Richard

Dave:
Hey, everyone. Welcome to On The Market.
James Dainard, what’s going on man? Good to have you here.

James:
I’m happy to be here. Just landed on a Red Eye in Naples, Florida. So I’m in a random hotel room right now.

Dave:
Why are you in Naples, Florida?

James:
It’s for a sales retreat. We’re having a bunch of guys meet at one of our partner’s houses, so it is pretty cool. But I literally landed, got in the Uber and pulled over to a random hotel to hop in for the podcast.

Dave:
Oh, my god. So that’s not even where you’re staying.

James:
No, this is halfway mark.

Dave:
You just rented a room to record the podcast.

James:
Got to get that good wifi.

Dave:
Wow. Oh, my god. Wow. You stay at nicer hotels than me. My wifi is always terrible there. But that is dedication, we greatly appreciate that. Well, today we have a great show. Let me ask you, have you heard the term “doom loop” recently?

James:
It is on repeat. It is the term of the month, at least. I know that much.

Dave:
Well, if you haven’t heard it, to our audience, doom loop is the scenario that a lot of journalists and analysts are talking about where commercial real estate defaults start, banks stop lending, credit tightens, which puts more downward pressure on prices, more people default, and it becomes this negative downward spiral. And this has happened in the past. This is not fiction or theory. This has happened and a lot of analysts are thinking that it could happen in the U.S. with commercial real estate.
So today we have brought on an incredible guest. It is Richard Barkham, who is the Global Chief Economist and Head of Global Research for CBRA, which if you’re not familiar, one of the very biggest commercial real estate firms in the entire country. He maintains a massive team of analysts and economists, and we have an incredible conversation with him about the doom loop, about what’s going on in the international property market, and how it could impact the U.S. And so I think we’re going to hear some really fascinating stuff in this conversation.
James, do you have any questions you’re particularly interested in asking Richard?

James:
Yeah, where are the deals going to be? We haven’t seen the huge deals yet.

Dave:
Give me those deals.

James:
Where are they going? Let’s go find them.

Dave:
Yeah. All these economists, they talk a lot about theory. They’re wonderful guests and they’re super helpful, but I don’t think they’re going to be showing you any properties that are going to be big deals for you.

James:
They drop you those little gold nugget hints that you should start looking.

Dave:
Yeah, they inform your strategy.

James:
Yeah, take notes and go dig on all the sectors he’s going to talk about.

Dave:
Before we get into our conversation with Richard, I just wanted to call out that you’re going to hear two different terms that you may not know. One is cap rates. We do talk about that a decent amount on the show. But cap rates are one way that commercial real estate is often valued. And it’s basically just a measurement of market sentiment and how much investors are willing to pay for a particular stream of income, or a particular asset class. The higher the cap rate, the less expensive the building is. So buyers usually like high cap rates. The lower the cap rate, the more expensive the building is. So sellers typically like that. So just keep that in mind as we go through this interview.
The other thing we are going to talk about is IRR. If you’ve never heard of it stands for Internal Rate of Return, and it’s basically just a metric that real estate investors really of all types use, but it’s used particularly often in commercial real estate, and it is a preferred metric for commercial investors because it is a very sophisticated one. I’ve written about it in my book, but I can’t even tell you the formula off the top of my head.
Basically what IRR does, in the most simplistic sense, is allows you to factor in all the different streams of income that you get from a property. So a lot of people look at cashflow and cash-on-cash return ,or they look at their equity growth and look at equity multiple. What IRR does is it looks at the different cashflow that you’re getting, the different equity that you’re building, the timing of that income, and gives you one solid number to understand your overall return. And it is a great thing to learn if you’re a real estate investor. We talk about it in Real Estate by the Numbers. Just know that Richard and James and I are going to talk about IRR and that’s what it means.
All right, James, with no further ado, let’s bring on Richard Barkham, the Global Chief Economist for CBRE.

Dave:
Richard Barkham, welcome to On The Market. Thank you for joining us.

Richard:
Very glad to be here.

Dave:
Let’s start by having you tell our audience a little bit about yourself and your position at CBRE.

Richard:
So I’m Global Chief Economist at CBRE, and CBRE is the world’s biggest property services company. I’ve occupied this role for eight years. Prior to that I was with a very well-known English company called Grosvenor, and prior to that, for my sins, I was a university professor.

Dave:
Excellent. And can you tell us a little bit about what you, and I presume your team as well, work on at CBRE in terms of economic forecasting and analysis?

Richard:
Yeah. So my team is 600 people around the world, and we are primarily engaged in collecting and managing data about real estate markets. Now just keeping connected with global real estate markets is what we do, and we like to be first in the market with commentary on recent trends in real estate, and we like to have the best big ideas about the forces that are driving real estate.

Dave:
Oh, good. Well, we want to hear about your big ideas. Let’s start though with just a general outlook. Everyone has a different opinion these days about where the U.S. economy is heading. What’s yours?

Richard:
The U.S. economy has been surprisingly resilient, but we still expect a recession to come. We’ve got it penciled in for Q4 of 2023 and Q1 of 2024. But given the resilience in the economy we can’t be exactly certain with that. I could see us pushing that out a little bit, but the sharpest rise in interest rates in 40 years eventually will bear down on the economy. It’s already bearing down on certain sectors, real estate’s one of them. Global conditions are worsening as well, which points us more in the direction of a recession.

Dave:
And what are some of those global conditions that you’re referencing that you think will have the biggest impact on the U.S. economy?

Richard:
Well, I think first and foremost, we’d expected China when it bust out of Ziglar, that covid lockdown, to take off into really rapid growth. And it did for a quarter. But in Q2 the Chinese economy has slowed up quite a lot, and it’s partly because people spent all of their money in Q1 and have restrained themselves a little bit in Q2. But I think there are more fundamental issues in China to do with the weakness of the housing market, particularly in tier two, tier three cities. And also the Chinese economy is running into its normal channel of growth is exports, but western markets are very sluggish.
So I think the Chinese economy has got problems. Now why does that affect the U.S.? It’s because behind the scenes over the last 20 years or so, China’s been an increasingly important driver of global demand. And although the United States is a fairly isolated and resilient economy it can’t completely get away with weakening global demand. And that’s the big thing about China. But I also noticed Europe has weakened as well. Germany, France, Italy, all had negative GDP growth in Q2. So the bigger developed economies are beginning to feel a pinch as well.

James:
Glad you brought that up because I’ve actually been reading up on the Chinese economy quite a bit and how much it’s been cooling down and possibly heading towards stagflation. That’s a huge deal because it’s a massive economy that’s been emerging. What is that going to do to our possible recession locally? A concern of mine is that could actually send the world into somewhat of a spin which could keep rates a little bit higher. Do you think that that’s going to affect rates going forward for the next 12 months with the impact of any kind of global slowdown as well?

Richard:
No, I think it’s the reverse in the case of China. I think China’s going to send a deflationary impulse, a slowdown in China, because China’s a very heavy user of resources and commodities in the world economy. If the Chinese economy slows up then that puts downward pressure on commodities and that helps to reduce inflation in the developed world. And I also think China drives a lot of the emerging markets. China and the emerging markets together may be 35% of the global economy. U.S. companies export to those markets. So I think through that there’s a slow down impulse sent to the United States economy and the other developed markets. But I don’t think it’s inflation, I think it’s deflation.

Dave:
So one question I keep asking some of our guests is, for those who believe a recession is in the future, what is going to change between now, which you described as resilient, to one that actually dips into a recession? What do you think some of the drivers are going to be that tip the scales?

Richard:
I think at some point corporates will want to reduce their headcount. If demand slows up corporates will want to let labor go, and I think what we’ll start to see is unemployment ticking up. We’ve got incredibly low unemployment. It’s been at 3.5. The last number was 3.8, but I think over the course of a recession that could easily get up to 4, 4.5. And indeed, it was much higher than that in the great financial crisis. So fewer jobs, harder to get a job, longer between jobs, and that feeds through into consumer sentiment. And I think then that triggers households being much more cautious about what they spend. And we’re beginning to see some element of that, because at the moment the U.S. economy is continuing to add jobs, the new jobs that is offsetting the slowdown in spending from people who are already employed.

James:
So Richard, when do you think… The jobs report is starting to turn. I think this last month was indicating that it’s starting to cool. It’s definitely starting to cool down, and as far as what I understand is a lot of the interest rates that are being hiked up is high, it’s to (a) battle inflation, but also to cool down the labor market. Do you think, until we see more unemployment, do you believe that the Fed is going to continue to keep raising rates to try to battle the labor market? Or is it something that they can make it more of a soft landing to where we’re not going to have to see a ton of unemployment to get rates under control? Because right now cost of money is excessively high. I know I’m paying it in all my daily activities in real estate. I think we’re all waiting for them to come back down, and we’re seeing inflation starting to tick down. The job market’s starting to slow down, but do we really need to see a break in the labor market for that to start changing the other way?

Richard:
I think the Fed would love to slow the economy up without actually impacting the labor market. So I don’t think the Fed is attacking the labor market, but at the moment today’s data shows that the employment cost index was revised up. So the cost of labor is still higher than is ideal. And one simple way of expressing that is the rate of growth of hourly wages in the U.S. economy right now is 4.4%. The Fed would like to see that at about 3.5% because, and this is a technical economics answer, 3.5% wage growth plus 1.5% productivity growth gives you 2% growth in unit labor costs, and that’s the rate that is consistent with 2% inflation. So 4.4% is above the rate that’s consistent with 2% inflation, and indeed, actually productivity is flat lining, so that impulse from the labor market.
Now there’s two ways that that can ease. One, we can get more workers back into the labor force. So labor force participation can rise, and that has been happening. But the other way that it can happen is through taking demand out of the labor market. And demand for jobs, jobs created is going down, but I think there are still something like 8 million vacancies in the U.S. economy. So for all that it’s slowing up it’s still a robust labor market, and I don’t think the Fed wants to cause unemployment, but it’s going to keep interest rates high until that wage growth eases back substantially, and that may then trigger a rise in unemployment.

James:
Yeah, I’m hoping it cools down. We’re still trying to hire right now and it is impossible to get people, like at the Pacific Northwest, it is just terrible. Every time we put a job ad up it takes us three to four months to fill it, rather than 30 days, like it used to be.

Richard:
Well, I think you’re not the only business feeling that really. And there was a sense I think that manufacturing industry was slowing up. But if you look at surveys of manufacturing industry, the biggest issue is not cost of financing manufacturing, it’s access to skilled labor. It’s a real thing. One of the drivers of that, of course, is demographic. You’ve got a lot of boomers leaving the labor market. On top of all of the cyclical stimulus and all of the macroeconomic cycle, you’ve got demographics overlaying that, and you’ve got boomers leaving the labor market. And some forecasts actually say the U.S. labor market is going to shrink over the next five years. So that needs to be replenished, I think, with I would say, legal migration of skilled people. And that is picking up, but it is, as you suggest, labor market conditions have cooled but they are still tight.
Getting back to the original question, that is of concern to the Fed. Absolutely it is.

Dave:
All right, Richard. Well, we’ve peppered you a lot about macroeconomics, but we would love to hear, given your experience at CBRE, your take on the commercial real estate market. It seems every single day we read a headline about some doom and gloom scenario, and would love to hear if you feel the same way? Or what is your thought on the commercial market?

Richard:
Okay. Well, let me just put that in context for folks, just big picture, just before I start. Commercial real estate in the United States is worth about 10 trillion. It’s a little bit more than that. Single family homes, or residential real estate, is worth 45 trillion. So the residential real estate market is much, much bigger, and that is in good health actually. Prices are going up and even construction is looking up, and that’s really odd given that we’ve got mortgage rates at 7.5%. I think what accounts for that is post great financial crisis. We’ve just failed to build enough homes in the United States. There’s a deficit of three to 4 million homes, so the demand and supply balance in the residential market is reasonably healthy.
Now we can come on to how that affects the apartment market. People talk about doom and gloom. Let’s just get commercial real estate in context. And the real recessionary sector in commercial real estate is the office sector. And of that 10 trillion, offices may be 25% of that. So again, it’s a big sector, it’s very visible, it’s in our face. And vacancy in the office sector is 19%, up from 12% a couple of years ago, which is a rate of vacancy we haven’t seen since the savings and loan crisis in the early 1980s. Companies are really cutting back on the amount of space that they’re going to use because of remote working.
And also, we’ve got a delivery of new real estate into the market from the previous construction wave. So fundamentals in office, very weak right now. This is a nuance, I’m going to talk about real estate stuff.

James:
Please.

