Are empty city office buildings going the same way as zombie shopping malls, or can they be revitalized to become residential apartments and condos? 

That question has many developers, city planners, banks, economists, and commercial landlords scratching their heads. What’s not up for debate is that commercial office space in major cities are experiencing a death spiral, or an “urban doom loop,” as quoted in the New York Times, in the wake of the pandemic, as remote working and high interest rates have limited options for troubled building owners. The future of American cities is riding on a solution.

Across the country, prices are being slashed as they were in 2008, with 50% or more markdowns. The knock-on effect has been a decimation of city budgets with a loss of tax revenue, affecting every aspect of a city’s efficiency and upkeep. Ancillary businesses such as restaurants, hotels, and entertainment venues also are feeling the pinch.

In the same New York Times article, a professor from the New York University’s Stern School of Business estimated that the national office market lost $664.1 billion in value from 2019 to 2022. That has caused businesses and inhabitants to leave, further affecting tax revenue and increasing homelessness. 

Offices to Apartments: Is It Possible?

An often-touted remedy to vacant office buildings is converting them to housing. After all, with an urban housing shortage, surely it makes perfect sense. But is it feasible? There’s more to it than clearing out desks and bringing in beds and baths. 

The good news is that—at face value—it is doable, but as with many commercial real estate issues, it’s complicated.

A shining example of such a conversion is 160 Water Street in New York City’s Financial District, a former 1970s constructed office building, recently revamped as Pearl House, a new amenity-filled 600-unit apartment building.

The obstacles

Money and sustainability are the crosscurrents of resistance, making such conversions difficult. According to economist Stijn Van Nieuwerburgh, a professor of real estate at New York’s Columbia Business School, only 10% to 15% of office buildings nationwide can be converted to residential use due to their heavy carbon footprints and the difficulty in bringing in enough plumbing, light, and air. It’s not impossible, but it’s pricey. 

Another factor to consider is that, like Pearl House, rents would need to be high to cover the construction costs. That means luxury apartments instead of affordable housing, which is not the mandate for most cities.

City Living: A New Reality

Cities as we have traditionally known them—hubs for business—are most likely changing. While certain companies are demanding workers return to the office, for others, the reality is that it’s far cheaper for workers to be remote. And it’s far less expensive for retailers to forgo expensive stores in favor of e-commerce sales backed by robust online marketing.

So what’s left for cities? Entertainment, shows, restaurants, clubs, and socializing. In this respect, the Wall Street Journal contends, American cities are starting to thrive again with tourism up—just not near offices.

An Opportunity for Investors

With the price of office buildings slashed, there is an obvious pull for investors to come in and buy at fire-sale prices. If there is a demand to live in former downtown office areas of major American cities, bold developers will start repurposing newer buildings or tear down older ones. 

A key component to making this work is to make cities attractive places to live once again. With that in mind, creating a new dynamic—a work/life culture where workers can walk to work rather than commute—could be a feasible new model. After all, it’s not that offices are completely empty; they’re just not full. Also, not everyone can work from home. 

Hybrid work models provide a middle ground for workers who are now used to working in their sweats and slippers while doing the laundry and companies demanding face time and usual business practices in the office. This concept is being adopted by city officials across the country, with incentives for developers to build more affordable housing. 

The conversion model is hardly new. Over the last 20 years, almost 80 New York City office buildings have been converted to residences, the most in the country, according to CBRE. Such conversions are credited with converting Manhattan’s Financial District into a livable neighborhood for families rather than a soulless commuter destination. 

Nationally, from 2010 to 2021, 222 office buildings were converted into residential space, with Philadelphia seeing the most, followed by Chicago. A slew of such conversions are in the pipeline for New York. Some will tout the new work/life model, with office spaces beneath luxury residences. Additional conversions are slated for Philadelphia, Cleveland, Los Angeles, and Washington, D.C.

Cash flow in luxury condos is always challenging. Often, they are the domain of affluent investors looking to park their money, leaving the units vacant rather than dealing with the hassle of tenants. 

However, many buildings welcome the short-term and mid-term rental models. Miami is one such city where investors only live for a few months of the year and look to lease their units for the rest. According to a report by the Chamber of Commerce as quoted on Condo Blackbook, Airbnbs in Miami command the 10th highest average daily rate ($290) of all the large cities in the U.S. Smaller pockets such as Miami Beach ($426), Key Biscayne ($571), and neighboring Fort Lauderdale ($297) boast even higher average rates. 

