peaked out late last year. And then that headline annual home price growth rate that we all look at, where home prices versus where they were a year ago, we’ve gone from 20% in 2021 to effectively flat in May, as the Fed raised rates and tried to compress that market.
But then we’re seeing this reacceleration. We’re back up to nearly 4% annualized home price growth again, and poised for some additional push based on some of the baked in home price growth that we’ve already seen this year. That’s what we’re seeing through August. And then if you look at what’s going on in the weeks since with mortgage rates, they’re up to seven and a half percent according to our ICE conforming 30-year Fixed Rate Index, which has pulled 6% of the buying power out of the market, since those August closings went under contract, right? We’re looking for maybe yet another inflection in the housing market, as we move late into this year. A lot going on in the report, a lot going on in the mortgage and housing markets right now.

Dave:
You actually beat me to one of my questions, Andy, which was about how much buying power has been removed from the market, because obviously, we see this dynamic in the housing market where supply has stayed really low, and even though demand has deteriorated over the course of the year. Since they’ve both fell relatively proportionately, we see housing prices somewhat stable, as you said. In August, they were up a bit, but now seeing rates just skyrocketing even more than they had. Just curious, how do you come up with that number, and can you just tell us a little bit more about the implications of that, that 6% of the buying power has been removed just in the last few weeks?

Andy:
Yeah. Let’s talk about the numbers in and of themselves, right? When we look at home affordability in general, we’re really triangulating three things. We’re triangulating income, we’re triangulating home prices and interest rates, and we’re looking at what share of income is needed at any given point in time for the median earner to buy the median home. That’s how we assess affordability, and we do it at the national level. We do it across all of the major markets across the country as well. Nationally, we go all the way back into the 1970s to draw comparisons, because what we found was, during the pandemic, we were reaching outside of normal bounds. We were seeing the lowest levels of affordability that we had ever seen in more recent data sets, and so we were having to go all the way back into the ’70s, into the Volcker era, to find something more comparable to what we’re seeing today, right?
That’s how we come up with those affordability numbers. When you look at that, what you see is that we’re nearing 40%, right? It takes 40% of the median earner’s gross, not net, we’re not talking paycheck, we’re talking gross monthly income to afford just the principal and the interest payment on the median home purchase. The worst that it’s been since the early 1980s, obviously, very unaffordable. And the only time we’ve seen affordability at these levels was when interest rates were above 12%, right? We’re seeing those similar levels of affordability today at 7.5%, just because of how much home price growth has outpaced income growth in recent years, so a massive challenge out there in the market. When you look at how that’s impacting demand and borrower behavior, we’re now seeing, if you look at mortgage applications, they’re 45% below pre-pandemic levels. That’s the lowest that they’ve been versus “normal,” right? If there is ever a normal in the housing market, that’s the lowest that we’ve seen them so far. You’re certainly seeing these rising interest rates start to impact how many borrowers are out there shopping in the market.

Dave:
All right, great. Well, thank you. That’s extremely helpful. Do you have any thoughts on if mortgages go up to let’s just say 8%, another 50 basis points, is that going to be another 6%? Does it get worse as the numbers get higher?

Andy:
Yeah. It’s pretty even over time, right? The rule of thumb is kind of a 10 to 12% reduction in buying power for every percent rise in interest rates, and so you can cut that in half for a half a percent rise in rates. Again, our Conforming 30 or Fixed Rate Index was 7.5% yesterday, meaning that if you look at the market yesterday, the average rate locked in by a buyer using a conforming loan was 7.5%. Again, if you go up to 8%, another 6% reduction in buying power, and vice versa if rates were to fall, and so you are seeing it constrained. When we look at it in the light of the August data that’s been most recently released, those ones went under contract in July, right? We’ve already seen that 6% decline in buying power from when the latest housing market data is coming out, suggesting we could see further cooling here over the next couple of months, so certainly something that we’ll be watching very, very closely.

Dave:
That talks a little bit about the demand side, but when you look at the supply side, to me at least, I have a hard time seeing how that moves a lot in the next couple of years, right? If this lock in effect is real and rates are going up, then it’s going to only get worse. Construction is doing its thing, but it’s not going to come in and save supply anytime soon. A lot of things people point to or ask about is foreclosures. But you said earlier that delinquency rates, at least according to the most recent Mortgage Monitor report, are lower than they were in 2019. Can you just tell us a little bit more about the state of delinquencies, and if you expect things to change anytime in the future?

Andy:
Yeah. We do expect them to go up, right? Current state of delinquencies, you hit it, right? They’re extremely low right now. We talked about that a little bit earlier. If you look at serious delinquencies, and the risk of foreclosure, and typically, foreclosures account for roughly three to 5% of all home sales, they’re well below that right now. Even in a normal market, you’re talking about relatively slow, or relatively low volumes of inventory out there, but they’re well below long-run averages. When you look at serious delinquencies, and look at remaining protections on those loans, you’re still seeing a lot of servicers that are rolling some of those forbearance plans forward, or rolling those forbearance programs forward to help borrowers that are struggling in today’s market. 70% of all serious delinquencies of the very low-level of serious delinquencies that are out there in the market right now are still protected from foreclosure by loss mitigation, forbearance, bankruptcy, those types of things, and so you’re just seeing very, very little inflow into foreclosure, and serious delinquencies themselves are the lowest that they’ve been since 2006.
I mean, you’re absolutely right. When we look at it from an inventory perspective, we’re looking for all of these little nooks and crannies, right? New builds, how can they help? How can potentially, if we saw some rise in defaults, could that actually help the market from a housing market perspective? There just aren’t a whole lot of answers right now to the supply problems. We’re still, as we sit here, we’ve been seeing inventory edge slightly higher the last couple of months. We’re still at roughly half of what we should have, in terms of for-sale inventory out there in the market. As you mentioned, that’s keeping prices very, very sticky.

Dave:
I have a question that might be stupid, so please bear with me right now. But I’m curious if the relationship between delinquencies and foreclosures have changed over time, or if that’s possible, because obviously everyone compares the current situation to what happened during the financial crisis, where a lot of people had negative equity, and if you were delinquent, then you were probably going to get foreclosed on, there was a short sales, all these negative outcomes. Right Now, all the data shows that people are equity rich, and so I’m curious if there’s any logic to this idea that even if delinquencies go up, foreclosures might not go up, because people could just sell on the open market. That could still help the inventory, but it wouldn’t be through a foreclosure.

Andy:
I mean, you’re absolutely right. It happens for a couple of different reasons. One of them you talked about is equity, and you’re right, they are as equity rich as they’ve ever been. We’re nearing the levels of equity that we saw last summer, before housing prices began to correct, so homeowners are very, very strong from an equity standpoint. The other reason is, I look at servicers like Bachmann a little bit, right? Servicers have all these tools in their tool belt, or whatever you want to call it, to help homeowners, and they’ve really built those over the last two decades, right? The first time was the great financial crisis, and we learned a lot about loan modifications, and what worked and what didn’t work, and they’ve got all of those programs set up, and ready to deploy when borrowers become delinquent. The second one was during the COVID pandemic, and forbearance became the big talking point, the big program that was rolled out there for folks that had short-term losses of income, right?
We have all of these programs, and all of these tools in our servicing tool belts now, that we’re ready to deploy, right? They’ve been battle-tested, they’re ready to go, they’re set up in servicing systems. We can roll out loss mitigation plans relatively easily, if folks have longer term loss of income. For short-term loss of income, forbearances have become very, very popular recently. We have a lot of tools there to help homeowners avoid foreclosure, and avoid that distressed inflow, even in the case that they become delinquent. It doesn’t mean it’ll be non-existent, but the roll rates from delinquency to foreclosure are certainly lower than they have been historically.

Dave:
Okay, great. Well, I’m glad my hypothesis beared out. But yeah, I think it’s important that… I was reading an article, I forget where it was, just talking about the banks learned their lesson from what happened during the great financial crisis, and how they lost a lot of money that they may not need to have lost, if they had these tools in their tool belt, as you said, because they were just foreclosing. Everyone was just panicking and just trying to like they wanted to get them off their books, whereas if they rolled out some of these forbearance programs, or loan modifications, they probably would’ve done a lot better. I think this isn’t just out of the kindness of their own heart, but the banks have a financial incentive to modify and work with borrowers, if there is some sort of delinquency.

Andy:
Yeah. We’ve learned a lot on both sides, right? We’ve been talking about servicing, and how we better service mortgages to reduce default, and that’s ingrained in servicing systems. We certainly have it in our MSP platform, most certainly. But on the origination side of the house, we’ve learned a lot of lessons there too, right? If you have an adjustable rate mortgage, make sure the borrower can pay their fully indexed rate, right? Same goes for buy downs that are taking place, same goes for credit quality. You’re seeing extremely high credit quality mortgages being originated in recent years. When you look at the outstanding stock of mortgages, mortgage payments are very low.
Folks have locked in very low interest rates right now. They’re very strong holistically from a DTI perspective, from an equity perspective, ARM share of active mortgages is a fifth of what it was back in 2006-07. in many ways, when you look at where we stand today versus the great financial crisis, the mortgage and housing market is structured very, very differently. It’s much more solid, and I wouldn’t expect to see anything near an outcome you saw from the great financial crisis era, just because of the improvements that were put in place across the board from origination all the way down through servicing systems.