Richard:
It’s not true that the market in offices is completely dead. I’d looked at the number of transactions that CBRE is doing in 2023, and it is only 5% down on the number of transactions that we did in 2019. But when companies are taking space which is 30% less than they took in 2019, so the market is active, just companies are taking lesser amounts of space, and they’re also preferring the newer build. The real flight to quality and experience, I think. Market not dead, but the unoccupied stock has increased from 12% to 18%.
Looking across the rest of real estate, by which I mean apartments, by which I mean the retail sector, by which I mean industrial, and increasingly alternatives such as data centers, medical office, life sciences, I would say the fundamentals there are actually reasonably robust. It’s really surprising when you look across it. Vacancy rates are notching up, demand is not quite what it was, but I would say fundamentals in all of those sectors are reasonably okay. By which I mean to say that people are active in the market, taking space, and there’s not a big surge in vacancy rates and unoccupied space.

James:
Richard, have you seen much price compression? We’ve seen it across some of the residential space, but now we’ve seen the median home price creep back up. Have you seen much compression with interest rates rising and the demand? Like you were just saying, tenants are occupying less space. Have you seen much compression in all those segments, like industrial, office, retail and pricing? What adjustments have you seen? Because I have seen pricing start to tick down in those sectors, not as many transactions going on, but what kind of price adjustments have we seen year over year, based on the demand being smaller?

Richard:
Yeah. I mean, that’s a complex story, so this’ll be a bit of a long answer, but let’s kick off with apartments. If you’re a user of apartments the price you pay is the rent, obviously. In that period 2020 to 2022 when people really bust out of Covid, we saw apartment rents going up at 24%, on average across the States. It’s terrible. I would say apartment rental growth has dropped to about 2%. So prices are still creeping up but it’s below inflation. And there are certain markets I think where there’s quite a lot of new apartments being built where you’ve actually seen some price declines. But on average, I think prices across America in apartments are still creeping up slowly.
In the case of retail, that’s another strange story. We haven’t built any retail space for 15 years or so. And the retail sector has gone through Covid. It’s cleaned up its balance sheets, it’s reinvented itself as a omnichannel operator, very snick omnichannel and I think part of the fact the consumer exuberance has sent people into retail centers. So actually in the retail sector our brokers tell us there’s not enough Grade A space. Companies are being held back from expanding because there’s not enough good space. We haven’t built enough. So rent’s still creeping up in retail, actually. That’s not to say there isn’t a problem with Grade B and Grade C malls. I think everybody would see that in their daily lives, but even some of those are reinventing themselves as community hubs and antique mall destinations. And they’re finding other uses, even flex offices are going into some B and C malls.
So that’s apartment, that’s retail. Industrial, that’s got the tailwind of the digital economy, of e-commerce, still well and truly behind it, and we are going to see leasing in industrial down 30% this year from a billion square feet last year to maybe 750 million square feet, but it’s still going to be the third-strongest year on record. So rents are moving up and more than a little in industrial, maybe around somewhere between 9 and 12%. So that’s a very hot market. And of course, other things like data centers. There are folks here in Dallas, where I’m based, leasing space six years out. There’s really huge demand for data centers around Cloud computing, artificial intelligence, it’s an incredibly hot sector.
So I’ll pause there. There are other sectors I could talk about, but I think the fundamentals in real estate, apart from offices, are surprisingly strong, which is not to say that investors are active. If you make a distinction to people who use the real estate for what it’s built for and they pay rent, and the people who own real estate, which are pension funds, life insurance companies, university trusts and other private capital, it’s very quiet on the investment front right now. And prices are dropping. The actual price that you would pay for real estate as an asset will be down anywhere between 15 and 20% on where it was two years ago.

Dave:
So just in summary. Yeah, so demand among tenants, whether they’re apartment tenant, retail tenant, seems to be holding up relatively well, but demand among investors is slipping. That is what we’ve been seeing, and the data I’ve been looking at shows that cap rates are moving up. Is that what you’re seeing? And if so, outside of office, I think we all understand office as being the biggest hit, but our audience is particularly interested in multifamily apartment type of audience so I’m just curious how cap rates are performing in that specific sector of commercial real estate.

Richard:
Well, I think it’s like all of the other sectors. Cap rates would be out approximately 125 basis points to 150 basis points, depending on the type of asset and the location, from somewhere around 3.5% out to 4 or 5%, depending on the location. And maybe higher than that, depends what the starting point is. There are a range of cap rates reflecting the different gradings and the different locations. I would say, as a general, prices are out 150 basis points, and that is the equivalent of approximately a 20% drop in prices.

Dave:
And do you think that’s going to continue?

Richard:
Yes, I do, actually. I see… Not forever.

Dave:
No, I just love someone who gives a direct answer. So usually when we ask something like that they, hey, well. Because it is complex, don’t get me wrong, there are many caveats, but I do always appreciate a very clear answer like that.

Richard:
Yeah. I think there could be further loss of value, and it won’t reverse itself until investors begin to see a clear glide path for interest rates. We began to see, I think maybe two months ago, just a little bit of a sense where people were… Looking at what I saw, which was actually offices, that’s got a problem, but fundamentals in real estate actually not too bad, we seem to be getting on top of inflation. And those forward rates of return, take a 5% cap rate, add 2% rental growth and we’ve got notionally a 7% forward IRR, and that equates to debt costs somewhere between 6.5 and 7.5%. People began to think maybe we’ll start looking at deals again.
But I think the spike in the 10-year Treasury, when it went from 4.2 to 4.4 in the last two weeks, again brought that uncertainty about the glide path for interest rates front of mind. So people just put their pens down again and thought, well we’re just going to wait and see what happens. We’re in this world, I think, that good news is bad news, whereas between 2009 and 2020, for real estate bad news was good news because it kept interest rates down. Now we’re in the opposite world, it’s the same world but it’s opposite. But good news is bad news because it increases the people’s worries about interest rates higher for longer.

James:
So Richard, you’re saying we could see some more buys over the next 12 months. I feel like the multifamily market has dropped a little bit, but the sellers are still hanging in there and there’s not a lot of transactions going on because the cap rates, they’re not attractive enough for us to look at them. Because I’ve seen the same thing, we were seeing cap rates like 3.5, maybe low 4s, and now they’re up to 5.5. It is not very attractive with the debt out there right now.

Richard:
No, no. I mean, I think if people had more confidence you wouldn’t just look at, to get technical, you wouldn’t just look at the cap rate. You’d have to look at the IRR, which takes into account the rental appreciation that you would get.

James:
Right.

Richard:
And I think the IRRs, even if you assume 2% rental growth, 2.5%, it gives you an IRR that is getting in the ballpark. But I think when confidence evaporates people are not IRR investors. IRR investors involve making assumptions about rent in the future, and people don’t want to do that. And just, as you say, there’s no positive leverage right now and people are unwilling to accept negative leverage in the marketplace.
But it won’t take much to tip that equation, I don’t think. We’d like to just get a bit more obvious direction on where inflation is going, a bit more obvious guidance that we’ve reached the peak of the Fed funds cycle, the Fed have been very equivocal about that, then I think things will tip. Because on the leasing side, leasing disappeared in Q2 of 2022, just when interest rates started going up people dropped out of the market. Well, leasing is back. Q2 of this year leasing came back. And we’ve got quite a high level of new construction, maybe 90,000 units per quarter, but the market is absorbing 60 to 70,000 units per quarter, at least based on Q2 evidence and Q3 trajectory.
So demand has come back up. Vacancy is probably increasing slightly. But with demand coming back it won’t take too much, in terms of that expectations for people to say there are some bargains to be had here. I would say, just on your point about sellers holding out, if the Fed hadn’t intervened and provided liquidity to the banking sector, which has allowed the banking sector to be able to transit through a period of loans. They might still be paying the interest but they’re below water in terms of value. We might have had a different situation. The Fed has been very active in providing liquidity to the banking sector. And of course, I think that’s kept pressure off the owners, and therefore you’ve got this standoff between buyers and sellers, or owners and potential buyers.

Dave:
Richard, I do want to follow up on the banking sector and what’s going on there. Just yesterday I was reading an article in the Wall Street Journal where they were positing about a “doom loop” in commercial real estate. The basic premise is that their valuations are already down. It’s put some properties under water and now people are starting to default on those loans. Bank credit is tightening up, which means people can’t refinance or they can’t purchase, which puts further downward pressure on valuations, and it creates the spiral that creates sustained downward pressure on prices in the commercial real estate space. I’m curious if you think there is a risk of this doom loop, or whatever you want to call it, if there’s more risk in bank failures and the lack of liquidity impacting the commercial market?

Richard:
I mean, what I’m going to tell you is rather a complex argument, which is somewhere in between, there’s no problem and there’s a doom loop.

Dave:
Okay.

Richard:
I think, with great respect, the journalistic maxim is to simplify and exaggerate.

Dave:
Right.

Richard:
And I think, to a certain extent, with real estate that’s what’s going on. And I’m not saying that there isn’t an issue with loan impairment, but I think what we are hearing and what we’re seeing is banks have got ample access to liquidity, and because of that they’re not suffering deposit flight. So where they are making losses or they have to write down loans, they’re able to bring that to their P&L account on a relatively orderly basis. There is no doubt that the cost and availability of credit for new financing is much tighter. It’s incredibly tight. But I don’t think the banks want to end up with real estate on their books. I mean, they’ve been through this before. They don’t want to put people into default and then they’ve got the real estate that they’ve either got to manage or they’ve got to sell it at some discount to somebody who holds it for two years and then makes a profit two years down the line. They’ve been through that before and they don’t want to go through that again.
So I think what we’re seeing is that, where possible, banks are extending. I’d go as far as to say extending and pretending, but there are lots of creative ways in which banks can work with borrowers in order to get through the period of acute stress. And I’m not saying there aren’t going to be losses. Our own research tells us probably 60 billion of loans are likely to default. There’s 4.5 billion of loans to commercial real estate. That 60 billion, maybe it’s 1.5% of total bank assets. So it’s going to be painful, but it is not going to bring down the banking sector. Therefore, the doom loop, it’s not good, and making losses is never good, but I don’t think it’s quite as an aggressive doom loop as we have seen in previous real estate crises. We’ve seen doom loops do exist in reality. They did in the savings loans crisis, they did in the great financial crisis, but at the moment, for a variety of reasons, I don’t think we’re there yet.

James:
There’s definitely a lot of articles with that word doom loop going on. It’s the new in-term I’m seeing on every article, where it’s doom loop, doom loop, that’s all I’m hearing.

Dave:
Just wait, James, the episode is now going to be called doom loop, and we’re going to probably have our best performing episode of all time if we call it the doom loop.

Richard:
Can’t we talk about virtuous circles rather than doom loop?

Dave:
Yeah, no one wants to hear about virtuous circles, they want to hear about doom loops, unfortunately. I would love virtuous circles.

James:
But if there is a doom loop coming, Richard, because it sounds like you feel confident in some commercial sectors going forward, what sectors do you feel are the most investors should be wary of right now? If you’re looking at buying that next deal in the next 12 months, what sectors are you like, hey, I would cool down on that or be wary of?

Richard:
Well, it’s very tempting to say offices, because offices, as I say, we’ve got that jump in vacancy from 12% to 19%. We’ve got no certainty about the return to work in U.S. office. We think the return to work will gather pace, but just over a longer period, but there is no certainty about that right now. On the other hand, as a professional in real estate of 40 years or so, you get the best bargains in the most bombed out markets. So amidst all of that repricing there are going to be some very good opportunities in the office sector. And if you really want to be contrarian you run in the opposite direction. All those people running one way saying doom loop, doom loop, you work out where they’re coming from and move in the opposite direction.
I think also retail has got quite a lot going for it right now. We were seeing quite a lot of private capital. And it’s not like office, the asset sizes can be smaller. It is possible for smaller investors to get involved in retail, and we are seeing a shortage of space, and we’re seeing some very, very interesting trends in retail. The sexy sectors, if I want to put it in those terms, or the sectors that we are most confident on, I think, because of the tailwinds are the industrial sector and the multifamily sector if you want to invest in longer term rental growth. But once the market starts moving that’s where the prices will rise quickest. So if you want to invest in that long-term story then you need to move quickly, I would say.
Don’t get me wrong, there are certain parts of multifamily and apartment that I think will run into some problems. There was quite a lot of very cheap bridge financing in the multi-sector where people were, in the boom years of 24% rental growth, people were buying Grade C assets with very low debt, and they were looking to refurbish and reposition those as B or B plus or A Grade space. Given the general weakness and the level of interest rates, I think some of those could end up defaulting. So if you’re a student of these matters there might be assets to be picked up or recapitalized in that segment of the market.

Dave:
James is going to start salivating now.

Richard:
Oh, I was. I was getting worked up.