While Miami condo prices are not cheap, offset by the global demand to visit the city, office-to-condominium conversions elsewhere could likely be more affordable, with developers looking to do early business to spark sales. Realizing that there’s nothing developers fear more than empty buildings, Airbnb and other short-term rental sites have specifically targeted them, offering to join forces nationwide. While apartment rentals are the obvious target, savvy investors looking to strike a deal for condos could use the same approach to generate ongoing passive income.

Final Thoughts

The pandemic has dramatically changed the use of office space in major cities. This, coupled with technology (Zoom, Google Meet, etc.), meant that the conventional use of office space was due for a change sooner or later. Time and money spent commuting and the cost of office rents versus tangible productivity meant that the pandemic accelerated the change rather than caused it. 

However, the loss of office space has dovetailed with a chronic housing shortage, and should cities encourage developers to reconfigure empty offices into housing, there could be an opportunity for developers and smaller investors alike.

Make Easier and Smarter Financing Decisions

Deciding how to finance a property is one of the biggest pain points for real estate investors like you. The wrong decision may ruin your deal.

Download our What Mortgage is Best for Me worksheet to learn how different mortgage rates impact your deal and discover which loan products make the most sense for your unique position.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Ashley:
This is Real Estate rookie episode 383. Can you invest while wrestling with college debt and much more on today’s episode? My name is Ashley Care and I am here with Tony j Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’ll discuss how to start your real estate development with a lack of funds and what are the exact steps for buying and launching a short-term rental. Now, if you guys have a question or want to maybe drop a horror story of your own, head over to biggerpockets.com/reply and we just might pick your story for the podcast. Now, today we are joined by two very, very special guests. We have Tama, who’s an investor and director of product and marketplaces at BiggerPockets, and we also have Mindy, who’s the host of BP money, also an investor and an agent.

Ashley:
And last but not least, we actually have a guest on today’s episode to ask a question live for rookie reply, and we are going to be discussing supplies for a medium term rental and also what is a medium term rental and how is it different from long-term and short-term? Let’s say hello to Mindy and tmo, our expert panel. Welcome. Thank you for having me. I’m so excited to be here. Thanks. I’m really excited to dig into some of these questions. Okay, well let’s get into it and welcome our first guest. Mitch, thank you so much for joining us today. Live on the real estate rookie reply. It’s not often we get to bring someone on to ask their question and to also have an expert panel. So Mitch, please tell us a little bit about yourself and then hit us with that hard hitting question that’s just nagging at you to get answered.

Mitch:
Cool. Yeah, thanks Ashley for having me here. And so a little background, I actually work with BiggerPockets on the agent sales side of the business and I help agents all across the US connect with investors in their market looking to buy their next investment property. I’m here just west of downtown Denver, Colorado. I’m now in our Nevada and I own a few rental properties now. And one of ’em, we just decided to experiment with the midterm rental strategy and we had been looking at it for a bit of time now and it looked like it was going to be the best fit. So we got the place furnished and we had used a referral from one of our real estate agents on who do you use as a property manager who’s great midterm rental property manager. And a couple months down the road we got a few bookings in and I think after the second booking we got hit with some fees, about $350 in restocking fees and kind of blindsided us a bit, seemed a little excessive, but we let it go and a couple months later, after another stay, so about 82 days in total we got hit with another $450 in restocking fees.
So at this point it didn’t make sense to us a lot of things like large ticket items, 200 trash bags, 115 dish pods all used in a two days and it just kind of raised a red flag. So we just had a question. How would you approach this situation with the property manager and risk burning the bridges with somebody that was referred to you? How would you approach that?

Tony:
Yeah, great question Mitch. And I think before we keep going, I just want to define exactly what a midterm rental is. So a lot of us are familiar with short-term rentals, Airbnbs, but a midterm is basically that kind of sweet spot between your traditional short-term rental guests and your traditional long-term rental guests. So think 30 days plus we probably less than a year somewhere in that sweet spot. So we have some special guests on the podcast today, so I’d love to get your opinion first. So we have Mindy and Temo. So Mindy, I’ll kick it to you first. What is your insight? What are your thoughts here for Mitch?

Mindy:
Okay, first of all, 82 days and they stocked 200 garbage bags. Are these people having massive, massive, massive parties? I mean that seems excessive isn’t the right word. That seems almost like they are taking advantage. So my first recommendation is to go back to your contract with your property management company because the contract is the legally binding document that is going to rule your relationship with your property management company. What is the section addressing restocking and to make sure that they don’t treat this as a short-term rental because there is a difference between short-term rentals and medium term rentals. I have a medium term rental myself and I give a kickstart to my tenants. I don’t expect them to arrive with toilet paper and dishwasher pods and garbage bags. I’ve got a few so they don’t have to rush right out the day after they get there and buy all this stuff.
But I’ve got like five dishwasher pods, a few garbage bags, a couple of sponges, a couple of laundry pods definitely have the toilet paper stocked because that’s a necessity. But afterwards, everything’s on them and I make sure that they know that in advance. This is a month to month rental and you are stocking everything just like a long-term rental. So I’m wondering if your management company has experience with medium term rentals and what that entails. So first I’m going to send you to the contract and then I’m going to direct you to chatting with the property management company and asking them directly why do you think 200 garbage bags is a reasonable restock on an 82 day stay?