Dave:
Well, that is encouraging. Hopefully, you are correct. You mentioned origination, and I just wanted to get a sense from you about what is going on in the origination market now, with rates continuing to climb, is volume just continuing to deteriorate or what’s happening?

Andy:
Yeah. I wouldn’t say deteriorate, because it’s already been relatively low, and refinances have hit about as low as they can get, knock on wood. But, I mean, there is a small baseline level of refinance activity out there that’s really cash-out lending, perhaps surprisingly, is what’s really left out there in the refinance space. It’s a very unique set of borrowers, right? It’s odd, because the average borrower refinancing right now is raising their interest rate by 2.3%, which seems absurd. Why would somebody give up a 5% interest rate, refinance into a seven and a quarter? It’s because those borrowers are really centered around getting the equity out of their home, withdrawing some of that equity, and so you’re seeing these very low-balance borrowers that are willing to give up a historically low rate on a low sum to withdraw a large chunk of equity at a relatively reasonable rate compared to what you can get on second-lien products, right?
There’s some of that activity going on, and so if you’re looking at this from a mortgage lender, you need to be very acutely understanding of what’s going on in today’s market, who’s transacting, why they’re transacting. But then it’s very heavily centered around the purchase market, right? This is the most purchase-dominant mortgage lending has been in the last 30 years. We’re seeing months where it’s 88% purchase lending. That’s really where lenders are focused is driving that remaining purchase volume out there in the market.

Dave:
What are the characteristics of the purchase loans? Is it home buyers?

Andy:
Yeah. Absolutely. Home buyers, it’s higher credit score borrowers, right? There’s a lot of economic uncertainty, there’s uncertainty across the board, and so you’re seeing lenders that are very risk-adverse right now, and so it’s higher credit score mortgages, it’s moving a little bit more towards the FHA space than it has been in recent years. When you look at how hot the market got in 2021, or in 2020, a lot of those would’ve been FHA buyers, had to move into conventional mortgages, because there were 10 offers on the table, and the first ones that were getting swept onto the floor were FHA loans, and so you saw it more centered around GSE lending back then. Right now, I would say a little cooler, right, relatively speaking? You’re seeing those FHA offers that are being accepted a little bit higher pace. You’re seeing a relatively strong first-time home buyer population out there, and so it’s a more FHA paper than what we’ve seen in recent years.

Dave:
I think that’s probably a relief to some people, right? Like you were saying, the FHA was just not really a viable option during the frenzy of the last couple of years. For a lot of people, that is the best or only lending option out there, so hopefully that is helping some people who weren’t able to compete, even though it’s less affordable, at least you can compete against, it’s a less competitive environment for you to bid into for a home.

Andy:
Yeah. Blessing and a curse, right? The reason that it’s less competitive is, because it’s less affordable as well. You’re dealing with affordability challenges, but less competition out there in the market, certainly.

Dave:
What we’re talking about here, I should have done this at the top. Sorry, everyone. These are just residential mortgages, right? This doesn’t include commercial loans.

Andy:
That’s exactly right. Yeah. We’re looking at folks buying single-family residences, buying condos out there, buying one to four unit properties across the US.

Dave:
Does any of your data indicate what is going on with investor behavior?

Andy:
It does, right? Investor is going to be a little bit more difficult to tease out, but when you look at investor activity, especially in recent years, they’ve ebbed and flowed along with the market. You saw them move in, when we all knew that inflation was going to become strong, they were trying to put their money into assets rather than holding it into cash, because everyone knew cash was going to get devalued in an inflationary environment, and so you saw them push into the market in 2020, 2021. They’ve backed off along with overall volumes declining in recent years, but they make up a larger share, because they’re a little bit less affected by interest rate movement, because you have more cash behavior there in that investor space. They make up a little bit larger share, but they have been ebbing, and flowing in and out of the market similar to other folks, only to a little bit stronger degree early on, and a little bit lesser degree more lately.

Dave:
Got it. Thank you. You said earlier that assumable mortgages are one of the things that are growing in popularity. Can you tell us more about that?

Andy:
Yeah. For folks that aren’t familiar with what an assumable mortgage is, it’s effectively, if I sell you my home, not only can you have my home, but you can assume my mortgage along with it. Now, the reason that that’s attractive is, if I have a three and a half to 4% interest rate on my home, you can get an interest rate three point half to 4% below what you could get out there in the market right now. At face value, they seem very, very attractive in today’s market where folks have locked in very, very low interest rates and you’re looking at getting a 7.5% interest rate if you just go directly to a lender today, right? Again, face value, these look like very attractive options, and they’re relatively common. There are about 12 million assumable mortgages, so FHA, VA, USDA mortgages are assumable out there. It’s about 12 million, so that means one in four, roughly, mortgaged homes in the US as an assumable mortgage-

Dave:
Wow.

Andy:
… which also sounds like, hey, there’s a ton of opportunity. A little over seven million of those have a rate of below 4%, so 14% of mortgage homes, you could assume the mortgage, and get a 4% rate or better, right? It seems like a ton of opportunity, and it’s certainly a growing segment, and a growing opportunity out there in the market. There are a few reasons why it hasn’t taken off as much as maybe you’d expect in hearing those numbers. One of them is two thirds of those that are assumable below 4% have been taken out in the last three and a half years, meaning folks just bought their home recently, or they just refinanced, and they want to hold onto that low rate, right? They’re expecting to live there for a while.
Reason number two is, it’s attractive to a potential buyer. It’s attractive to that existing homeowner as well, right? They don’t want to give up a sub 4% interest rate for the same reason that you want a sub 4% interest rate as a buyer. And then the third reason is more around home prices, and home price growth, right? If you look at those 12 million assumable mortgages out there, average home value is about $375,000. The mortgage is only about $225,000, right? You’re going to need to bring an extra $150,000 to assume the average home either in cash-

Dave:
Wow.

Andy:
… or via secondary financing at a higher interest rate. A lot of folks, assuming these mortgages, we’re talking FHA, VA homes, they’re in more first-time home buyer communities, folks shopping in those specific places don’t have $150,000 in cash to bring to the table, or that secondary financing offset some of the savings you were going to get with that assumable loan. Certainly attractive out there in some situations, but there are some reasons why you’re not seeing it completely take off, and everybody selling their mortgage, or turning over their mortgage along with their home.

Dave:
Just so everyone listening knows, because most of these people are investors who aren’t owner-occupied, assumable mortgages really are only available for owner occupants. If you were considering house hacking in a duplex, or quadplex, this is a feasible option. But if you wanted a traditional rental property, you would have to go a different creative finance route, but you couldn’t use an assumable mortgage. Andy, I got you here. Curious about, we’re fresh into Q4, curious, we’re seeing some seasonal declines, where do you think we’re heading through the end of the year?

Andy:
I think you’re going to have to watch housing metrics very, very closely for the tail end of this year, and here’s why, right? If you look at how hot the housing market has been so far in 2023, and there have been months where we’ve been 60% above normal growth in terms of housing, there’s a lot of baked in reacceleration that’s going to take place out there. If you’re looking at annual home price growth rates, I mentioned nationally, they’re up 3.8% through August. They were effectively flat in May. If we didn’t see any more growth, and we just followed a traditional seasonal pattern, you’re going to see that annual home price growth rate rise from 3.8 to 5%, through the tail end of this year.

Dave:
Wow.

Andy:
There’s some baked in reacceleration out there in the market that’s going to carry the housing market higher. The reason that I say you need to watch very closely, is that may be countered by some slowing out there in the market from the recent rise in interest rates, right? Keep in mind, and I think I may have mentioned this earlier, but the August home price numbers that you’re seeing out there, those August closings went under contract in July. Interest rates were more than a half a percent below where they were today, and so you’re seeing a different affordability environment, as we sit here in October, than when these latest housing market numbers when those homes were put under contract, right?
There’s going to be a lot of tea-leaf reading here in housing market numbers over the next few months to say, what if this was baked in reacceleration that we already had caked in before we got to these latest home price rises, and how much actual shift are we seeing in the market from this rising interest rate environment that could slow us down over the tail end of this year? You have to watch those housing market numbers very, very closely, understand what month you’re looking at, understand when they went under contract, because I do expect some inflection out there in the market, based on this latest interest rate increase. You’re already seeing it in mortgage applications, right?
Even when you look at seasonally adjusted numbers, we’re now at the deepest deficit that we’ve seen so far in the pandemic in terms of buyer demand out there. That could cool off not only volumes, transaction volumes, but could cool off prices as well. You’re just going to have to dissect that cooling from the already baked-in reacceleration that that’s caked into some of these upcoming numbers.