Dave:
That’s his wheelhouse.

James:
I was getting itchy fingers all of a sudden. I’m like, yes, here we go. And I think Richard nailed it. It’s like everyone was buying these deals on very tight performers and then they’re debt adjusted on them in midstream, and your construction costs are higher, your permit times are longer, and then all of a sudden your cost of money’s gone up and it’s definitely got some trouble in that sector. It’s like the stuff that’s stabilized is still moving as well, but the stuff that’s in mid-stabilization that’s where we are seeing opportunities. And that’s definitely where we’re looking.

Richard:
That’s right. And again, over a long career, people who’ve made very good buying decisions have bought from troubled developers or troubled construction companies. We’ve seen this one before.

Dave:
Well, I hope no one loses their shirt. I’m not rooting for that at all. But I think it is helpful to recognize that this is happening and that there are likely going to be distressed assets that need to be repositioned by someone else other than the current owner.

Richard:
Yeah. I mean, the banking sector at the moment is writing off a lot of debt that’s below water so there is an economic cost to this, but it’s just not got out of control at the moment. And thankfully it hasn’t quite hit the consumer sector, the housing market yet, because that then impacts ordinary people, and that’s not very pleasant at all.

Dave:
Well, Richard, thank you so much for joining us. This has been incredibly insightful. I do want to share with our audience that you and your team have authored an incredible economic report, called The Midyear Global Real Estate Market Outlook for 2023. It’s a fascinating read and there’s a great video that goes along with it as well.
Richard, can you just tell us briefly about this, and where our audience can find it if they want to learn more?

Richard:
Yes, it’ll be on the CBRE website, cbre.com. Go to Research and Insights, and click through on that. It might take two or three clicks, but it is there. I have my research experts from around the world and we try to be neutral and balanced and data driven. We just give a broad overview of real estate markets in the United States and around the world. Actually, I participated in it and I learned from it as well, actually.

Dave:
That’s the best kind of research project, right?

Richard:
Yeah, absolutely.

Dave:
All right. Well, Richard, thanks again for joining us.

Richard:
It’s my absolute pleasure.

Dave:
So James, Richard has told us that he thinks asset values are going down, which obviously is not great for anyone who holds real estate, but also, that there might be some opportunities, which I know you are particularly interested in taking advantage of. So how does this type of forecast or prediction make you feel about your business?

James:
Well, I like he gave me verification that you should be buying when other people don’t want to buy, essentially. There were so many key little things when he was talking about how industrial the rents are going up, but the pricing’s going down. So there is some opportunity in those sectors of going through and just looking for those opportunities right now, because you hear it all the time that people are like, “Ah, you can’t buy anything. You can’t buy anything.” But that stat alone that he was talking about, industrial, rents are going up but the pricing’s going down, that is where you want to go look at. So I am getting more and more excited for the next 12 months, and it’s going to be a matter of being patient and finding the right opportunity.

Dave:
You mentioned on the show that cap rates where they are now, you said Seattle, what are they 5.5?

James:
Yeah, I would say 5.25 to 5.5, in there, somewhere there.

Dave:
But given where interest rates are, that’s negative leverage, that’s not something that’s typically attractive to investors given where debt costs are. At what point would cap rates have to rise for you to feel really excited about the potential of the deals you could buy?

James:
Well, you can always get a good cap rate if you buy value add. That’s where you can increase it. But I mean, in theory, I don’t really like to buy below cap rate. I would want to be in that 6.5. If it’s stabilized with little upside, I want to be around a 6.5 right now.

Dave:
And just so everyone understands, cap rates are a measure of market sentiment. And as James is indicating, it ebbs and flows based on cost of debt, how much demand, perceived risk. And generally speaking, cap rates are lower for stabilized assets. And when cap rates are lower that means that they trade at a higher cost. When cap rates are higher, they’re cheaper. And usually you can get a higher cap rate as a buyer if you’re buying, as James is saying, a fixer up or something that needs value add.
But sorry, James, go ahead.

James:
Yeah, I think that’s what we’re seeing right now. A lot of the transactions we’re seeing in this last six months it’s a lot of 1031 movement of money, but not a lot of new buyers walking in for that general 5.5 cap. If they have a purpose to go buy, they will. Other than that, everyone’s chasing that value add where you got to roll up your sleeves, get to work. But there is some really good buys right now. I know our IRRs have increased quite a bit over the last nine months to where we’re now hitting 17, 18%, and so those are all good things.

Dave:
That’s a very good thing. Well, we’ll just have to keep an eye on things and see how it goes, but I generally agree with Richard’s assessment. Cap rates are up, and I do think they’re going to continue to climb while my guess is that rents, at least in multifamily, which is the sector I understand the best, are probably going to slow down. They might keep above zero and grow, but I think these insane rent growth rates that we saw in multifamily are over for the time being. And so that combined with cap rates increasing we’ll bring down multifamily values even further past where they’re today, which might present some interesting opportunities. So we’ll have to keep an eye on this one.
James, thanks so much for being here. We always appreciate it. And for everyone listening it, we appreciate you. If you like this episode please don’t forget to leave us a review on either Spotify, or Apple, or on YouTube if you’re watching it there. Thanks again, and we’ll see you for the next episode of On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions and investment strategies.

Bill Rudin, Rudin Management Company CEO and co-chairman, joins ‘Squawk Box’ to discuss New York City’s real estate landscape, the looming commercial real estate crisis in the city, and more.

You’ve seen the headlines and felt the pressures of the realities of a post-pandemic economy. As businesses flex their creative muscles to return profit margins to their former glory, many are looking at product size. While shrinking sizes can be a cost-efficient and timely switch with fast results, it also draws immediate customer impact. There are better ways to navigate this economy while protecting quality and brand promise.

1. Review Sales Data to Discover Efficiency Opportunities

Let data be your guide as you explore opportunities for greater efficiency. Take a broad look at the total data set for your sales patterns to establish a baseline. Then, drill down to more recent segments where you may better project current buying behavior.

If you have loyalty programs where you can assess individual customers’ buying habits, extract buying frequency and product size data. Isolate buying patterns against product size to see what’s most preferred and when. Doing so can reveal otherwise missed opportunities, like the ability to reduce a product option.

For example, imagine you’re selling tea in 20-count boxes, but your most popular options are available in a 40-count box. Customers may enjoy not having to buy boxes as frequently, but at what cost to your business? The manufacturing costs, labeling changes, and shelf space may be costing you more than you think.

Store data may also reveal that the best sales and coupons are applied to the 20-count boxes. By eliminating the larger quantity item, you can boost manufacturing efficiency without sacrificing quantity or quality.

2. Break Down the Product Lifecycle to Determine How Much Size Matters

Don’t close that spreadsheet just yet; there’s more insight to uncover from your customers’ buying habits. After looking at buying frequency to explore product range, it’s time to dig into individual product sizing.

The term ‘shrinkflation,’ when a product size changes but the price remains the same, can be seen everywhere. The amount of cans in a seltzer water case goes from 12 to eight. The ounces in a bottle go from 16 to 12. However, not all product sizes shrink with the same customer impact. Sometimes, product size changes are welcomed in certain categories.

In the fast food industry, it’s widely understood that sizes have moved beyond super, reaching even mega size. As customers consider how they want to buy and enjoy such items, many are intentionally buying smaller. Whether it’s a health preference or a budget move, it’s a change worth noticing.

Launch a post-purchase survey, isolating those buying smaller sizes to a subset of questions. If the data indicates that they’d prefer more modest sizing, stress-test this change in sample markets before converting completely. By responding to customer preferences in size, you can maintain quality and price and delight customers at the same time.

3. Rethink How You Fulfill Products in a New Economy

Shrinking sizes often track back to the journey your product must make after manufacturing. Shipping weight matters and small changes in individual package sizes can present attractive opportunities for brands. Before you shrink, rethink and retool your product fulfillment process to ensure you’re at your most efficient.

Examine your shipping process at every level. Identify the cost per shipment, taking into account surcharges for fuel, timing, and parcel sizes. Product weight is one of the immediate benefits of changing product sizes, but changes like better route planning can be cost-saving too.

Upgrade your direct-to-consumer experience to make direct sales efficient and enjoyable. Explore subscription options, a strategy that benefits you and the consumer. If you’re selling bath and body care for the whole family, offer subscriptions supporting the demands of your busy customers.

A subscription creates sales consistency and shipping planning opportunities, which can help determine manufacturing needs. For your customer, a subscription eliminates a to-do list item and often results in savings on products and shipping. Keep in mind your warehousing relationship will be integral to this strategy, which can ensure subscriptions are fulfilled and expectations are met.

Preserve Product Quality and Customer Loyalty

As you navigate today’s economic pressures, shipping landscape, and customer expectations, let quality be your north star. Preserve the features and benefits of your product with a vengeance, ruthlessly protecting what your customers have come to expect.

If product changes are needed, go above and beyond on service and training to ensure your customers are well taken care of. Monitor and address customer feedback through whatever changes unfold, taking action and updating processes in response. By prioritizing the customer experience throughout change, you can improve your initiative’s effectiveness while preserving trust, loyalty, and brand legacy.

The truth is, we’re not quite there yet. While the term “quantum computing” trips easily off the tongues of policymakers, business leaders, scientists and engineers, it could be five years or even longer before this new data-crunching technology begins to make any meaningful impact on our lives.

And here’s the problem? As things stand, companies working in the quantum computing space are engaged in cutting-edge development work at a time when no one can be totally certain what the market will look like in five or ten years’ time. The assumption is there will be customers and use cases but, as things stand, it’s impossible to predict which technologies they will choose to adopt. In the meantime, startups must continue to fund their development work while trying to establish some kind of traction in a market that doesn’t really exist.

So what does that look like in practice? How are young companies finding their feet in an industry that promises to change the world – but not just yet ? I spoke to two U.K. quantum startups about their progress from drawing board to marketplace.

Market Confidence

According to figures published by Markets and Markets, revenues in the sector are expected to come in at around $899 billion in 2023, rising to $4,375 million in 2028. The development of quantum hardware and software is something that governments are keen to encourage. For instance, the U.K. government sees Britain becoming a “quantum-enabled” country by 2033 and has committed £2.5 billion to supporting development over the next ten years.

So there is confidence and consequently, there is VC cash available. For instance, Oxford Ionics – a hardware company with 50 people on the payroll – has raised £40 million so far. Phasecraft – a software startup – has secured £17.4 million in equity finance, plus a further £3.7 million in grants.

Oxford Ionics co-founder and CEO, Dr. Chris Ballance says that despite the risks associated with technologies still under development, it’s difficult to see how machines that perform calculations significantly faster than conventional supercomputers will not have enormous value. “As a company, we have been willing to take a bet on this and we are asking investors to do the same,” he says.”

The key, he adds, is to find the right investors – those who understand not only the potential rewards in the market but also the risks. There is, he adds, a need for a certain amount of investor education. “We are tough with our investors. We will tell them why they shouldn’t invest.” This is not an exercise in gratuitously scaring sources of finance away. It is about ensuring that the investors and the company are aligned.

And as Ashley Montanaro – CEO and cofounder of Phasecraft – sees it, VC finance has been crucial to enabling his company to develop its software algorithms. “There are different ways to fund yourself,” he says. “For instance, some companies offer consultancy. We see that as a distraction. VC finance allows us to focus on the hard R&D.”

Grant funding has also played a part in the Phasecraft journey. “Financially, that’s been important but not essential,” says Montanaro. “But grants are important in enabling collaboration and also in providing validation for what you’re doing.”

Commercial Viability

Perhaps the most crucial aspect of attracting enquiry is the ability to demonstrate commercial viability. In the Quantum Computing world, the basic unit of information is the Qubit. Oxford Ionics controls its Qubits – which are individual atoms – using a proprietary system designed to be scalable.

Ballance says there has been a focus on technology that will scale to meet the demand. The key is the development of reliable hardware that not only provides a sufficient number of Qubits to outperform supercomputers but also a low enough error rate to make the technology useful and workable.

And In one way or another, that’s what all the quantum hardware companies are working on at the moment. While there are a range of hardware technologies that are proven to offer quantum functionality, the tricky part is ensuring the kind of consistent performance that can be commercially exploited. That’s when the banks, the research institutes, the multinational corporations, and indeed all those who will benefit from the technology will begin to buy in.

Finding Customers

But here’s the question. How do those who are developing the technology know what their potential customers are looking for?

“We spend a reasonable amount of time talking to customers, precisely for that reason,” says Ballance. “Typically, we’ll be talking to people with PhDs in Quantum computing. We ask them what they need.”