Dave:
That’s interesting. Just so make sure everyone understands this, we talked about on the show that year-over-year housing data is really important to look at versus month-over-month, because of the seasonality in the housing market. But to your point, Andy, there’s something known as the base effect that goes on, sometimes, when you’re looking at year-over-year data. Whereas if last year we had this anomalous high-growth, which is what happened last year, usually, the housing market doesn’t grow in Q4, but it did last year, that it may look like, or excuse me, sorry, it shrunk last year in Q4. It’s going to look like we had significant year-over-year growth in Q4, even if there is a loss of momentum, it might not necessarily be reflected in that data. I think that’s really important and a good reason for everyone, as Andy said, to keep an eye on metrics very closely over this year.

Andy:
You’re right. Traditionally you’d want to look at year-over-year versus month-over-month. One way that we’ve been looking at it, and I really like right now, is month-over-month seasonally adjusted numbers, right? They take that seasonal component out, because you’ll get very confused if you look at the housing market, and look month-over-month and don’t seasonally adjust.

Dave:
Right. Yeah.

Andy:
You’re going to be seeing a different trend every six months, right? Look at the seasonally adjusted month-over-month numbers, and those will give you indications for where those annual growth rates are going to go, and then you can take out the downward effect, if you want to, last year, right? A seasonally adjusted month-over-month is really important in today’s market, and that’s going to be one of the key metrics to watch, as we move towards the tail end of this year.

Dave:
Awesome. Now, in your mortgage report, there is a lot of… In the Mortgage Monitor report, there’s some great data about what’s going on regionally. I’m just curious, what are some of the big trends that you’re seeing? Because over the last year, we’ve seen, I guess, a return to somewhat normalcy, and that different markets are performing differently, whereas during the pandemic, everything was just straight up. Do you see that pattern continuing, or do you think mortgage rates are going to dictate the direction of every market, regardless of region?

Andy:
I think mortgage rates are going to dictate direction, but you’re going to see some regional differences, undoubtedly, right? Maybe we just hop across the country, and talk about what we’re seeing in region, from region to region. I mean, the Upper Midwest, and Northeast have been, and continue to be among the hottest markets in the country. The reason behind that is affordability well below long run averages, but still strong compared to the rest of the country. More importantly, you’ve got massive inventory deficits in the Upper Midwest, and Northeast, so regardless of the metric, right? We were talking about which metric you should look at, earlier. Take any metric you want to, take month-over-month, take year-over-year, take where we’re at today versus peak values next year.
The Northeastern part of the country, and Upper Midwest are going to be at the top of the list in terms of home price growth, right? Those are the strongest, and we expect to remain the strongest in the near term. When you get over into the West, it’s really interesting, and again, this is where you see some differences, and you really have to be aware of which metric you’re looking at. The West saw some of these strongest corrections, where we can lump pandemic boom towns in there, if you want to, Phoenix, and Boise, and Austin, and those guys. We saw some of these strongest corrections late last year, one, because those are the most unaffordable markets, not only compared to the rest of the country, those are the most unaffordable markets compared to their own long-run averages.
When interest rates rose last year, those are the markets where you saw inventory return back to pre-pandemic levels, and they were the few markets that did it. Anytime, we’ve seen a market get anywhere close to those pre-pandemic levels, we’ve seen prices start to correct, right? Those are markets that came down significantly last year, and they were the coolest markets, with the exception of Austin which continues to correct. If you look at what happened in August, the fastest month-over-month growth was in San Jose, Phoenix, Seattle, Las Vegas, which was really surprising to me, when we looked at those numbers. Those are markets that are still down 4% last year. But all of a sudden, sellers have somewhat backed away, inventory deficits are returning in those markets, and you’re seeing the housing markets reheat again, right?
I think it tells us a couple of different things. One, as we’ve move through the next couple of years, expect a lot of inflection going on in the housing market. You’re going to see some ebbs, and flows. When you’ve got a 50% deficit of inventory, and a 45% deficit right now in demand, if either one of those moves in any direction, you could see sharp upward, and downward swings in the housing market. Those pandemic-boom markets are extremely volatile right now. We saw the fastest 10% drops in prices we’ve ever seen in the housing market last year, in some of those markets. And then now, you look at month-over-month seasonally adjusted, and they’re seeing some of the sharpest rises. A lot of nuance going on around the country, when you look at it on a region by region, or market by market basis.

Dave:
Well, I’m glad to hear. It gives people a reason to listen to this podcast, as long as there’s a lot of economic volatility. Even though we don’t like, it’s good for my employment status. But, Andy, this has been super helpful, and very informative. Is there anything else you think from your Mortgage Monitor report, or anything else that you think our audience of investors should know right now?

Andy:
No. I mean, I think we’ve covered most of it. I think that the key thing, and again, this goes back to your employment, right? I mean, it’s really watching what’s going on a month-over-month basis. I think there are some folks that you started to see the housing market bottom out, and start to pick up steam here this year, and it was, “Oh, we’re back to normal, and the worst of it’s over, and this is it, and we’re ready to move forward.” I don’t think so, personally, right? If you look at the underlying numbers, and I touched on this a second ago, if you look at how unbalanced both sides are, you could still see a lot of volatility, and it’s going to be years before we see what’s “a normal housing market” ready for just normal, sustained three to 4% growth over the long run, so expect the unexpected, expect volatility out of the housing market.
We’re still in a very unbalanced position, and you could see shifts in either direction, and a lot of it’s going to be driven by, one, what happens with interest rates, and how sticky the broader economy and inflation is, and how that puts pressure on mortgage interest rates out there in the market. And then, two, that demand side, and we were talking about that earlier, right? Where does that… Sorry, I said demand, I meant supply side. Where does that inventory ultimately come from, right? Are builders able to eventually help us build out of this? When do sellers become willing to sell again, and do we see any distressed inventory? I mean, those are going to be the key components on that side.

Dave:
Awesome. Great. Well, that is an excellent advice for our listeners. Andy, if people want to check out your Mortgage Monitor report, which is awesome, everyone, if you have an interest in this type of stuff, definitely check it out, or anything else that you’re doing at ICE, where should they check that out?

Andy:
Yeah. They can access that a few different ways. We’ll add a link to the latest report in the show notes, where they can just click that, and go directly to that latest report. We also have a full archive on our website at blackknight.com that you can go out there, and access some of our historical reports as well. If there’s anything you want to see beyond that, you want info on our home price index, or anything like that, you can email us at mor[email protected], and we can communicate that way as well.

Dave:
Great. Thank you. Just again, everyone, it is in the show notes, or description, depending on where you’re checking us out. Andy Walden, thank you so much. It is always a pleasure. We appreciate your time.

Andy:
You bet. Thank you for having me, appreciate it.

Dave:
On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Paul Donovan, chief economist at UBS Global Wealth Management , joins ‘The Exchange’ to discuss variable rate mortgages pushing up the CPI, the effort to exclude asset prices in the CPI, and the direction of inflation trending downwards.

Picture this: You’re a content marketer at a fast-growing technology services firm. Your desk is littered with studies, notes from your last few marketing campaigns, and a cold cup of coffee. You’ve been staring at your screen for too long. The blinking cursor mocks you. You’re in the thick of writing a consideration-stage ebook to inspire and educate buyers on a new vertical you’re targeting. Your goal? To position your company as an authority and build trust with prospective customers.

The topic is complex, and the publication deadline is drawing near. Although you’re not a subject matter expert (SME), you took on the project with confidence. After all, you’re a great researcher and writer. And you have a roster of in-house SMEs and satisfied customers who can lend their insights.

Only—you don’t.

Silent Slack, sales, and SMEs: Where are the experts?

You pop into various Slack channels, looking for experts, prospects, and customers to speak with. You especially want to talk to people who’ve actually felt the pains your company aims to resolve. But the silent response is disheartening. There seems to be no one to talk to other than the sales reps, most of whom are as lost as you.

You ask to sit in on demos and sales calls so you can learn the language of prospects. Sorry: No can do. Even your company’s lead SME, who’s always generous with his time, says his boss doesn’t want him to meet with you anymore due to “cost factors.”

Sound familiar? As a writer, this lack of access is maddening. How are you supposed to write with expertise and authority when you’re in what I call the “marketing cage,” a stifling enclosure that separates you from the people and insights that could add depth to your work? You’re literally left to your own devices, scraping together the same tired, old information from secondary sources and filling in gaps with educated guesses.

I call this sad state of affairs “writing by the MSU approach”—the Making Shit Up approach.

A wake-up call: The 2023 Trust in Marketing Index

I suspect that the scenario I just described—an amalgam of work experiences over the years—is why Informa Tech’s 2023 Trust in Marketing Index survey found that 71% of B2B technology buyers are disappointed with the value of gated content. (I bet they’re equally disappointed with ungated content, likely even thinner and weaker than most gated pieces.)

Marketing’s grade? D-minus

The Trust in Marketing Index measures the state of the relationship between B2B technology decision-makers and marketers. This year’s inaugural score was a measly 61 out of 100. That’s a “D minus” on the “A to F” letter-grade scale. I cried when a college professor gave me a “C” on a paper. A grade of “D minus” would have crushed me.

What’s worse is that the stakes are huge. Without trust, everything we content marketers work for—lead generation, customer retention, and business growth—starts to crumble. Our target accounts? They’re looking elsewhere, at our competitors, where content marketers have broken free from the cage and are producing content that delights rather than disappoints.

5 trust busters in B2B marketing content

Imagine a decision-maker, let’s call her Sarah, who reads a piece of your content and finds it riddled with outdated statistics and a thinly veiled sales pitch. She abandons the asset and begins questioning your brand’s authority and expertise. Her skepticism grows when she runs across similarly disappointing content from your brand on social media. And when your targeted ad appears in her LinkedIn feed or a sales email lands in her inbox, she’s already predisposed to dismiss it. You’ve lost a potential lead and an advocate who could have amplified your content within her network.

As you can see, a lack of trust doesn’t just jeopardize a single touchpoint. It eats away at the foundational relationship you need to drive sales, loyalty, and advocacy. Lack of trust is a corrosive force that undermines your marketing goals at every stage—from awareness and consideration to decision and retention.

The Trust Index survey pointed to five issues that—alone or together—create disconnects and lead your audience to question your content and your brand’s credibility and expertise.

1. The generic content conundrum—speaking to no one

Content that speaks to everyone speaks to no one, a sentiment echoed by 42% of survey decision-makers who said most B2B marketing content is too general. It’s a pitfall content marketers—especially those confined to the marketing cage—know all too well. When cut off from SMEs and happy customers, you must resort to generic industry jargon and broad strokes that add little value. After all, you have to get something into market.

Consider a hypothetical software company that specializes in supply chain management solutions. Its content writer, isolated from customers’ real-world challenges, produces a blog post titled “5 Ways to Improve Your Supply Chain.” The post is filled with vague advice like “optimize your logistics” and “streamline your procurement process” but fails to dive into the specifics of how to actually achieve those goals. While the post may technically cover the topic promised by the title, it lacks depth and actionable insights.

Now, imagine you’re a supply chain manager looking to reduce supplier lead times. You stumble upon a social media post promoting the article. The title looks appealing, so you click in—and are immediately disappointed. The article is a fluff piece that doesn’t address your pain points; it offers nothing more than what you already know. The result? You close the browser tab, probably never to return, taking your potential business to the company’s competitors.

Sadly, the software company missed an opportunity to engage because of generic content. Worse, the generic content also risks damaging the company’s reputation for thought leadership—a double whammy no brand can afford, especially when trust is the currency of B2B sales today.

2. The same-old-content syndrome—recycling but not reinventing

Although the internet is a treasure trove for information seekers, it’s also a landfill of repetitiveness. Even before generative AI quadrupled the size of the landfill, a shocking number of articles and whitepapers read as though they were cut from the same cloth. I can’t tell you how many times I’ve held my head in my hands and groaned in frustration while conducting research for a piece of content. If you’re relying on the same recycled stats and arguments everyone else is using, you’re actively contributing to the sea of generic content that alienates decision-makers.

Imagine John, a CTO at a growing tech startup. He’s after a cybersecurity solution that can scale with his company. As he sifts through articles, white papers, and blog posts on the space, he notices a theme: Most of the pieces parrot the same “Top 5 Cybersecurity Threats” or offer the same “7 Best Practices for Cybersecurity.” John wants insights to help him make informed decisions, but instead, he gets an echo chamber of recycled ideas. Feeling frustrated and a bit cynical, John starts to think that if these companies can’t offer unique insights in their content, how innovative could their solutions be? He becomes skeptical, not just of the content he’s reading but also of the brands producing it. The ultimate casualty is trust—John is no longer sure whom to trust and, by extension, where to take his business.

The same-old-content syndrome is a trust buster of the highest order. It diminishes your brand’s perceived expertise and fuels skepticism that can spill over into how prospects view your products and services. And in an environment where it’s hard to differentiate, publishing same-old content is doubly detrimental.

3. The gated content problem—high stakes beyond the gate

When it comes to gated content, the stakes are even higher. When potential customers fill out a form or sign up for a newsletter, they expect the content behind the gate to offer substantial value, something worth exchanging personal information for. Yet according to the Trust Index survey, 71% of decision-makers are often or sometimes disappointed with the quality of B2B gated content. If that’s the case for gated material, it’s unnerving to think about how ungated content—often more generic and less detailed—might fare in the same survey.

Imagine that Emily, a procurement manager, is actively researching enterprise resource planning (ERP) solutions. She comes across an ebook called “Unlocking the Future of ERP” on your website. Intrigued, she fills out a form to download the content. What she finds, however, is a skimpy 10-page document rife with buzzwords like “scalability” and “efficiency” but lacking concrete examples, case studies, or actionable insights. She feels cheated. “I gave away my contact details for this?” she thinks, shaking her head.

The problem isn’t over when Emily trashes the ebook. She’s now wary of your brand, questioning the value of engaging further. The next time she comes across any of your content—gated or not—she’s likely to pass. Even worse, Emily may share her negative experience within her professional network, further eroding your brand’s trust and reputation.

The gated content problem isn’t just about a single ebook, whitepaper, or webinar. It’s about how buyers perceive your brand’s ability to deliver value. Unequal value exchanges—like filling out a lengthy form in exchange for a thin ebook—cast a shadow of doubt that can extend to every interaction a potential customer has with your brand, making it much harder to rebuild lost trust.

4. The stale information dilemma—Outdated insights lead nowhere

In the Trust Index survey, 33% of decision-makers said that encountering outdated information reduces or completely eliminates their trust in a B2B brand. Completely eliminates—that’s harsh! Although being in the marketing cage limits access to fresh insights and expertise, it’s no excuse for delivering stale content.

Consider Shauna, a healthcare manager looking for a new electronic health record (EHR) system for her medical facility. She stumbles upon your company’s whitepaper that promises to reveal the “Latest Trends in EHR Technology.” Eager to inform her decision-making process, Shauna downloads the document, only to discover that the “latest trends” are from two years ago and have been widely covered elsewhere.

In an industry like healthcare, where compliance changes and tech advancements happen fast, the lapse is more than a minor inconvenience; it’s a red flag. Shauna wonders: “If their content is outdated, what will their EHR solutions be like?” The question lingers, affecting her view of your content and perception of your products and services.

Presenting outdated content is like a self-inflicted wound. Buyers who encounter the issue may not stop by ignoring future content from your brand; they might also share their negative experiences with peers, further amplifying the trust deficit. It’s a downward spiral that starts with outdated content and, in a fast-paced market, can lead to broader questions about your brand’s credibility and relevance.

5. The sales pitch turn-off—undermining trust with disguised agendas

Buyers are bombarded with marketing messages at every turn, so the last thing they want is a hard sell masquerading as valuable content. For 29% of decision-makers taking the Trust Index survey, encountering content that leads with a sales pitch is a deal-breaker that can instantly sever the trust bridge.

Imagine Lisa, a director of operations at a manufacturing company. She’s grappling with efficiency issues on the production floor and is actively seeking solutions. Hoping for valuable insights, she clicks on an article titled “How to Boost Manufacturing Efficiency.” Instead, she gets a pitch for your company’s efficiency software within the first few paragraphs.

Her initial interest turns to immediate disillusionment. What could have been an educational experience now feels like an ambush. Lisa feels deceived, and that sense of betrayal extends beyond the article. The next time she encounters your brand—in a sponsored post, a webinar invite, or a product demo—she brings that skepticism. She’s hesitant to click, hesitant to engage, and unlikely to buy.

When you disguise sales pitches as genuine content, you tell your audience that you’re more interested in ringing the sales gong than solving real-world challenges and enriching lives. Because trust is precarious, the sales pitch turn-off can be the final straw that moves a potential customer from consideration to outright dismissal.

What’s next? It’s not all doom and gloom…

Those five trust busters highlighted in the Trust Index survey show how shaky trust is today. But it’s not all doom and gloom. There is light at the end of the tunnel. The survey also revealed trust boosters and steps your brand can take to build or rebuild trust. I’ll share those findings with you in my next article.

Stay tuned!