Styling itself as a quantum algorithm company, Phasecraft specializes in the quantum simulation and analysis of materials with solar panels and batteries being a particular specialism. It is also in regular contact with potential users of its services. “We have a number of partnerships,” says Montanaro. “They include Johnson Matthey, Oxford PV and Roche.” These partnerships are helping the company develop algorithms that will solve real-world problems. In addition, it is working with IBM, BT and Rigetti.

The business models are also being developed. Both Ballance and Montanaro believe the main route into quantum solutions for the majority of organizations will be through a quantum-as-a-service model, using third-party hardware and software. That doesn’t necessarily mean an arms-length relationship with providers. This is a complex area where users and suppliers are likely to work closely together. A few organizations will buy their own in-house systems.

The adoption of quantum computing will depend on precision engineered hardware that can outperform supercomputers on a reliable basis, something that will in turn feed a specialist software industry. Ultimately, some technologies will win through with others failing to gain traction. But with quantum likely to revolutionize functions such as drugs discovery, materials development or financial modeling, the expected rewards mean that startup capable of demonstrating the viability of their technologies have a fighting chance of securing VC capital.

Ashley:
This is Real Estate Rookie episode 322.

Tony:
So we only do welcome gifts at a few of our properties right now and ours are pretty plain. It’s a little note card that we have. It’s a little package of popcorn and it’s like some candies. I personally probably wouldn’t standard include wine as a welcome gift for a lot of the reasons that you mentioned. We have sent gifts like that in the past, but only if we know if we get something from that guest before they check in. So someone’s like, “Hey, my wife and I are celebrating our 10th anniversary.” Anyone who’s celebrating an anniversary 10 years is probably over 21 years old, right?

Ashley:
My name is Ashley Kehr and I’m here with my co-host Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we’re bringing the inspiration, motivation, and stories you need to hear to kickstart your investment journey. Today we’ve got a really good rookie reply for you guys. Ashley kind of goes off the rails at one point and she just goes rogue and comes up with her own question. But we get a few good guest questions as well, or rookie questions I should say. So we talk a little bit about mortgage interest and is it a business expense or is it not? We talk about the pros and cons of buying your properties in LLCs or just doing it in your personal name.

Ashley:
I love it how Tony said Ashley has a question and then we have really good questions from the rookies.

Tony:
She’s reading into that guys.

Ashley:
So yeah, some of the things we talk about today are about mortgage payments and how they should be broken out on your tax return and in your own bookkeeping for your profit and loss statement to show your income and expenses. You have your principal that is included in your mortgage payment, and then you also have interest, and then you may also have escrow, which would be your insurance and property taxes too. So we’re going to touch on that and why a bookkeeper can play a really big important key role in helping you decipher that.

Tony:
All right guys, so I want to give a quick shout out to someone by the username of Alyssa A. And Alyssa says, “Favorite podcast. Been listening to The Real Estate Rookie for the last year. One of my favorite podcasts for being a newbie and real estate, always have the best guests, inspiring stories and advice.” So Alyssa, I appreciate the five star review and if you’re one of our rookies and you haven’t taken just a few minutes to leave us an honest rating and review, please do. The more reviews we get, the more folks you’re able to reach and the more folks we can reach, the bigger impact we can have, which is what we want to do here at The Rookie Podcast. So take two minutes, leave that review, and we just might shout you out on the show.

Ashley:
So for this week’s Instagram, shout out, I want to give a shout-out to Dell Collective. So this is an Instagram account that hosts unforgettable stays and so they share their journey about the three different short-term rental properties that they have, and I want to stay at one of them because they’re so beautiful. So if you are looking for design and experience ideas, I’m pretty sure they have a camel I think on the property even that you get to hang out with while you stay there. So definitely check out Dell Collective. They have a really unique Airbnb experience along with some of the different, I guess, amenities that are provided along with your stay and the really cool animals that you get to meet while you stay there. So go ahead and check out Dell Collective on Instagram.

Ashley:
Okay, today’s first question is from Heidi Keywood. “Why is mortgage interest not considered a loss in income or an expense? Is it just the cost of doing business? A $100,000 mortgage costs 50,000 in interest over 30 years, that’s $50,000 you’ve lost, even if the tenant is paying it. I know it’s a tax deduction and leveraging your money allows you to buy more properties and everyone has different goals, immediate cashflow pay down and larger cashflow for retirement, et cetera. But I don’t see interest expenses in the equation in any discussion and that affects how to use your cash. Thanks.”

Ashley:
So first of all, interest expense or interest on your mortgage is an expense and it should definitely 100% be included on your profit and loss statement. So if you’re using the BiggerPockets calculator and you put it in there that you’re going to be using a mortgage, the interest will show up as an expense when it is showing your profit or loss on the property. Your mortgage principal payment, that is only calculated since it is money borrowed against your cash flow. That is not calculated as a loss or as a loss in income or an expense as Heidi had put it.

Ashley:
So 100% it definitely should be accounted for. So Heidi had said that she has seen it places where it’s not included and I’m not sure where those are. Maybe people are posting examples, but it definitely should be included when you are running the numbers as to how you’re going to fund the deal. If she saw maybe properties that were being paid for in cash where there was no interest, that could have been the scenario, but it definitely should be included on your tax return and it also should be included as an expense on the profit and loss statement. And what having a bookkeeper can do is every month when you make your mortgage payment, they will take that say $585 and they will take say the principal that you’re paying is actually only $115 of that, and they will take it and they will allocate that $115 to the mortgage principal to show, okay, your mortgage balance is now this, and then they will also take the interest expense and put it as an expense for you to bring down your bottom line.

Tony:
Yeah, well said Ash. I think the only thing that might be kind of causing some of Heidi’s confusion, and maybe this is something that’s affecting some of our other rookies as well, is that a lot of times you’ll just hear people refer to what they pay monthly for their home as their mortgage payment. So they just use that as a catchall phrase, Hey, my mortgage is X, Y, Z, when in reality that mortgage payment is a combination of your principal interest taxes and insurance. So your PITI. So if you hear someone say, Hey, my mortgage is 2,500 bucks, a lot of times you’re including that interest payment as part of that 2,500. But yeah, it’s Ashley’s point, you should definitely be including your interest as an expense on your P&L. And if you are not or your bookkeeper is not, I would probably go find a new bookkeeper.

Ashley:
Okay, the next question is from Mark Urban. “What are the pros and cons of purchasing in your personal name versus in LLC? And if you go the LLC route, do you put all your properties in one or a separate LLC for each property? I’m relatively new, so pardon, if this question has been asked before.” Mark, we welcome every question here and we are so excited to have you part of the real estate rookie group and that you’re going to be starting your real estate investing journey. This question has been asked before and it gets brought up a lot. Definitely is something that people are unsure about because there is not one defined answer. Is this 100% what you should be doing? We’ll go through the pros and cons. Putting it in your personal name leaves you up for liability that someone can sue you personally if something goes wrong with the investment property, but you can also get better financing by having it in your personal name.

Ashley:
So the bank will give you a better rate and terms because it’ll be on the residential side and not in an LLC. If you put the property in an LLC, it does provide you more liability protection against you personally and your personal assets as long as you are following the rules of having a business that is an LLC such as properly maintaining your books. Downside of an LLC is that the bank loans are not as term and interest rate friendly. So for example, if it’s in your personal name, you can probably get a fixed rate over 30 years. With an LLC, you’re probably only going to get a fixed rate over five years and only amortized over 15 or 20 years. So those are some of the differences. If you go the LLC route, do you put all your properties in one or separate LLC for each property?

Ashley:
So the main reason for most people to put a property into an LLC is for that liability protection. So I would not look at how many properties, I would look at what your total equity is. So if somebody were to sue you, how much equity do you have available where the judge would say, okay, you have half a million dollars in equity, you sell all your properties. If you have them leveraged and maybe you only have $50,000 in equity, then there’s not that much to lose.

Ashley:
So I would look at it more of an equity position. I have LLCs based on my partnerships, but one partnership, the equity got too high for our comfort, so we started a second one, a second LLC, now that properties are going into that. So it really depends on your comfort level as far as how much equity is in that you’re doing the properties. And then there’s also a lot of people that just put one LLC in each property, or I’m sorry, put one property in each LLC, but Tony knows it is very expensive in California to have 20 different LLCs to maintain. You’re paying the, what’s it in California? $800.

Tony:
$800. Yeah.

Ashley:
And is that per year?

Tony:
Per year.

Ashley:
Per year. And then you also have your bookkeeping for each LLC, it’s to file a tax return for each LLC. So that can completely diminish your cashflow if you only have one property in that LLC. So that’s definitely something else to take into consideration. One more thing I will add is if you do go into your personal name, definitely get an umbrella policy from your insurance broker that all encompasses and gives you some kind of protection. So if somebody does sue you personally, they will pay up to a million, 2 million or whatever that umbrella policy is in legal fees or most likely they’ll settle for that amount of money and you won’t lose anything.

Tony:
Yeah. Just to add on to that last piece you said, Ashley, is that a lot of new investors, I think they get understandably, but they get kind of freaked out about the liability that comes along with being a landlord. And for a lot of people their minds go worst case scenario. And the truth is that there’s tons of ways to protect yourself and actually kind of alluded to this, but I think the bigger question you need to ask yourself is how much do I really have to lose If you don’t have much net worth and if someone came after you and there’s maybe a car, there’s not a whole lot for you to risk there. And for a lot of people, especially when you’re just getting started out, a lot of times the protection you can get through your home insurance policy and through your umbrella policy can give you pretty decent coverage, as you said, up to millions of dollars, which hopefully would cover a lot of incidents that happen at your property.

Tony:
To Ashley’s point, we don’t have one LLC per property. We have a couple of LLCs that kind of manage a lot of our holdings and we do that because we feel that’s the right structure for us. But I think the best thing for you to do Mark, is to go talk to an attorney in your estate, someone specifically that and maybe not even in your state, but really more so someone that understands real estate investing and all the different kind of nuances that come along with that and kind of lay out like, hey, here’s what my picture looks like, here’s what I’m worth, here’s the assets that I have, and let them kind of understand, hey, what’s the right way for you to do this? Because I don’t know, some people that spend $50,000 in legal fees for asset protection, but it’s because they’re protecting tens of millions of dollars. I myself today probably wouldn’t pay a lawyer $50,000 to set up asset protection for me because in comparison to my assets, it doesn’t make sense for me to do that, right? But someone that’s got thousands of units probably.

Tony:
So I think you want to weigh the cost against the benefit and see what structure makes the most sense for you, but I think getting some good legal advice is a good first step as well.

Ashley:
So the next question is actually I’m going rogue on this. This is a question that I have for you, Tony, that I wanted to submit today to Real Estate Rookie. So I never ever go on Facebook, but I actually once in a while go on Facebook marketplace and look for properties for sale and I actually found one, so I’ve been logging into check if the guy has messaged me back on it and he did today, but I also just scrolled through my feed and it was just, I’m not in this group, it’s like an Airbnb, VRBO, booking.com host group and it must have came up as a recommendation.

Tony:
Suggestion group.

Ashley:
So it’s a picture of a fridge and it has six different beers and a little wooden crate thing and then a bottle of wine and it says, here’s a choice, beer or wine, have a drink, it’s vacation time. And then the person wrote, “This is a little something that I do for each guest and the refrigerator. I have a nice bottle of wine and a variety six-pack of beer along with a 12 pack of waters.” And then of course, this cute little sign. “I would like to see what other hosts do for their guests as a special little welcome.” So in my brain, the first thing I think of is, Okay, what if they’re underage kids in there and they drink alcohol? I always think worst case scenario.

Ashley:
So I go into the comments and there was actually a mix of them, some just being like, you know what? It’s the person’s choice. This is a very nice gesture. Other people talking about recovering alcoholics, how this may be a trigger for them and that it’s not a good idea to put it in the home. Also, other people talking about liability or saying that it’s actually illegal for you as a business owner to provide the alcohol on the property because you don’t have a liquor license depending on what their state was. So I was just wondering if you have any take on this as to what are your thoughts on it?

Tony:
That’s a great question. I’ll answer with a little anecdote first. There was this podcast I was listening to, and it was a podcast about the court system and this lady was going to the courthouse every day following these different court cases that were happening. But one thing that she called out in the podcast was that as she was in the courtroom, there were TVs in the waiting areas, but the TVs were always only set to the food network. And she asked someone there, she’s like, there’s so many other options, why the food network? And they kind of started rattling off the different possibilities. They’re like, “Oh, well we could put the news but it’s too polarizing. Or we could put sports, but not everyone likes sports. Or we could put a kid show, but not everyone’s in here with kids.” And they just rattled off all these different reasons why all these other options were potentially bad ones and they landed on the food network because they’re like, “Who doesn’t seeing good food getting cooked?”