David Greene:
This is the BiggerPockets Podcast Show 834. Using a HELOC right now is not a bad idea if you could pay it back off. Flipping a house, making a loan, doing a BRRRR, that kind of stuff makes sense. But if you’re doing this for the down payment of a house and you’re locked in and it goes the wrong way, the economy getting worse, tenants having a hard time paying their rent, now you’re getting double squeeze and it could go pretty bad pretty quickly, even when you did nothing wrong, just the market turning against you.
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world every week, bringing you the how-tos, answers, secrets, and strategies that you need to be successful in today’s ever-changing market. Today, we have a Seeing Greene episode. I know that the consistent green light that is usually behind me is not here. That’s because I’m traveling.
I actually came out to Florida a little bit earlier to promote the book Pillars of Wealth on the Valuetainment Podcast, as well as be ready for BPCON, which is right around the corner in Orlando. I’ll be driving there from my rental in Fort Lauderdale where I am now, and I brought some backup. Rob is joining me, looking handsome as ever, to take your questions about real estate and give our perspective, the Greene perspective, on how they can be solved, and today’s episode is awesome.
Before we get to it, we have a quick tip. My quick tip is take care of your short-term rentals when you’re staying in them. I walked into my rental to record the podcast today before the cleaners came, and I’ve noticed that there are fake eyelashes all over the place. They actually look ironically like caterpillars. And in Florida, there are caterpillars everywhere.
And one of them was moving and I thought it was one of the fake eyelashes moving and jumped out of my shoes as I thought that an eyelash had been possessed by a demonic entity, only to find out that it just looked a lot like a caterpillar. Rob, do you have any crazy Airbnb stories that you can share for today’s quick tip of things you’ve seen in these properties?

Rob Abasolo:
Yeah, I think just go stay at your property and bring a screwdriver and tighten furniture. Every time I go stay at a property, I’m like, dang, this chair was about to fall apart. One more person sitting on this and I’d have a lawsuit on my hand. So I would say empower your cleaners with a screwdriver at the very least and encourage them to tighten things up, because things get a little loose there whenever guests are just jumping around everywhere, not taking care of your stuff as they would take care of their own.

David Greene:
Ah yes, I refer to this as Ikea roulette. All right, in today’s show, you are going to love it. We get into what to do when you’re new and have a growing family and your property may make sense as a rental. A few scenarios with paid off properties, how to leverage them, if we should take debt out, how to get them performing optimally, scaling issues, is the market one where you should be scaling aggressively or is a more measured approach, more popular, as well as a two star review that you’re not going to want to miss. All that and more in today’s Seeing Greene. All right, let’s get to our first question.

Rob Abasolo:
Welcome, Tim. So what’s on your mind?

Tim Alhanati:
Hey, guys. Yeah, thanks for having me on. So I live in Orange County, California and I’ve been starting to listen to the podcast a little bit recently. I’m really new into the real estate investing world. My wife and I own our house, probably about 300K in equity, and we’ll eventually want to move out. We’re expecting our first child.
And once the second one comes, we’re going to be a little bit crammed and definitely want to get into the investing world, whether it’s in the SoCal area or starting into long distance investing, whether it’s better to get into the long-term rental space or short-term. A few different questions that I’m pondering based on being early into it.

David Greene:
Okay. Tim, are you an analytical man?

Tim Alhanati:
Yes, I’m a numbers guy, absolutely.

David Greene:
Not a surprise. I could tell from what you’re talking about. Okay, so you’ve got a little bit of equity in your primary home and you’re considering tapping into that with a HELOC, right?

Tim Alhanati:
Yes, I’ve looked into it. Yep.

David Greene:
And your comfort level is probably much more geared closer to long-term investing. Short-term is something that probably scares you a little bit, but you hear people talk about it, so you’re willing to give it a chance?

Tim Alhanati:
Nail on my head. Absolutely.

David Greene:
Okay, and then have you considered just renting out the town home and buying something with the low down payment as a house hack when the baby comes, or do the HOAs of the town home make it not cash flow?

Tim Alhanati:
No, it would cash flow a little bit. I’ve run the numbers a little bit. It would cash flow. I mean, luckily we bought it four years ago. The mortgage was pretty low. We got a low rate, and I think the market rent would be pretty good. So I think it’d probably be about 3,300 or so. I think we pay about 2,100 including the PMI and escrow and all that. So I mean, we have a little bit of capital right now to help out with a new house down payment, but obviously living in Southern California, it’s a little tough.

David Greene:
All right, Rob, I’m going to let you start. What do you think?

Rob Abasolo:
Yeah, so my question first and foremost is, are you doing this right now in this point in your life because you need money, or are you doing this right now because you just want to get into real estate?

Tim Alhanati:
Good question. Not really in need of money as far as any sort of money crunch, but definitely wanting to get into it as soon as possible just to always thinking 10 years from now, I’m glad I got into the real estate market, just more of a wealth building.

Rob Abasolo:
Great. Okay, so if that’s the case, just based on the fact knowing a little bit about you, knowing how much money… You said you have a little bit of capital. You want to get into it. I might actually push you a little bit more towards the long-term rental side for a couple of reasons. You said you’re analytical. I think it’s pretty easy to comp out what you’re going to make on a long-term rental. I think it’s a relatively standard process for doing that. I think you can be pretty calculated with that.
Not that you can’t with short-term rentals, you totally can. Short-term rentals are just more volatile, and you’re going to have some high seasons. You’re going to have some low seasons. It’s not going to be consistent. And so if you’re just looking for something where, “Hey, I want to get in, I’m cool to play the long game,” long-term rentals are definitely going to be that. They’re not going to be super high cash flow most of the time. There’s exceptions to that rule. You’ll make a little bit of money every single month.
And in 10 years, I think that’s definitely something where you’re going to say, “Well, hey, I’m glad I did that 10 years ago. I didn’t make a ton of cashflow, but 10 years later my appreciation is super, super high.” So I think I might push you a little bit towards there, especially considering that you’re in Southern California. And I think if you’re going to go the long distance route and if you’re open to that, you might just have a little bit more stabilization on the long-term side of things.
I don’t think you’re going to be able to get a cash flowing long-term rental in SoCal. Maybe a short-term, but that will require more money, I think. What about you, Dave? What do you think?

David Greene:
I’m thinking more about Tim’s personality than the actual market right now, and I don’t think we talk about this enough within real estate investing, right? We tend to speak about it as if it’s stock trading. So with stocks it’s like, well, what’s the best company? What’s the best strategy? Because who David is as a person doesn’t matter. I’m just pushing a button on my computer, on my phone. But real estate investing is more hands-on. There’s more creativity. There’s more problem solving. There’s more organizational skills.
It’s more like piloting an aircraft, like a fighter jet, than it is to just putting something on autopilot and letting it go. The skills of the pilot matter, as well as the type of the plane they’re flying. They sort of create this hybrid of success, and so your skills as a fighter pilot are going to play into this. If you’re more analytical, if you’re a little more risk averse, you want something that’s a little more predictable, I think you do well as a short-term rental investor actually, because the smarter that you are, the more creative that you are, the better your work ethic, the more likely you are to succeed.
I’ve been going through a really rough patch for about a year and a half right now with all of business and all of my rentals and all the people I have working with me, trying to move these pieces around to get everything to fit. What I found is that a lot of the problems with business and real estate come from the belief it should be passive. And frankly, that’s the way that real estate investing has been marketed for a long time. So the more passive that you want something to be, the more headaches you’re going to get from it.
It’s always, I delegated it. I have my org chart. Someone is supposed to be in charge of this. What do you know? That person doesn’t do a good job. The whole thing falls apart, and Rob’s on the phone while we’re in the middle of recording a show trying to get a hot tub delivered on one of his decks. And I’m making fun of him because I say someone should be doing it, but Rob has figured out that it needs to get done right and I’m the only one that I trust to do it. So Tim, I’m going to come back to you. First off, are you okay accepting real estate is not going to be as passive as maybe you’ve been told?

Tim Alhanati:
Yeah, yeah. I think honestly, even with my current job, I mean, I stick to the hours and I’m lucky that I don’t have to work longer hours than I would. Normal 40 hour a week. I’m willing to take the time outside of that and spend time doing it.

David Greene:
So if you’re willing to put the time and you have the skillset, which it sounds like you do, you will get a better return on your time in the short-term rental space. Because as a traditional rental, like all those ones I have, my skills as an investor, once you buy the property, there’s not a whole lot you do. You got what you got, right? Your ability to look at that property and try to manage it will really only help you when you’re trying to save money on repairs. That’s about the only time.
You don’t do anything to increase your revenue. You can’t make the property taxes go down. With the short-term rental, you have a lot more control over the expenses and the income, which results in a better NOI, which gives you better profit margin, which opens up doors to hire more people. So I would like to see you get in that space. Now, I don’t know if I would like to see you go there right away. All right? If you moved out and you house hacked, which I think you’d be more comfortable doing, could you do a short-term rental on that town home or are those prohibited?

Tim Alhanati:
No, I don’t think so. I haven’t looked into it. I’ve actually also thought of doing a midterm even for that one.

David Greene:
That you can do.

Tim Alhanati:
Yeah.

David Greene:
Yeah, that’s what I do in California. They’re 30-day rentals. Not everywhere’s the same, but most of the municipalities in California will not let you do an Airbnb unless it’s your primary.

Tim Alhanati:
I think the one I have right now is a little versatile. I think I could honestly go either way with it.