Tony:
So when I think about from a host perspective, it’s almost that same approach. We’re like, okay, what’s the food network of a welcome gift? So we only do welcome gifts at a few of our properties right now and ours are pretty plain. It’s a little note card that we have. It’s a little package of popcorn and it’s like some candies and we do that at I think two or three of our properties right now and that’s it. And for most people, there’s not a super high allergic reaction to popcorn. We thought about maybe home baked goods but don’t like what if people are allergic to nuts or peanut butter or whatever’s inside of them. So we said, what’s something simple, something generic, something that most people can be happy with. So I personally probably wouldn’t standard include wine as a welcome gift for a lot of the reasons that you mentioned.

Tony:
We have sent gifts like that in the past, but only if we know if we get something from that guest before they check in. So someone’s like, Hey, my wife and I are celebrating our 10th anniversary. Anyone who’s celebrating an anniversary 10 years is probably over 21 years old. So in some of those situations we’ll send a bottle of wine or if a guest maybe has an issue getting into the property because they’re checking coat working, we’ll send a bottle of wine or something like that. But as a standard catch all, give for everyone, I probably wouldn’t do it.

Ashley:
Yeah, we’ve done it twice in our A-frame property and the one was for the first ever guest, and you could tell by the picture they were definitely over 21. And then the second one was for a couple getting engaged where he had just asked us a couple different questions about how he was planning his proposal and things like that and asked, where’s a good place to go get drinks? We’re doing this hot air balloon ride or whatever. And so our manager had given recommendations, and so this was all done ahead of time, so we left them a bottle of champagne, but we actually hid it and then we told him where it was so that after he proposed and stuff and they came back [inaudible 00:18:09].

Tony:
That’s super cool. I do think welcome gifts in general are a good idea because as supply continues to increase on the platform, competition continues to increase, the hosts that really separate themselves through the experiences, the ones that I think will do relatively well. So we’re always kind of reevaluating what can we do to improve that experience for our guests.

Ashley:
Yeah, one thing that I’ve never seen feedback on is that we bought $150 Marriott plush bathrobes and our cleaner takes them home every time and does them as we have, I don’t know, four of them, whatever, but we leave two at a time and does them as part of her sheets wash cycle, and we have never had anybody say that they like them or even use them or what. We found someone in the hamper and everything that cleaner says, but nobody has cared about that. Then we also get at weddings, people sometimes provide flip-flops or whatever, or even slippers for your guests or you’re doing a bachelorette party or bridal shower, whatever, and so you can buy in bulk slippers. And so we actually tried that out too, and people use them, but nobody has ever left in their review or private review like, “Oh, we love this little touch.”

Tony:
We love the slippers.

Ashley:
Yeah.

Tony:
It’s an interesting concept and it’s something that I struggle with as well. I read this book about Disneyland and how they create the magic at Disneyland, and it started to give these little examples of things that Disney does that go above and beyond what a typical amusement park will do, and it’s all with the goal of creating this magical experience. If you walk through a construction zone at Disneyland, you never see the construction because they decorate even the gates that they put up over the construction. If you walk through a different amusement park, you’ll hear the tractors going off in the background, you can see everything that’s going on. Disneyland has people that are going through scraping up gum all day, just all these little things that they do, and no one’s probably ever commented at Disneyland. I love going to Disneyland because there’s no gum on the ground, but they can feel the difference.

Tony:
All these things kind of just combined, it creates a significantly better experience for people when they’re there. So I struggle with that. It’s like, do we invest in these little things that may not themselves create that positive review, but it’s the combination of all those small things together.

Ashley:
What’s your biggest complaint, would you say, as to far something that’s very little, that’s not like you wouldn’t think somebody would even put their time and effort into actually sending you a private note when they read a review.

Tony:
I feel like it’s either something related to cleanliness, maybe a cleaner missed something. That’s probably the biggest beef that most guests have these days. But outside of that, I wouldn’t say there’s anything that’s consistent. It’s usually some one-off thing where it’s like, for example, our AC was leaking at one of our properties and the mini split is right above the bed. So that guest complaint about that, but I don’t, there’s nothing that’s like all the time we get this same complaint. So it’s kind of hard to say.

Ashley:
Yeah, I was trying to think too, and none of our stuff is really about cleanliness or things that need to be fixed or anything like that. It’s more of like, oh, could you add this in? Or we actually got one the other day, they still gave us five stars, but there was like, there’s nothing to do here. And I don’t know if they meant in the house outside or the location of the property, but I was like, Hey, there’s board games. There’s a TV, I’m not sure exactly. There’s a fire pit, there’s a basketball net.

Tony:
We’ve kind of gotten dinged on some of our properties for location as well. And when that happens, there’s the location description on Airbnb. We can talk about the location. We’ve tried to go back and update that so people really get a good sense of where they are. One of our properties, it’s literally as far north-west, it’s in the far edge of Joshua Tree. Literally. If you go the next parcel doesn’t even belong to anyone. It’s all government land. So that’s how far out it is. And initially we were getting reviews from people that were saying like, ah, it’s a little bit far. There’s a two-mile dirt road to get there. So we put that information out into the listing. We say, Hey, you’re going to love being so remote. If you’re really looking for a solitary desert escape, enjoy the two-mile bumpy dirt road on your way to get there to really experience the desert. So we try to hype it up inside the listing so people understand that, but when we do get comments like that, we try and go back and optimize the listing to make it more apparent upfront.

Ashley:
Yeah, it’s so funny. The things we thought were going to be issues haven’t been issues at all. The driveways actually really steep, and if it rains, it can get really muddy and we put in there, we highly recommend bringing four wheel drive and stuff like that. And nobody has complained about that at all, which has been super surprising. But yeah, I was just looking at the review that we got today that kind of made me want to ask you that is the only thing that they complained about was the difficulty of finding light switches. And I mean, this is the tiniest little property ever, and they could have, and I still have the messages hooked to my phone, so I’ll still get like… Sometimes they’ll pop up for me. And so I read it and they had asked our manager who we can’t find it, she responded right away, told them the exact one they were looking for, where it was located or whatever.

Tony:
We do label our light switches, as silly as that sounds, but it’s like we’ll have one sink light, kitchen light, patio light. That way people, because we were getting those questions a lot too, like, “Hey, which switch does this thing?” and, “I can’t turn thing on?” So yeah, you got to dumb it [inaudible 00:24:21].

Ashley:
Yeah, I think the only one we have labeled is the exterior camera, and we give them the option of shutting it off.

Tony:
Really?

Ashley:
Yeah, exterior.

Tony:
Interesting. We literally just argue with the guest maybe two weeks ago, two or three weeks ago, because we said, say in our listings like, Hey, there’s an exterior security camera for your safety and for us to make sure that nothing goes wrong with the property. At this particular property, we had two, one at the front and one on the side that pointed towards the backyard. And for most of our properties that have big backyards, we do that. One on the front and anywhere there’s a point of entry. And she was making this big fuss because the listing only said security camera and not security cameras. And she literally reached out to Airbnb and she was like, their listing is incorrect and they’re watching me. And anyway, we’re pretty staunch about keeping our security cameras on at all times because in case something happens, we want to be able to check.

Tony:
For example, someone literally broke into one of our properties last week. There was one night that was unbooked and our cleaners had cleaned the property on Monday. No one checked in Monday night. The next guest was checking in on Tuesday and the cleaners cleaned the property Monday. We saw them come in, we saw them leave. They finished their checklist. The guest gets there Tuesday and he’s like, “Hey, the property looks a little dirty, and someone left some white residue on the countertop and there’s some weird things happening.” So we went back like, yeah, okay, cool. The cleaners were there. We go through our cameras, and turns out someone broke into the lockbox and stayed the night at the property, and we saw them at two o’clock in the morning. They were literally trying to creep past the camera so we couldn’t see them. So anyway, we never turn our cameras off because you never know what could happen.

Ashley:
So I should start leaving them on. Make them-

Tony:
You should always leave them on.

Ashley:
Well, they have to turn it back on when they leave, which everybody has been super good at that. But yeah, so basically it’s when they’re there, some people don’t. Yeah.

Tony:
Because we had one guest that reached out to us saying that she slipped and fell out by the hot tub. And again, we have a camera that points to the backyard, and we were able to go through all the camera footage, and the only time she slipped and fell was because they were drinking sitting at the outdoor patio table, and she tried to sit down and she missed her chair, but she tried to message us and say that she slipped because it was so wet by the hot tub. So even just for reasons like that, we never turned the cameras off.

Ashley:
So let’s go back to some of our other questions here. The next one is from Julie Glazer. “Is there a way to find out what a property sold for other than asking a real estate agent? Zillow and the assessor’s site does not seem to be accurate. For example, I purchased a property in September, and it’s not updated on Zillow for the price I paid, thank goodness, the assessor’s site had it appraised at 74,000, which is way over what it was actually worth given its condition. I called our recorder of deeds, and they do have an online record search, but it’s $20 a day or $250 a month.”

Tony:
So Julie, first, just to kind of clarify the different data sources here. So typically there are a couple ways you can get data on properties that have sold. You can get it from the MLS, like the multiple listing services, or you can get it from the actual county records. Typically, the most accurate information comes from the county records because those are based off of the paperwork that gets filed when the property is closed. In California, our title and escrow companies collect all the paperwork from the buyers and the sellers, and then they submit all of those final documents to the county. So those are typically your most accurate data sets are from the county.

Tony:
Zillow, if I’m not mistaken, and someone shoot me an angry message on Instagram if I’m wrong here, but I’m pretty sure Zillow is pulling their information from the multiple listing services. So if an agent fat fingers a number or whatever, as they’re kind of finishing things out, you could see inaccurate data on Zillow as well. So just understand that there’s two kind of different ways to pull that information first.

Ashley:
So Tony, where do you think they get it? If it’s an off-market deal and it’s not on the MLS then?

Tony:
Yeah, so there’s a couple places I like to go for data. So first you can go to the county. So Julie looks like you’ve already reached out to them. 250 bucks a month seems pretty steep, but luckily there are other ways to get that information. So there are data aggregators, basically websites, software companies that pull data from all these local counties and they put it all in one place. So Invelo is one option. BiggerPockets has a good relationship with Invelo. PropStream is another option, but both of those data software providers allow you to search pretty much every city county across the entire country and see the same data you would see as if you were paying that two 50 per month. So I think my first recommendation, Julie, would be to go to a website like Invelo or PropStream and set up an account with them. I think it’s like 99 bucks a month or something like that. So you’re only paying one subscription, but then you get access to nationwide data as opposed to just that one little county or city.

Ashley:
And I think some of them have free, I think Invelo, if you’re a BiggerPockets Pro member you get like $50 free to spend on stuff and then PropStream, I think you get seven days free too. So lots of options to just try it out, especially if you just need one thing. For myself, I’ve looked at the county records and you can still pull information a lot of times without having to pay to get the searches or if you actually go to the assessor’s office, especially if it’s a smaller town. Today, my business partner is actually going to the assessor’s office. They’re only open on Tuesdays from one to 4:00 PM And this question actually made me remember, and I just messaged him real quick on my computer and I said, “Did you go to the assessor’s office?” And he’s like, “No, I’ll go right now.”

Ashley:
Thank you. So also thank you Julie for your question so that this reminded us to make this happen or else we’d have to wait until next week. But you go to the assessor in person and you may have to pay a fee still depending on how big the assessor’s office is, but you can get the information from there too. And then also we have a newspaper, I think it’s called Business First or something, it’s in Buffalo, and it’ll actually publish all of the real estate transactions that have happened and what they were recorded at. So you can actually pay a membership to that newspaper, which is probably going to be way cheaper than the $250 a month. And you can go and search and they think they do it every week. Here’s the transactions that happened this week.

Ashley:
And usually it takes a little while. So if the newspaper comes out in January, it may have been transactions from the end of November or December or something like that, but if it was a while ago, you can go through the newspaper too and search or go to your local library and go through the big computers where you click through the pages of whole newspapers.

Tony:
I think the last thing to highlight too for Julie is the assessor’s appraised value. So the assessor’s appraised value, at least in the properties that I’ve purchased, that I’ve researched, that I’ve analyzed, I’ve never seen the assessor’s value match the actual appraised value of the home. Typically, I see that it’s lower. The assessor’s kind of trying to understand, Hey, what kind of property tax bill should you have? And luckily, it’s always lower than what the actual appraised value is. So I would never use the assessor’s website to gauge the value of a property. It’s only more so for your property tax perspective.