David Greene:
That’d be great. I would like to see you house hack. Put 5% down on something else. Get as big of a house as cheap as you can, as ugly as you can, so you can add as much equity, as many bedrooms, as many units, whatever you can do to make that thing a good rental property later. And then just take your time. No pressure. Do you like a live and flip type of a situation? When you’re ready, live in part of it with your growing family, rent out another part of it to somebody else. Turn that town home into a short-term rental or a medium-term rental.
And if it goes bad, your fallback plan is to make it into a traditional rental, which you already know will cash flow. I like this plan because it lets you screw everything up and then figure out what went wrong and fix it without a catastrophe. You’re not putting 25% down and a hundred grand on a rehab and just closing your eyes and hoping for the best with this deal. You’re getting exposed to what is going to go into real estate investing without making it a huge capital risk. Rob, you see me hosing that?

Rob Abasolo:
No, I like it. Look at us switching sides over here for once.

David Greene:
I saw the look on Rob’s face when I said short-term rental. He’s like, what?

Rob Abasolo:
I was like. And also one thing I wanted to touch on, David, he mentioned using his HELOC as maybe part of the down payment or towards the down payment. What do you think about that?

David Greene:
I’m not against it in all cases. I’m more against it now than I was a year ago. HELOCs are adjustable-rate mortgages, which means we tend to analyze properties based on what they are right now. I need to come up with a name for this, like right now itis or something. People always analyze a property with what’s the rent right now? What does Rentometer say? What is the mortgage right now? Well, rents change where your expenses usually don’t, okay? But with an adjustable-rate mortgage, your expense changes too.
The model of looking at it on a spreadsheet only tells you the minute that you close on the deal, what you can expect to get is likely rates are going to keep climbing. I just did a video about this on my YouTube yesterday that we don’t know, but the mortgage-backed security market is getting a little bit fickle. They’re like, I don’t know if we want to keep buying all these mortgage notes right now because they think we could be heading into a recession. So they have to raise the mortgage interest rate to get people to buy them.
And if that continues, it’s going to create pressure that rates are going to keep going up. That’s not really tied to the Fed rate like people think. It’s tied to the demand in the market. So using a HELOC right now is not a bad idea if you could pay it back off. Flipping a house, making a loan, doing a BRRRR, that kind of stuff makes sense.

Rob Abasolo:
Somewhere you can get out of it pretty quickly, right?

David Greene:
Yeah. But if you’re doing this for the down payment of a house and you’re locked in and it goes the wrong way and you start to hit trouble with the economy getting worse, tenants having a hard time paying their rent, now you’re getting double squeeze and it could go pretty bad pretty quickly, even when you did nothing wrong, just the market turning against you.
That’s one of the reasons I didn’t say out loud, but I was thinking I’d like to see you get into a house hack because you can put less money down. You don’t have to tie into that HELOC. You can keep that powder dry.

Rob Abasolo:
I agree with all of that. I just want to clarify though, HELOC being a home equity line of credit, so you’re basically using that equity in your house to fund the next one. Is it an adjustable-rate HELOC? Because some are fixed. I have a fixed one from a few years ago, and I think that makes a pretty big difference. Tim, is it fixed or is it adjustable?

Tim Alhanati:
I haven’t done anything with it specifically. I was just curious. Most likely variable.

Rob Abasolo:
Okay. Yeah, if it’s variable, I think David’s spot on. If it’s fixed, I mean, you can calculate it, right? Even if it’s a high interest. If that delta between using that to cancel out your PMI is worth it, then obviously data would say to do that. Just keep in mind that when you use your home equity line of credit, that will count towards your debt to income ratio, so that may lower your purchasing power on whatever property you buy.

Tim Alhanati:
Yeah, that’s new information I found out recently.

Rob Abasolo:
Yeah, yeah.

David Greene:
Very good point there, Rob. And I love that you brought that up because for everybody listening, if you’re going to get a HELOC, now you know to ask the question, do you have a fixed rate HELOC option? All right, Tim, we’re going to be getting to our next question. But before we do, where can our audience find you?

Tim Alhanati:
I’m on Instagram. I’m @TimAlhanati. Pretty easy.

David Greene:
@T-I-M-A-L-H-A-N-A-T-I. It wasn’t as easy as you made it sound.

Tim Alhanati:
It’s a tough one. It’s a tough one.

David Greene:
I’m @timvanderschlakenhadsenfuchi. Very easy.

Rob Abasolo:
Wow, what a riff. I love it.

David Greene:
All right, thanks, Tim. Let us know how it goes and reach out to me if I can help you in any way. Okay?

Tim Alhanati:
Sounds good. Bye.

David Greene:
And thank you, Tim, for joining us today. Remember, everyone get your questions in at biggerpockets.com/david to be featured on the show. We hope that you are enjoying the shared conversation so far. Rob and I certainly have, and thank you for spending your time with us. Please make sure to like, comment, and subscribe on YouTube, as well as leave us a review wherever you listen to your podcast. We actually wanted to read one of the reviews that someone left us for all of you to hear with a specific way that you can help us out after hearing this.
So this was a two-star review that came in from GJOVI33 who said, “We will tell you all the best secrets,” with an exclamation point, and then in “behind our paywall. Buy our masterclass to learn more.” I can understand the frustration with that. I don’t see how it has anything to do with BiggerPockets.

Rob Abasolo:
Right, right.

David Greene:
BiggerPockets doesn’t really offer paid courses. Bootcamps is the only thing I think, and they’re pretty dang cheap.

Rob Abasolo:
Right. They’re super cheap, and then we have BP Pro, which again is mega cheap and optional. And you get, honestly, I think most of the content on the website for free. So the podcast is free. I think what happened was his username is GJOVI33. He must be Bon’s brother, and I think he’s just got a chip on his shoulder that he never…

David Greene:
Because he was never the Bon Jovi that made it?

Rob Abasolo:
He was never the Bon Jovi. He was the G Jovi in his family, and I think he was just… Yeah, he’s just out to get it. He’s out to let us have it kind of thing, you know.

David Greene:
Well, Rob and I believe in turning lemons into lemonade, and here’s how you can help us with our lemonade stand. If we get more of you to leave a five star review to overwhelm this two star review, this can actually be a net positive. So please head over, leave us a good review, an accurate and thorough review. This doesn’t make any sense that this person’s upset that you have to buy a masterclass. Definitely not a BiggerPockets thing. But enough of that, moving into the YouTube comments that y’all have left on previous Seeing Greene episodes from FlorianWu7256.
“It was actually super interesting to watch both of Rob and David’s different perspectives and conclusions. Our individual opinions are influenced by our own life goals and life experiences made me even more open-minded. Thank you.” And from Riz Keysetya, “Great episode, David. I have question. I bought multifamily investment properties using a DSCR loan. My question is, can I move into the property since this property is an investment property? Please advise. Thank you.”
Okay, in most DSCR loans, I don’t know about your specific loan, your loan documents would say so, but in the vast majority of them, all the ones I’ve seen, you cannot move into the property if it is an investment property. Now, what I can’t say for sure is if you are prohibited from moving in it or if you are stating when you bought it that you are not going to move in it and it was not purchased with the intention of moving into it. So you would need to check with a loan officer that originated that loan, if that was us at the One Brokerage.
Send an email to your loan officer to ask this question. We’ll get you an answer. But if you got it from someone else, you’re going to need to go ask them. Most DSCR loans, they make you say that this is not something that you’re buying to live in because they’re using the income from the property to approve you for the mortgage and you’re not going to be able to generate income if you’re living in the unit. Does that make sense, Rob?

Rob Abasolo:
Yeah, it does. It does. I would bet more than likely that you cannot live in there.

David Greene:
The only question is I don’t know if there’s a law that says you’re not allowed to do it, or if you just said, “I am not intending on living in it when you bought it,” and you swore that you weren’t at the time.

Rob Abasolo:
Right. Well, that’s very true. For sure there’s usually documentation that you sign that’s basically like a, “Hey, I promise I will not live in this investment property.” Just read your loan docs when you sign them. I know, crazy concept. But nowadays, I probably spend a little more time at the closing table than I used to a few years ago.

David Greene:
All right, our next comment comes from episode 825. LOL. I love the three star from Debbie Part. It made me laugh. This is where Rob and I, or this is where we read a three star review from somebody else that wasn’t super thrilled with the podcast. Hey, we bring you the good, the bad, and the ugly. Which of those three would you qualify for, Rob?

Rob Abasolo:
I’m good with just being the middle there. I think I’m going to go the good. Oh, shoot. Sorry, I don’t know why I was thinking good, better, best. Maybe I’m just always optimistic.

David Greene:
Yes, you are. I think that’s what we learned about you.

Rob Abasolo:
I think I’m going to go good then. I’m going to be arrogant on this one. I’m going to say good.

David Greene:
All right, Rob, put on your earmuffs before I read this one. Our next quote comes from Alexandra Padilla. “Loved having you both on a Seeing Greene episode. I say you keep it going. Rob was my original catalyst into short-term glamping rentals, and you, David, have been my catalyst to become a full-time real estate professional. Having you both together is a big bonus. I vote to continue to bring Rob on. Thank you both for all the knowledge and real encouragement just to do something to keep moving forward. You guys rock. By the way, I love bald men. So sexy.”
Folks, this is a groundbreaking moment in the world of BiggerPockets. This might be my first compliment from a female in YouTube comment history ever. It is a running joke that I will frequently get comments from somebody, like if I’ve been working out and my arms look bigger, or the lighting was really good, always from dudes. I have a huge dude fan base. Never once has a woman said something. Let’s hope that Alexandra Padilla is a real profile and not something that a dude made.
Rob, I’m happy to have you here with me for this. How do you feel seeing my first ever compliment from a possible female fan calling me… Well, maybe she’s not even saying I’m sexy. She’s just saying bald men are sexy. But indirectly, I’m still going to take it.

Rob Abasolo:
Can I take off my ear muffs? I haven’t been listening.

David Greene:
Good point.

Rob Abasolo:
Okay, yes. I’m just reading up on this, catching up. Look, man, I’m really happy for you. I’m really proud of you. I think this is a big moment for you. I think there’s a moment where things change for people, and this is your moment, man. I think, Alexandra, if you’re here, if you’re listening to this, reach out. Reach out to David on Instagram or reach out to me. I’m happy to make the connection and good day to you.

David Greene:
And if you are someone who’s been listening to this podcast, chasing your dreams, trying to hit financial freedom, let this be a moment of encouragement for you. I’m going to share this victory with all of you. Because if I can get a compliment from a female on my physical appearance on this podcast, anyone can do anything. All right, and our last comment here comes again from Apple Podcast. This one from Justice Short, who gave us a five star review, labeled grateful.

Rob Abasolo:
Just as short as who?

David Greene:
What’s that?

Rob Abasolo:
Just as short as who?

David Greene:
Oh, that’s funny.

Rob Abasolo:
Do you think that’s what they’re going for?

David Greene:
Rob, Justice.

Rob Abasolo:
Justice Short.

David Greene:
Yeah, not just as.

Rob Abasolo:
I used to know a guy named Justin Time. No, no. Justin Case. Real guy.

David Greene:
Yeah, that’s a funny name.

Rob Abasolo:
Yeah, sorry. Carry on.

David Greene:
Extremely grateful for this podcast. I loved it when Brandon was the host, but honestly, love it even more with David as the host and Rob as the co-host. This podcast offers everything any real estate investor could look for, from mindset to economics and practical advice to grow your portfolio. Appreciate you for all that you do and continuing to make me laugh with you all along the way. Now, that is a pretty nice review. How does that make you feel, Rob?

Rob Abasolo:
That is heartwarming. Yeah, I’m just like, who makes her laugh more, me or you? Both. Is it the dynamic?

David Greene:
See what happens? One compliment and all of a sudden it’s a competition with you now. I called you handsome Rob the whole time, and one person calls me sexy and you’re like, “Wait a minute, what about me?”

Rob Abasolo:
Yeah, exactly. I got to get fed some of the compliments too. Justice Short, let us know. Let us know in excruciating detail which jokes have made you laugh.

David Greene:
Excruciating detail. That is funny. All right, and just to keep it real, it is very difficult to make a podcast that focuses on practical advice, overall principles and philosophy, keeping it entertaining, keeping it moving quickly, and try to make people laugh. So thank you candidly, Justice Short, for the observation you left and the review. And again, if you like this, please go leave us a review wherever you listen to your podcast. They help us a ton.

Rob Abasolo:
They really do.

David Greene:
All right, our next question comes from JR Matthews in Boston, Massachusetts.

JR Matthews:
Hi, David. My name is JR Matthews. I live in Boston, Massachusetts. I’m standing on the deck of a waterfront two family that I’m house hacking with my beautiful wife, Crystal. I was able to get this house as a result of following the systems I’ve learned from your podcast and books. I have five small multifamily homes and I want to scale. I’m running into trouble getting a HELOC due to DTI. I don’t want to cash-out refi and lose my rates below 4%, and I’m not crazy about selling any of the properties.
Should I keep hunting for a HELOC, sell the properties and 1031 into something better, or find a deal that’s good enough to make a cash-out refi worth losing the low rates? If I live to the average age for men in the US, I have 12,775 days left to make an incredible life, so I’m itching to make some moves here. Would love any advice you have to offer. Thank you guys so much for what you do.

David Greene:
All right, Rob, this is an interesting dilemma and one I hear on Seeing Greene often. I know you’re not always with me on these shows, but welcome to the club. Here’s what’s basically going down. I have something good going for me and I don’t want to mess it up, but I also want to scale. It looks like this is a capital problem.
Now, most of the time we take equity, we turn it into capital. We reinvest it. We do that through a HELOC, a cash-out refinance, or selling the property. JR here says, “I don’t really want to do any of those three things. I feel stuck. What should I do?” What do you have for him?

Rob Abasolo:
Well, he’s got something that a lot of people don’t have, and that is multifamily experience. So I would say a lot of people would look at his portfolio and say, “Hey, he’s got my dream life. He’s got my dream portfolio. I would do anything to work with this person.” I might consider opening up the conversation of just finding a partner, finding a partner that wants to learn what he’s doing and maybe he can guide that partner in the purchase, maybe put a little bit of capital in the game so he’s got some skin in the game.
But maybe work out a sweat equity versus capital type of thing and work with a partner/investor, because it sounds like he doesn’t want to do the other three things. Ultimately, I would say the three things he doesn’t want to do are all things that are necessary to continue to scale. So he either has to make a compromise on that side or be willing to split equity with somebody else and move into the partnership investor type of scenario. What do you think?

David Greene:
I love that you gave the practical approach because I really wanted to give the philosophical/mindset approach and now I get to. This is really one of the huge motivations for why I wrote the new book Pillars of Wealth because this problem is a frequent one that we get in real estate investing. For the last 10 years, largely it’s been the hottest market that real estate has ever had. And so the strategies that we would recommend were just scale, scale, scale. Pull equity out of stuff you did before.
Reinvest it into new stuff. Of course, you could have lost, but the odds of losing were so much smaller because the value of property was going up. The rents every year were going up. Rates were only going down. I mean, you had every single tailwind that you could possibly get, making it so that being aggressive was in your favor. It’s not a market where being aggressive is in your favor as much. That does not mean, should I buy real estate or should I not buy real estate? It’s not a polarizing thing.
It’s a spectrum. It’s just harder to buy real estate. So you should buy, but just be more careful. And what I don’t like about this is he’s giving up a sure thing for something that’s much less likely to be a sure thing. In Pillars I talk about you need a three pillared approach to building wealth. One of those pillars is investing, of which we talk about real estate investing. So I don’t really need to bring that up because everybody listening to this already gets it.
There’s other people in the financial independence, retire early space or maybe the business space, the people that are listening to Alex Hormozi, they want to make a ton of money, they need to hear about real estate investing. They don’t realize it’s a pillar. Our audience knows. Our audience needs to hear about the other two pillars, the art and skill of saving money and the art and skill of making money. And what I really like to see from JR here is to let the frustration that it’s hard to buy more real estate become the fuel or the carrot that causes him to make some different life changes.
Can JR make some cuts in his own budget? Can he budget money a little bit better and save more? Can JR maybe pivot a little bit here? Your favorite word there.

Rob Abasolo:
Pivot.

David Greene:
Pivot. Start a business, work some more overtime, get a raise, get a second job. Just take some risks in his financial life where he gets out of the W-2 cage and gets into the 1099 free-range, right? That is something I’d like to see a lot more people do Instagram they want to improve their financial position. I want them to keep investing in real estate. I want you to get away from only investing in real estate.
The healthiest investors I know make money, save money, and invest the difference. And this question seems to be geared around, how do I scale without saving more money or making more money, and that’s what makes me nervous. What do you think about that, Rob?

Rob Abasolo:
No, totally right. One of the pieces of context here that we know on our end is he said that all properties are cash flowing around one to $3,000 a month. So let’s take the average of that being $2,000, he’s got five properties, so he’s making about $10,000 of cashflow. I mean, that’s not nothing, right? If he had came to me and said, “Oh, I have no money at all,” that’s like a whole nother conversation. But I think if he’s very diligent in saving $10,000 a month, a year from now he’s got 120K that he could theoretically roll into the next purchase.

David Greene:
That’s a great point. That would be focusing on the defense side. From the offensive side about making more money, that could happen within the investing pillar. So maybe these are traditional rentals that are all cash flowing like that. But if he moved them to midterm rentals or even short-term rentals, what if he could double the revenue that he’s making at half the time it would take to save up the down payment for the next multifamily property?
He doesn’t have to go learn a whole new asset class, lose his interest rates, try to 1031 into something that’s risky. Just take the offensive pillars and apply them to the investing that he’s already doing.

Rob Abasolo:
Yeah, I think we get into this conversation of how can you make more money with your current portfolio? And that’s a really good question. It’s like, can he convert anything to mid and short-term rentals and maybe just amp up that one to $3,000 of cashflow per property to maybe two to $4,000. Even doing that would be pretty significant.