Ashley:
Let’s break that down real quick. I think that does get really confusing because when you get your property tax bill, okay, you have the market value and then you have the assessed value, and the assessed value is determined by the assessor along with the market value and the assessed value is usually lower than what the market value is, and that’s what they’ll take that amount and they’ll multiply it by the percentage of the property tax rate, whatever that may be for your town or county. So that is determined by the assessor themselves. This is 100% completely different than an appraisal. So for an appraisal, it is an appraiser who is going out a third party and they’re going and looking at the value of the property, which would be more comparable to the market value of the property, but still there can be a huge difference of what’s listed as the market value.

Ashley:
And also you have to look at when the property was actually assessed by the assessor too. So when was the last time the assessor went around and said, okay, you know what, I’m changing. Your property is now worth this instead of that, and they usually do a whole town reassessment for the property, and you’ll get a letter letting them know that they’re going to be doing this and that. So you want to go outside, make your house look like a dump for the days that they’re going around town, assessing property, your property tax [inaudible 00:33:35] lowered. But just so you know that there is a big difference in that, the appraised value and the assessed value of your property, because I have seen people say like, oh, they’re listing this house for sale for this, but the assessed value only says it’s worth this. There usually is a huge, huge, huge difference, and you want your assessed value to stay low, to be low.

Ashley:
So another thing, yeah, to keep in mind is that when you purchase a property, so at least in New York State, you can’t get reassessed right away. So it’s whenever there is a county or town reassessment that this will occur. And usually it’s the town that does the assessment, and so they will be like, there was maybe when you bought it, there was just an assessment done that year, so you bought it after the assessment was done. So you’re clear for a little while until they do that reassessment, and when they do that reassessment, they would look at what you had purchased the property for and what the condition of the house looks like at that time. So that’s also something to be very cautious of. If you are paying a lot more money for this property, be cautious that when there is a reassessment that your property taxes could increase.

Tony:
It’s cool that New York kind of only reassesses on a fixed cadence for one of the counties I purchased and even where my primary residence is, the reassessment happens at the time of transaction. So what happens, for example, and Joshua Tree will, we own quite a few properties whenever we purchase a property, they immediately reassess the tax value. So our property taxes go up as soon as we purchase that property, but then we also get hit with what’s called a supplemental tax bill. So I don’t know how, I don’t know the math that goes into this, but basically the county is saying, I don’t know if we’re like, hey, this is what we should have been getting on this property for the last timeframe. And it’s not a small amount. It’s like $4000 or $5,000 that’s due that first year of ownership when you buy that property.

Tony:
So I think it really is important for new investors to kind of understand those nuances because imagine you bought that short term… And we got surprised the first time that we did it. We bought that first short-term rental and we’re cashflowing like crazy. Then we get a bill for 4,000 bucks. We’re like, “Hey, we’ve already been paying our property taxes.” And they’re like, yeah, we know. You owe us this too. So then we had to start kind of budgeting for that in our new properties. So just important for rookies to kind of understand what that process looks like.

Ashley:
Yeah, there was a parcel of land that I helped an investor with. He owned the land already for a long time. So it was taxed at… The assessed value is based on it being vacant land. And then he went and did a new development on it and his property taxes for three years after that were still based off of the vacant land because they hadn’t gone and done the reassessment. So here’s a three and a half million dollars property getting taxed on a $20,000-

Tony:
Like empty plot of land.

Ashley:
… [inaudible 00:36:28] value. So there are ways that it could definitely benefit you, but then that year that it was reassessed like woo, a big shoot up. So just so you know to expect those coming. Well, thank you guys so much for submitting your questions for this week’s rookie reply. Remember, you can always leave a question, and The Real Estate Rookie Facebook group, you can send a DM to Tony or I or you can go to biggerpockets.com/reply. Thank you so much for listening. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram and we’ll be back on Wednesday with the guest. We’ll see you guys then.

Ashley:
(Singing).

How successful are microfinance organizations in achieving their missions? According to a recent report, one such group, U.S.-based Friendship Bridge, shows clear evidence of achieving its aim of breaking the cycle of generational poverty among rural families in Guatemala.

“We wanted to know, are we helping our clients achieve their objective of getting more education for their children and creating more opportunities for them,” says Caitlin Scott, chief strategy officer at Friendship Bridge.

The report, produced by impact measurement company 60 Decibels, draws on phone interviews with 277 Friendship Bridge clients conducted earlier this year. The 25-year-old organization, which serves 30,000 women a year in Guatemala, provides loans of $400 or so to groups of low-income mostly rural women who would likely not be approved for loans at traditional banks. It also provides monthly educational services aimed at helping their borrowers avoid a cycle of indebtedness. The organization disbursed $25 million to more than 33,000 women in 2022.

Confidence and Skills-Building

According to Scott, Friendship Bridge had long heard anecdotally that clients, who are women with little schooling, were able to send their children through high school or college. But no one had conducted methodical research into what extent clients developed the ability to support their children in ways that opened up opportunities and the ability pursue a better future—and whether Friendship Bridge was helping them achieve those goals. With that in mind, the organization worked with 60 Decibels to investigate the issue.

Results were largely positive and Scott attributes much of that success to the monthly workshops the organization holds. Because about 60% of clients have completed just primary school and 30% have no schooling at all, the organization focuses much of its educational work on the importance for group members to support their children’s education and how to do so. It also discusses keeping a budget and other business administrative skills, financial and preventive health education and issues related to women’s and children’s rights and empowerment.

“We focus on confidence, skills and knowledge-building and creating an environment where they can apply that knowledge in a trusting environment,” says Scott. “That allows clients to feel more confident in their ability to take what they think should happen in their own homes and act upon it.”

Key Findings

The report’s key finding’s include:

Learning skills. Eighty-nine percent of clients say they have learned skills that allow them to support their children’s education and personal development. That includes having an increased sense of responsibility for guiding children’s actions and being better able to help with learning to read and other aspects of their personal development, along with such matters as how to talk to teachers and create a healthy environment in which to do their homework.

Engagement. Ninety-eight percent of clients strongly agree that their children are more engaged in their education than they were at the same age. The vast majority attribute all or most this change to their involvement with Friendship Bridge. Clients also report participating in more decision-making about their kids’ schooling and feeling greater optimism about their children’s futures than before.

More income. Ninety-three percent of clients say they’ve grown business income since starting to participate in the program. Also 38% increased how much they’ve been able to spend on educational costs and 74% increased the quality and quantity of the nutrition they provide their families.

Dave:
Hey, everyone, welcome to On the Market. I’m your host, Dave Meyer, joined today by Kathy Fettke and James Dainard. How are you both?

Kathy:
Wonderful. Survived a hurricane and an earthquake in the same day.

Dave:
Yeah, you had a little bit of a one-two punch there.

Kathy:
Well, it wasn’t really a hurricane, but for Californians it was like a Category 4, so we survived it.

Dave:
But tell everyone what you told James and I you’re going to go do later today.

Kathy:
I’m going to go surf those hurricane waves just so I can say I did.

Dave:
That’s just so badass. I would be so terrified, but that sounds very fun if you’re competent enough to do that.

Kathy:
Yeah, we’ll see. We’ll see.

James:
Yeah, my roof did spring a leak. I was sitting in my house and all the rain, it was like a slow, slow drizzle. It was actually a normal Seattle day for this tropical storm. It was just rainy and drizzly, but all of a sudden, I started hearing the dribble in the hallway and I’m like, “Oh no.”

Dave:
Yeah, I thought Seattle, like you said, this is just a normal occurrence where it just rains nonstop.

James:
It was like a four out of 10 for a normal Seattle day. It was just a January 18th normal day.

Dave:
Well, I’m glad you’re both okay, and hopefully, it doesn’t turn into anything more than that. We’re going to tangentially actually talk a little bit more about this today because we’re going to talk about insurance costs because we have a correspondence show where Kathy, James, and myself have all brought a relevant news story to the show and we’re going to talk and discuss about the implications of each of them. In addition to talking about insurance costs, we’re also going to be talking about mortgage rates and how those keep going up and new home sales and what Warren Buffett is doing about it. So you’re definitely going to want to listen to each of these stories and understand how they may impact your financial decisions.
But first, we have a little game to play. In this game, we’re going to be talking about housing inventory, which I feel like is the word of 2023 and I have three questions for you and see how well each of you do on this. The first question, James, let’s start with you, is, which month and year had the lowest housing inventory in recent history? We’re talking the last five years.

James:
I’m going to go April 2022 because the market was just … I mean, we were selling everything way over … There was nothing for sale. I think, in our local market, we were down to … It was under half month’s worth of inventory. So that’s what I’m going with. It was the hottest I’ve ever seen it.

Dave:
So this was when rates had already started going up and everyone had FOMO and they were just buying anything that came on the April 22?

James:
Yeah, they were just starting to step on those rates, but then the people with locked in rates were in that frenzy to get the rest to lock in and get closed. So that’s my prediction.

Dave:
All right, Kathy.

Kathy:
I am going to say March of 2022 for the same reasons. It was the time to get in before rates went up and there was already a frenzy.

Dave:
Well, I wanted to guess something around then, but I’m going to guess … I actually don’t know the answer to this off the top of my head, but I’m going to say May of 2020 because that’s when everything just stopped and maybe that what happened. So the answer, Kathy, you’re so freaking good at these, you’re always get them right, is March 2022 was exactly correct. Maybe you cheated or maybe …

Kathy:
No, no, I have-

Dave:
… you’re just really good at this.

Kathy:
I do quarterly housing updates at Real Wealth and I have this Altos Research slide and I talk about it all the time. So that one, I knew.

Dave:
Dang. Okay, all right. Well let’s see if you can do this next one. How many homes were on the market as of July 2023? You can round to the nearest thousand. We won’t ask you to get it exactly correct.

Kathy:
July 2023, I want to say, I’m going to really botch this one, but it was somewhere around 400,000, 420. I’ll say 420, 420,000, but I’m talking single family homes.

Dave:
Okay, and, James, what about you?

James:
You know what? I also just did a market update, so I think it’s about 1.5 million homes if I remember right.

Dave:
Okay. So the answer is 647,000 homes and this is according to realtor.com. And, Kathy, just so you know, the way they measure this is active single family and also condo townhome listings. So only about 650,000 in July in 2023, which brings us to our final question, which is, how many homes were on the market in July 2016? So if we go back seven years, how many homes were on the market? James, what do you got?

James:
Back then, the market was a lot more … I’m going with about a million homes because I would think there’s about 30 to 40% more.

Dave:
Kathy?

Kathy:
This is going to be a wild guess, but I feel like right now we’re about half of where we were, so if we’re … I would say 1.2 million.

Dave:
It is 1.46 million.

James:
Whoa.

Dave:
So we are well under half of total inventory according … Again, this is according to realtor.com in inventory. So as I was joking before that this is the word of the year in the housing market for 2023, it makes sense when inventory or supply really in any sort of marketplace drops that dramatically, obviously, some wonky and weird things are going to happen and we all know what’s happened with this inventory dropping throughout 2023. So pretty good job. You were directionally correct about all of these, so I know these are very difficult. So great job on these.

Kathy:
Directionally correct, I’m going to put that on my wall.

Dave:
That’s what analysts say when you’re wrong, but you want to sound right. They’d just say, “It was in the right direction.”

James:
“That’s perfect.”

Dave:
“You were right.”

Kathy:
“Good for you. You get a trophy.”

Dave:
No, you nailed one, Kathy, and, James, you were pretty close, so we’ll give it to you.

James:
Yeah, I was also really far off on one of them, so-

Dave:
That’s all right.

Kathy:
That’s okay. Just keep selling them, man. Just keep going.

Dave:
All right, well we’re going to take a quick break and then we’ll be back with our three stories to discuss. Kathy, let’s start with you. What story did you bring today?

Kathy:
Mine is from Fortune and it is titled Warren Buffett Just Made a Big Bet on the US Housing Market. Okay, so that should get your attention, right? Because usually he knows a thing or two about where to invest. So this article says, “On Monday, Berkshire Hathaway disclosed to the US Securities and Exchange Commission that it made investments in three major homebuilders, D.R. Horton, Lennar and NVR.” But what should be noted here is that most of the investment went to D.R. Horton. And D.R. Horton is known for creating the starter homes, the more affordable homes, which is what is needed in today’s market. Over the past decade, there has been more household formation than new home creation and any new homes that were being built, generally were in the higher end because you can make a bigger profit from that.
And so this affordable housing, the new supply, it’s just not there. And yet, this is a time when we have a massive Millennial bubble of first time home buyers between the age of 30 to 34, forming families, having babies, pets. They want their first home and that first home is just not there. So when Warren Buffet does something, you should probably pay attention. I really wish someone had given me a little insider information here because stocks have just gone up crazy in these homebuilder stocks. So I look at this like 2012. In 2012, when the market was crashed and there were foreclosures everywhere and people were afraid to buy real estate, Warren Buffet went on CNBC and said, “Man, if I could …” He didn’t say man, but he said, “If I could buy a couple hundred thousand homes and put them on the rental market, I would if I knew a way to manage that.” And then suddenly the institutional investors woke up and said, “That’s what we’re going to do.”