David Greene:
Yeah, and it’s better to make more money within your investment portfolio than it is to make it outside of it, because the money that you make within your investment portfolio is sheltered by the depreciation of the portfolio. So the taxes you pay on that money is significantly less when it’s sheltered by depreciation versus if you just go get another W-2 job. Your income goes up, so does your tax rate. All right, moving on to the next question here.
It’s from Gary Schwimmer in California. I had to hear any of the senior condo from my parents in Deerfield Beach, Florida. I own the condo outright and only pay the HOA fees and property saxes. I have left it empty for several years basically due to not knowing how to be a landlord. I’m especially skeptical since this would be long distance. At a loss at what to do with this property. Do you have any suggestions?

Rob Abasolo:
Easy. I love this one. He’s got a good problem. Most people are like, “I don’t have money, or I don’t have a property.” He’s like, “I’ve got a property. It’s empty. What do I do?”

David Greene:
I mean, anything he does is better than what he’s doing. That’s another thing. You can’t mess this up.

Rob Abasolo:
So there’s this concept that I call reverse arbitrage. And for those of you that don’t know, rental arbitrage is the idea where you go and you rent a property from a landlord. You’ve got to pitch to them on it. You got to get their consent. You rent that property and then re-list it on Airbnb. You can make decent money doing that. But reverse arbitrage is when you’re the landlord who is open to leasing your property to an Airbnb host, and that’s exactly what he could do. He could say, “All right, listen, I don’t want to be a landlord,” so he could just rent it to someone that want…
Airbnb can be a little tough for people that don’t have a ton of money to get into, but arbitrage allows you to get in for like eight to $12,000. So there’s a whole pool of people that would beg him like, “Oh my gosh, please, can I rent your place? Can I list it on Airbnb?” And as long as he was okay with that concept, which I don’t see why he wouldn’t be, then he could actually make really good money on that property without really having to do anything. He wouldn’t need a property manager.
The co-host or the arbitrage person is basically going to manage the property for him and is going to pay him a little bit more than market rate. So that’s my suggestion.

David Greene:
I love it. And if you’re going to take that route, a little bit of advice for you, my man, Gary, the person that you let rent this out as an Airbnb is going to be taking a risk. They are going to be looking for people to use that property and making the same or more than the rent that they’re paying you. If they fail at their job, there’s a very real possibility that they will not pay you the rent that you’re owed. If you’re going to take that route, choose someone that has something to lose. You don’t want to do this for a person that has bad credit and no money.
Because if they fail at renting it out on Airbnb, they’re going to have no problem just not paying you. You want to find a person that has something to lose, who doesn’t want you to sue them, who doesn’t want to be held accountable and responsible for the least that they agreed to pay you the money. The more they have to lose, the less likely they are to skip on your payment. So don’t assume that all people you could do this with are the same.

Rob Abasolo:
True. One positive thing is he’s not used to making money already. So if the person doesn’t pay him, nothing really changed.

David Greene:
It’s a beautiful thing of being at rock bottom. You can’t get any worse. This is the most excited I’ve been for a Seeing Greene question the entire time when I’ve done it.

Rob Abasolo:
I know. It’s like a true softball for us. All right, one final thing. I can already feel the comments like, “Oh, Rob, arbitrage sucks.” Listen, it’s a good entry point for people that need to get in. But another entry point is you can actually get a little bit of that upside too, Gary, and you can actually instead of offering it up as a reverse arbitrage situation, you can find a co-host, find someone who is willing to co-host for you. You will have to pay for the furniture. You’ll have to pay for the setup, which can cost you anywhere from 10 to 20 grand, depending on your space.
Have someone else manage it for you. They’ll charge a 20% fee or a 15 to 25% fee to do so. And in that case, you get both the stable income every month and the upside, if they really, really come in and crush it, which in Deerfield Beach, I mean, I’m sure you would probably do okay out there during the summer season.

David Greene:
Yeah, and funny story, I’m actually in Fort Lauderdale right now recording at my Airbnb that has not been cleaned yet from the guests that were here before. Try my hardest not to touch anything, and it’s like less than eight miles away from Deerfield Beach, where Gary’s condo is located. So let’s see if I get in touch with Gary before I leave here and go check the place out for him.

Rob Abasolo:
So you can rent it out.

David Greene:
That’s exactly right. I need a place to stay while my place is being cleaned.

Rob Abasolo:
I do want to say that all the advice we just gave is contingent that the HOA allows it, because he says he does pay HOA fees. Normally HOA scare me, but considering he’s in a beach town, typically a lot of condos in the Florida area, they do allow the short-term rental stuff. So it may not be an issue, but definitely read your bylaws on that one.

David Greene:
Moving on, our last question comes from Rayna in Georgia. Rayna says, “Hey, David, I just bought my childhood home and it is paid in full, but it needs repairs. How can I leverage this home given the condition and no mortgage?” Rob, what say you?

Rob Abasolo:
Hmm. Well, I think first and foremost, she needs to get it rental ready no matter what. I think the paid in full thing, we’ve had a couple people on Seeing Greene lately that have this. That’s a gift. All right? A lot of investors would go out there and be like, “Leverage. Leverage. Take out a cash-out refi. Go reinvest it.” I actually think once you reach that point where something is paid off, it is a gift. It is a cash flow gift. So I would say try to be very scrappy with getting it rental ready and just put it up on the market and rent it and cash flow every single month.
There are different levels of rentals you can do from pad split to long-term rentals, to medium-term rentals, to short-term rentals. You can do pretty much anything you want, and the best part is that there’s very little risk considering that you own it outright. And it’s not like you’re going to be missing the mortgage payments. You will still have to pay taxes and utilities and everything like that. But you are, in my opinion, in the least riskiest version of real estate as it stands. What do you think?

David Greene:
Well, I think that they’re asking, how do I get money out of the property to make these repairs? Is that the way you understood the question? How can I leverage this home given the condition and no mortgage? Or you think they mean, how can I use this home given the condition and no mortgage by leverage?

Rob Abasolo:
Well, yeah, I think she’s saying, “I’ve got this asset. How can I leverage it in my benefit?”

David Greene:
Well, it depends how bad the repairs are. If they’re just basic repairs that need to be done and you can still generate some kind of rental income from it, you can rent it out to somebody in whatever way you do, traditional, midterm, short-term, whatever it is, and then use the money that comes in that you’ve generated to pay for the repairs so that the property pays for them themselves.
The tricky thing would be if it’s in such disrepair that you can’t collect any rental income from a tenant, where the only tenant you can find to live in it isn’t going to pay the rent. So what do you think from that perspective, Rob, if it’s in such bad shape that it’s not something that could generate revenue?

Rob Abasolo:
I mean, I would say she could possibly consider a HELOC, and I just don’t want her to go into a full on six-figure renovation, but she could consider a small HELOC that she uses to renovate it and get it rental ready and then rent it, and then just make the delta between her HELOC payment, her home equity line of credit payment, and the rental rate that she gets.

David Greene:
Yeah, that’s a great point. I think you could pay HELOC on the property for a small amount to make the repairs and then pay off the HELOC with the money that came in from it. But I would say, Rayna, don’t do anything big. If you’re new to real estate investing, you haven’t done a ton, it says here in my notes you have one duplex in Florida and a single family in Birmingham, so maybe you have some experience, but don’t go crazy in a market like this and dump a ton of money into that house when we don’t know what’s going to happen to the value of real estate or the ability to be able to rent it out.
There’s a story going around in the news right now of somebody that has a house in Brentwood, California in Southern California with a tenant that’s been in it for over a year that is refusing to leave unless they get $100,000. So we’re starting to, unfortunately, see more and more of these tenants holding landlords hostage based on technicalities in the law.
So if you’re not super experienced with real estate, I’d hate to see somebody get into a situation like that. But like you said, Rob, this is a gift. It’s a great situation to be in because the risk of making mistakes is so low when there’s no mortgage.

Rob Abasolo:
Yeah.

David Greene:
All right, that’s all we have for today. Thank you so much everybody for joining Rob and I on Seeing Greene. I hope that you see things from my perspective a little bit better, and that Rob’s perspective added a little bit of color to green. I feel like it was a little bit more forest green that just David Greene today with you here.

Rob Abasolo:
That’s right. That’s my favorite color, forest green. Any ornamentation I can add to the Greene factors honestly makes me a happy man.

David Greene:
Thank you, man. What’s your favorite color, by the way?

Rob Abasolo:
It is green.

David Greene:
It is green.

Rob Abasolo:
I don’t tell you that because I don’t think you need to know that information, but it is green.

David Greene:
I bet you say that to all the people when you’re co-hosting the podcast with them. I hope that’s the same thing that you tell Pace.

Rob Abasolo:
When Brandon told me that, I told him my favorite color was Turner.

David Greene:
That’s funny.

Rob Abasolo:
And he was like, “What?” And I was like, huh?

David Greene:
My favorite color is you. This is David Greene for Rob “The Shameless Gadfly” Abasolo signing off.