James:
They’re like, “Yeah, we’re going to go do that. Thanks, Warren.”

Kathy:
So it’s just we know … At least, the National Association of Realtors says that over the past decade there is 6.5 million homes that weren’t built that needed to keep up with the household formation. So how quickly can we get there even with Warren Buffett’s money? I don’t know. I just hope they don’t overbuild, because when he says something, everybody jumps in, but this is … Perhaps, this inventory problem will get solved over the next few years.

Dave:
I’m curious if Warren Buffett made any commentary about this yet or is this just through SEC filings?

Kathy:
I don’t see anything in here that has a quote from him.

Dave:
So I was just hoping, he was like, “Yes, we’re going to put all of our money in Spokane,” or whatever. I don’t know. We could all just follow him. Like all the stock traders do, they just follow him around. But in real estate, we can’t just follow Warren Buffett around unfortunately.

Kathy:
I think it’s really everywhere. I don’t know that there’s a specific market. D.R. Horton is nationwide, and nationwide, there’s issues with affordable housing. And I can tell you, I’ve said this before, but it is really hard to create affordable housing in today’s market. Even though the cost of goods has come down a bit since 2020 and 2021 when builder supplies were out of control, prices have come down, but they’re still too high. And in our own subdivision in Utah where we were required to do 30% affordable, it cost us about $850,000 to build an affordable town home, just a town home and we have to sell them or required to sell them for about 375,000. So it’s costing us more than double to build it. So I don’t know how D.R. Horton’s going to do it, but I know that is their thing. That’s what they do. Maybe they’re not as custom as the homes we’re building, but they’re going to get them up somehow.

James:
Well, Kathy, I stayed in one of their units and I can tell you, D.R. Horton’s finished package is not the same, but they build a really good house, especially for that first-time home buyer, entry-level builder. And I really liked this article because Warren Buffett likes to invest in services and things that are in high demand and being able to build efficiently is very difficult right now. These big track homebuilders like D.R. Horton, because they’re buying such huge sites in the middle of the outskirts, that path to progress areas, they’re able to attain dirt a lot cheaper than infill metro. In addition to when they’re building that many homes on one site, it is so much more efficient, which will drive down your costs.
As inventory and housing shrinks and shrinks and shrinks, they need this product because it is affordable and that’s where the market’s absorbing right now. And big builders, they know how to build the right way for the right price that will allow everybody to continue to still be a homeowner because of the cost to build.

Dave:
Yeah, I see this as a good thing. I don’t really know a ton about D.R. Horton in particular and their business model, but I think anything that happens that encourages affordable housing in this country would be very beneficial. Obviously, some people were expecting prices to dip and make homes more affordable, but that hasn’t happened. Affordability across the country is at a 30-or 35-year low and so this is a huge problem that we talk about all the time. And so hopefully, these builders and investors are seeing a path to creating more affordable housing inventory so more people can, like Kathy said, achieve what they want to in terms of their financial situation and homeownership.

Kathy:
Yeah, you make a great point because a lot of people thought with interest rates going up last year that the housing market would crash. There were headlines everywhere about that and everybody was wrong. Because what higher rates actually did was make the market worse and more stuck because you’re just not going to sell your house, you’re not going to put it on the market, and therefore, there’s nothing for sale. The only thing that’s going to be for sale is new homes and that’s why new home sales are up 23% versus existing home sales down 20%. That’s what’s for sale.

Dave:
Yeah, this is an encouraging story, but I think it has to be a bigger trend. I just looked this up, but D.R. Horton, which is the biggest homebuilder in the country by volume since 2022, in the year ending June 30th, 2023, they built 83,000 homes. That’s remarkable. It’s insane. But even if they ratcheted up 20%, which would be big, that’s really not making a dent in the total amount of homes that are needed, especially in this category. And so hopefully, other builders are encouraged and maybe learn something on how to efficiently build these more affordable homes, so that we can get a significant amount of them on the market.
I don’t know what number is necessary to really chip away at that huge shortage, but I think D.R. Horton would need to quadruple in size to really make a difference in the next few years on their own. All right. Well, that’s a great story. Thank you, Kathy. James, what do you got for us?

James:
We’re talking about the squeeze right now. For us investors, we’re getting squeezed on all sides. You’re getting squeezed on your debt costs. It’s a lot more expensive and also insurance and that’s what this article talks about is, Commercial Real Estate is in Trouble. Climate Change is a Part of the Problem and this is reported by Time. And what this article talks about is the cost of insurance, especially in areas that are susceptible to a natural disaster like hurricanes and earthquakes in the same day.

Dave:
At the same time.

James:
At the same time.

Dave:
You’re going to need a whole new category of insurance.

James:
Yeah, I don’t know what kind of coverage you need. Yeah, you need earthquake and hurricane. So that’s causing problems for commercial real estate, especially in retail in those spots because rent growth has been very small, especially since the pandemic and commercial real estate’s already getting squeezed. We’ve been hearing about this for the last six months, right? Rates are going up. Notes are starting to balloon out. And in addition too, cost of insurance is way, way up, especially in areas like Denver because the wildfires or in Houston with the natural disaster and Miami. And it’s a big deal, because from 2017 to 2022, the cost of retail rent only increased by 0.4% annually, whereas the cost of insurance increased by 9%.

Dave:
Wait, did you just say retail? So we’re talking about … You said commercial insurance, but this is not for multifamily, it’s specifically for retail?

James:
It referenced more about retail, but also in multifamily. Multifamily has also gone through the roof. I know in Houston alone, the premiums have spiked dramatically. And so what’s happening to these investors, especially if they bought over the last couple of years, is they’re getting squeezed because they didn’t perform out this insurance premiums to spike this high. Insurance companies are having problems making … There’s been reports that they’re having problems starting to cover these claims and they can be insolvent, which is a massive issue because of all these natural disasters.
And so what’s happening is it is not just retail, multifamily syndicators, especially ones that bought in the last year or so, they did not anticipate this and now their debt costs are also creeping up and so they’re getting squeezed on all sides and it could become a major issue. And it could also hit the residential homeowner too, because as pricing, or like we were just talking about, as inventory shrunk to all-time lows in that April and March of 2022, people were really stretching themselves even with those low rates. And now property taxes have reset, it’s getting more expensive and their insurance is also going up in these areas, flood insurance, hurricane insurance. Insurance companies are starting to drop coverage, which is making it harder to find, right?
State Farm just dropped or they are not going to be issuing any new policies in California and same with Allstate. And now Farmers Insurance is setting limits on California. So as the amount of coverage shrinks, the premiums could continue to grow and it could start to really cause an affordability crunch.

Dave:
Kathy, show us your insurance bill in California. We want to see that.

Kathy:
I won’t. We have a house up the road that we put an illegal deck on and put in windows without permits and didn’t really know that we needed permits for those, but we knew. Anyway, we got a violation. So we still have that property and it’s rented. The insurance on that property went from 2,000 a year to 12,000 a year. So we are absolutely negative cashflow on that and we would love to sell it, but we have to carry these violations and you have no idea what it takes to get … It takes years to get permits for a deck. I know, I know. But insurance, most people where I live in California, they cannot insure to the value of the home. It’s just not there anymore. California mandated insurance that goes to a million dollars. There’s a lot of areas in California where you can’t rebuild for a million.
So it is definitely an issue. It’s a huge issue in Maui. Many of those people that lost their homes were not insured properly. So there’s two parts to this. Make sure you’ve got somebody who understands your policy and what it covers. And believe me, you won’t understand that. As normal people, we’re not meant to understand what’s in that insurance policy. You need an expert to review it to make sure you’re covered 100%. And to James’s point, I interviewed a bunch of people. We actually did a YouTube video for On The Market if you want to check that out, I interviewed a bunch of commercial investors or apartment investors at a Dallas event. And yes, they are getting hammered.
And, Jimmy, you said their costs are inching up. No, no, no, no, they are mileing up. It’s not inches, it’s miles, the insurance. Imagine with my insurance going from 2 to 12 million, I mean 2,000 to 12,000, with these multifamily, you’ve got to put zeros. If they were paying 200,000, they’re paying 2 million or whatever it is. They cannot afford these new expenses because rents are simply not going up in a way to keep up with that and then add the mortgage payments that, again, did not double, almost tripled in some cases. So people in multifamily are in a world of hurt, not all, but many and I’m just thankful that I’m in … We have five syndications in, guess what? Home building.
So for a minute there during COVID, it was a scary thing to be in, a scary investment in new homes because like, “Oh, is this market going to crash?” And no, it just turns out it’s going to be a good investment to be bringing on new supply. Unfortunately, the affordable housing we’re bringing on in Utah still is around $2 million, so not that affordable.

Dave:
So what do operators do in this scenario, right? I don’t see insurance going down, right? It’s not typically something that fluctuates. It’s something that trends upward or shoots upward in this case over time. And if rent, which I believe is … Rent growth is suppressed right now and, at least in my opinion, will stay suppressed for a little while. What happens now?

James:
Well, there’s a couple things you can do as an operator to drive this cost down, but unfortunately if you’re already midstream, it’s a little too late and you have to reperform the deal. Because you can take certain steps with your insurance companies, if you do a certain amount of improvements, it can reduce your insurance liability, right? In Washington, if we install a lot of drainage or any of these areas that have flooding issues and you install extra drainage that will help prevent the building from being damaged, it can actually reduce your cost or certain types of roofing, all these things or retrofitting your building, taking it up to a new standard, so the building’s more secure will help your policies.
But the issue is that costs more money and you need to account for that when you’re in feasibility or you’re going to perform out that deal. And so many of these syndicators might have to look at, “What’s the cost analysis?” If they have to spend a certain amount, will it get their insurance premium down? And they’re going to have to either raise more capital and put more money in the deal to try to drive the premiums down or they’re going to have to absorb it and wait for the rents to keep going, but it’s not … You’re getting squeezed. And so it’s really going to change how people are underwriting in these markets that are susceptible to this.
Like upfront cost, you either need to factor in a higher insurance premium increase or put more money into the building upfront to drive those costs down.

Dave:
And, James, do you think those same pieces of advice are applicable to residential real estate as well?

James:
Yes, I do, because also if you have a short-term rental or any kind rental property out of state, Kathy just mentioned, I mean, that’s a single family house. 2,000 to 12,000 is detrimental to your performance and your cashflow. And so you really have to count for this going forward and it’s going to be an issue across the board and I think it could. For me, I don’t like dealing with those weird variables like that. That will make me stay out of those markets because I like to just buy things that are more stable with more steady growth. I think it could slow the demand in some of these seasonal areas, especially with the Airbnb markets.

Dave:
Oh, yeah. Based on what Kathy was saying, I have an Airbnb in Colorado in the mountains and I can’t get the full property insured, their full replacement cost because of the wildfires. And just in the last two years, we’ve had evacuations and all sorts of things that are … They’re not doing it for no reason. There is risk. And so it’s definitely something you’ll have to consider as a home buyer. And, James, to your point out, if people can’t afford it, home prices might negatively be impacted in those markets.

James:
Yeah. And then also it’s like what’s going to happen with these lenders if these properties start to become very underinsured because people can’t cover their premiums. That could be a major pressure point or they can do that forced-placed insurance, which is extremely expensive.

Dave:
Yeah. I don’t know how this all works out, but something … I wonder if we’ll start to see more … Like in Florida, they have a state insurance. I forget what it’s called, but they have an insurer of last resort basically that’s sponsored by the state government there and I wonder if we’ll start to see that in other places.

Kathy:
Well, that’s what we have.

Dave:
You do have that in California too?

Kathy:
It’s called California FAIR Plan and lender … It’s the insurer of last … It’s California basically.

Dave:
So basically … But you still buy a policy, right? So you buy …

Kathy:
Yeah.

Dave:
… a policy essentially from a government agency?

Kathy:
I don’t know quite how it works. Maybe California backs it. I’m not sure, but that’s what you can get if you can’t get insurance. And it’s not great. It’s not the best insurance. Like I said, it’s caps at a million and, “Find me a house along the coast that you can rebuild for a million.”

Dave:
Yeah, well, this is definitely something we should keep an eye on, because in recent years, we’ve seen this start to go up. I know, in Florida, premiums have gone up 40% in the last few years, as James said. Certain places in Texas. I’m sure in some of the places that have been recently impacted by natural disasters, we’ll see that as well. So definitely something to keep an eye on because it’s one of those sneaky things. For, I don’t know, the first 10 years I invested, I never even really thought about it. It just would go up like 3 or 4% a year and you’d have a pretty good sense of it, but it is becoming a real variable and that can impact your bottom line. As James said, that level of uncertainty is obviously unappealing to anyone investing.

Kathy:
You know what’s interesting though, Dave? I had mentioned I bought a brand new duplex in Palm Coast, which is pretty close to the coast in Florida. But because it’s brand new, our insurance is really low. So I think there is this belief that no matter what you’re going to pay a lot, but if you have a property that was built to today’s standards …

Dave:
Interesting.

Kathy:
… the insurance is much, much lower. So people think that it’s a bad investment to buy a new home because it’s more expensive, but when you add all those factors of less repair costs and lower insurance, it’s really … Actually, we’re cash flowing really well on it. Plus, we got that low rate because we were able to negotiate with the builder to pay points to pay the rate down.

Dave:
That’s a great point. And just going back to the short-term rental I was talking about, your HOA and different things can do things as well. We’re a “fire-safe community” where they do fire mitigation and they built cisterns and all these different things with the intention obviously of saving homes, but it also helps bring down insurance costs if you can show that you, like Kathy said, have a modern home that is built up to modern standards and the community is proactive about trying to reduce any potential risk.

Kathy:
Yeah, and to that point, one of our employees actually bought a home right where that last massive hurricane went through. Which town was it in Florida?

Dave:
Was it Fort Myers?

Kathy:
Fort Myers, yeah.

Dave:
Cape Coral? Yeah.

Kathy:
He just bought a new home there and the storm came through right over him and the devastation …

Dave:
Wow.

Kathy:
that storm caused and nothing happened to his house.

Dave:
Interesting.

Kathy:
So it does matter. It does matter to have a home that’s built today’s standards.

Dave:
That’s good advice. All right, well, for our last story, I’ve got one for you and it’s about something you would never guess, but it’s interest rates and mortgage rates, because although we talk about it all the time, they’re doing something interesting. The Wall Street Journal reported just a couple of days ago last week in the middle of August, the end of August, that the average mortgage rate rose to 7.09%, which is the highest level in more than 20 years. And we’ve been talking about high interest rates, but just for context, up until the last few weeks, we had peaked for the cycle back last November, November of 2022.
And then in 2023, we’ve seen a lot of fluctuations and variations, but it’s mostly been in the mid-6s and the high 6s. Now recently, they’ve shot up. Last week, the reading was at 7.1% and I was just nerding out here before and looking at treasury yields before and they’ve been going up. And so I expect, as of this reading, what is it today? The 21st of August, we’re recording this. I expect that mortgage rates this week will probably shoot up to 7.3 or maybe 7.4. So it is really going up. And I think the really interesting thing here is that it’s happening at a time when you usually see that seasonal decline in housing activity. And so to me, I’m just curious, we’ve seen the housing market be more resilient than I thought it would be, but I’m curious if you guys think that this upward, this new leg up on the mortgage charts will maybe take some wind out of the housing market in the next couple of months.

James:
I’m definitely feeling it slowing things down. And part of that is just that seasonal slowdown, is … I mean, the pandemic made us forget about these seasons a little bit because it didn’t matter, but I’m seeing the showing activity drop pretty rapidly right now. I know mortgage apps are way down week over week and it’s getting expensive. I felt like the market was actually very fluid when the rates were about 6.6, 6.75. It was like that perfect, I think, affordable pricing in there, but as median home prices continue to keep going and we haven’t seen that dip, the rates could cause it to come down because the buyer activity had dropped pretty substantially in the last 30 days, at least in our market. And it sounds like it’s across the board.
Because it is expensive. You run these mortgage, you’re like, “Man, is it worth it?” And if they’re thinking, “Is it worth it?” they’re going to sit on the sidelines for a little bit.

Kathy:
To me, this again comes down to the high-priced versus the low-priced markets. In a low-priced affordable market where the homes are maybe 200, 300,000 a market where Henry’s in, the impact is really not going to be that much. It’s going to be a few dollars, maybe $12 a month in payment difference from what it was just a few months ago. So in those markets, yeah, I don’t think it will matter and it hasn’t over the past 18 months, but in the higher-priced markets, absolutely that payment is hugely different when rates go up. So the big question is, will they continue to rise or they come down? Nobody knows. I think one of the reasons that they spiked is because the Fed is reducing its balance sheet and selling off some of their mortgage backed securities and they flooded the market and the sales were not good.
And the way the bond market works is, if you want to attract investors, you have to give them a good return, right? So you have to give them a better return, which means higher rates. And then if people are scared, then they don’t care. They just want their money safe. And so even if bonds are selling for 2% or zero or whatever, people just buy them because they’re afraid to put their money anywhere else. And that’s not the case today. So what this reflects is that a strong economy combined with the Fed reducing its balance sheet. So I have been in the camp of, “I think rates are going to come down,” and yet, there are so many factors with the big one being the Fed reducing its balance sheet and flooding the market with these bonds which drive prices up.

Dave:
Yeah, I, unfortunately, have been on the hire for longer train for a few months now and think this is probably what we’re going to see for a little while. I think they will come down in 2024, but I think, for now, we’re going to see this. And part of me wonders, James, you mentioned affordability, which is obviously the major factor, but I always am curious if there’s this psychological impact here too where it’s like things are starting to go, rates were peaking, they started to go down, people started to get comfortable, maybe feeling like, “Okay,” they’ll maybe be able to refinance in the next couple of months or next couple of years and things will get even better for them. And now the fact that rates are reversing and shooting back up is just discouraging people, just psychologically even beyond the actual dollars and cents of it.

James:
Yeah, and I think it’s discouraging in two ways, right? Inventory is really low, so what you can buy is pretty disappointing right now when you look in most markets. It’s average. And then the cost of money’s gone up. So people are just like, “It’s not worth it,” and I definitely feel like that is a psyche that … I mean, we see the market. It’s like a seesaw. It goes up. It’s just like this weird quick movement and it’ll go for a two-week run and then it goes stale for two weeks and then it goes for a two-week run. And so it’s very pulsating and it does have to do with the rates. And one thing is, if Jerome Powell starts … If he starts hinting that the rates are going to go up again, then there’s this little surge because people get FOMO. So I think a lot of it is psychological right now.

Dave:
Yeah. That doesn’t sound very good. Average or bad inventory at a very high price, it’s not a very good sales proposition. Hopefully, that’s not what you’re telling your clients, James.

James:
No, well, luckily, we’re looking for the uglies, so we can find those. And then right now, the good thing is, if you’re bringing a really good product to market and it’s in that affordability range, it is still gone. They’re moving quickly, but like Kathy said, the high end is people are being selective. They want what they want and they should.

Dave:
Yeah, yeah. If you’re going to pay a lot of money for something, it’d better be something you like.

James:
Yeah, feel good about it.

Dave:
All right, well, those are our stories for today. Before we get out of here, we do have a crowdsource question which comes from the BiggerPockets forums. And today’s question comes from Travis. He asks, “Can you get a HELOC, which is a home equity line of credit, on a rental property or is it just your primary residence?

James:
That’s a tough loan to get.

Kathy:
You could probably get one, but you’re going to pay double digits for that.

James:
You can. The money’s super tight right now on that product. The loan to value needs to be fairly low on that. I think you have to be below 70% loan to value and so that’s the struggle, is you can’t really tap too much into the equity right now, but their products are out there. Some of the major banks have been bringing that back. Your local banks are looking at it a little bit right now. There is options, but they’re expensive, and a lot of times, you just can’t quite get the money that you’re looking for out of it, so it’s not quite worth it. But credit unions are a great way to go for this.

Dave:
I think one of the things you have to think about is put yourself in a lender’s shoes. They are going to offer the lowest rate on a primary residence because they know, at the end of the day, if you get into financials, bad situation, you’re going to make payments on your primary residence because it’s the place that you live as opposed to a rental property. And so that’s why HELOCs are generally considered great options, because a lot of times, the interest rate is similar to that of a 30-year fixed rate mortgage because lenders see it as very safe. Whereas when they look at your rental property, I’m sure hopefully you’re a responsible investor and make your payments, but they just see it as less safe. And especially in interest rate environments like this, they’re going to be increasing their risk premiums to make sure that they cover themselves. So probably not the best time to look for one, but you could.

Kathy:
There’s a lot of trapped equity that people are trying to tap and it’s hard. I saw a really interesting post on, I think it was Instagram and somebody said, “Yes, I refi’d my rental property from a 2% to a 7% rate because it’s going to challenge me to find deals that make more than 7%.” I thought, “Okay, I’m just going to sit here in my 2%. I don’t need that challenge.”

Dave:
Wow.

Kathy:
But if you’re going to get a HELOC at 10, 12%, whatever it’s going to be on that investment property, the 7% all of a sudden sounds really good.

Dave:
Right, that’s true. That’s a good point. That’s not the philosophy I would use. That’s like those people who go running with a weighted jacket just to make it harder on themselves. Running’s hard enough. I don’t need to make it any harder.

Kathy:
Did you mean my husband? Yeah, that guy.

Dave:
Does he do that? He would.

Kathy:
He would.

Dave:
That makes sense. Rich is a beast. He probably doesn’t even notice this on.

James:
He has three people on his back too.

Kathy:
Right.

Dave:
Yeah, it’s just the whole. All right, well, thank you both for joining us today. This was a lot of fun and thank you all for listening. We appreciate it. If you like this show, don’t forget to give us a review on either Apple or Spotify and we’ll see you for the next episode of On the Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Research by Puja Gendal. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify datapoints, opinions and investment strategies.

CNBC’s Robert Frank joins ‘The Exchange’ to discuss another month of record high rent in New York City, a shortage of rental inventories in Manhattan, and more.

In a new ranking of American universities, the Wall Street Journal has a surprise. The highest-ranked public university is listed as the University of Florida, and at #4 is Florida International University.

In the recent past, FIU has been ranked among the top 100 universities in the world. That was the highest FIU had ever been ranked and naturally, it brought a lot of joy in Miami and Panther land. So, imagine the surprise at being ranked #4 – and that too for a university that was started in 1972 – and without the endowments of Harvard and Yale.

So how did FIU ascend to a spot so close to the mountain top? Look at the criteria – and it becomes clear. It is a revolutionary way to rank universities and examines the value of education.

The Wall Street Journal employed a comprehensive approach that went beyond merely assessing graduates’ gross salaries as a sole criterion. Recognizing that individuals born into families with substantial financial resources often have greater access to elite opportunities and consequently earn elevated incomes, the Journal considered this important context. Furthermore, it’s worth noting that many other ranking systems tend to overlook the influence of privilege and nepotism within their criteria, potentially skewing their assessments in favor of those with pre-existing advantages.

One of the key factors examined by The Wall Street Journal that has affected the rankings is the value added. This analysis considers the difference between the salary actually earned by FIU graduates and the salaries they would have earned if the student had not graduated from FIU.

Given that many of our students come from families that have never attended, or graduated from, universities, this delta is large – meaning that the value added is huge. That’s why FIU has this huge jump in ratings.

This criterion seems to measure the true value of education and what it should be all about – not about how many privileged students have you admitted and how much money did they make, but how did the non-privileged students do, who are sometimes the first in their families to attend college.

The true measure of a society’s success lies not in preserving the status quo for the elite but in providing opportunities for all. It’s not about maintaining the wealth of the rich, but rather fostering an environment where everyone has the chance to prosper and attain financial security.

If education is about giving everybody a chance, FIU does well. 25% of its students are first-generation and nearly 50% are Pell grant recipients, which is given to students with high financial needs.

I have seen many examples. In one class, none of my students showed any interest in going on a Mediterranean cruise as part of a business course. When asked why, one student, whose family had immigrated from Haiti, told me that he was worried about earning enough money that week to put food on the table. Going to Europe was not on his mind.

FIU is to university education what Unicorn-Entrepreneurship is to venture development – giving the entire pyramid a shot at the brass ring based, not on privilege, but on skills and smarts. Some of my students from underprivileged backgrounds have become Rhodes scholars. Others have built successful businesses. It’s what education should be all about.

MY TAKE: I did not expect a revolutionary ranking system from the WSJ, the bastion of privilege. After a while, you get indifferent seeing the same old rankings where the big surprise may be that Harvard dropped a notch. Let’s hope this new thinking starts a transformation all around.

FIU NewsFIU recognized for first-generation student success programs, initiatives

Poets&Quants for UndergradsRanking: Wall Street Journal’s 2024 Best Colleges In America