Tony:
We do the same thing even for our short term. We give starter kits for supplies and things like that. We give more than enough. Most of our stays are two to three days on average, but even still every once in a while we’ll have someone that uses all eight trash bags in a two nights day. I’m like, Hey, you got to go figure that out for yourself afterwards. Right. Tiana, what about for you? What are your thoughts on that?

Tiamo:
Yeah, very similarly, we were at an Airbnb this weekend and they said very specifically what they do include and what they don’t include for us. So if we want to use extra supplies that was on our own. But similar to what Mindy was saying as far as the contract, I said very early exactly what the expectations were. And I actually looked at a lot of the housing for nurses across the nation specifically in Colorado to say what were their expectations? So they expected blackout curtains, they expected good linens, good towels, that kind of thing. They didn’t expect me to restock all their toiletries every single month that they kept staying with us.

Tony:
And Tama, I think you bring up a really good point about setting expectations because what leads to less than five star reviews, it’s not necessarily missing something from your listing, it’s just that a guest was expecting something, they didn’t get it. But if the expectations are set correctly when they enter, if they know, Hey, I’m going to get eight trash bags and I’ve got to do the rest myself, even if they run out of the all eight, then they still know that, hey, that was the expectation coming in.

Ashley:
I do have something I want to add to the conversation, but before I do that, we are going to take a short break and when I come back I’m going to play devil’s advocate.

Tony:
Alright, we are back from our break and we’re hearing Mitch’s story about some issues with this property manager and I’ve given some advice, Mindy tmo, but now Ashley says she wants to play little devil’s advocate. So what do you got to say, Ash?

Ashley:
Okay, Tony, I’m actually going to play devil’s advocate and I’m going to be on the positive side for the property management company and I’m going to try to look at maybe one reason why they were doing this as a positive. So when I heard the 115 dishwasher packs, the 24 cleaning sponges and the garbage bags, all I thought of was buying in bulk can reduce costs. So in my mind, I am thinking this property management company went out and said, we’re going to get enough supplies for a year for this property so that way we only have to send someone there once we’re buying in bulk. So it’s going to be cheaper than having to restock every once in a while buying just small 10 packs of garbage bags or however much you want for each person. And I look at my own Airbnbs where we have a closet where we stock up big time and do a bulk order and fill it up.
So Mitch, my question to you would be do you think that maybe this was a reason that they were doing that to kind of buy in bulk and to save you money, but it backfired because everybody had access to those items at all times. Where my cleaners, they ration share, they’ll give each person so many things, a toilet paper out of that closet and then it’s locked up. So I’m curious to hear, could that be one of the reasonings? And they weren’t actually to be bad property management or to kind of screw you over in a sense or overcharge you.

Tony:
It’s a good point, Ash, right? But I still think even if that was the case, it almost does speak to maybe a little bit of lack of efficiency on the property manager side to not

Ashley:
Giving the free for all

Tony:
Given the free for all. Yes. Right. Yeah. So there’s probably still some feedback there that needs to be shared. Manique, what are your thoughts on that?

Mindy:
My thought is I absolutely went that route and said, oh, they bought in bulk and I’ve stayed in a lot of Airbnbs and there is always that closet. It’s not always locked, and I am one to open every single door. I’m not one to take every single garbage bag because I’m usually traveling and plus I’m not a big steeler, but I always open every door and I see that there’s these giant Costco sized bags of everything. So I absolutely think that that’s what they did, but why did they do it twice? And if they did it the first time and left the door open and everything got taken by the first guest, then that should kind of be on them to restock on their own dime because great point. There’s no way that the first guest used 115 laundry pods or whatever it was. But again, I want to go back and direct Mitch to first the property management contract, and then if there’s anything missing in the property management contract, call up the property management company and get an addendum to the contract that spells out specifically the things that are missing.
Who is going to restock? How much is going to get restocked at a time? How frequently is it going to be restocked? You don’t need to go and buy a big $20 thing of Costco toilet paper every week, but if it’s, I mean, what is that going to last three months, four months, then every quarter you expect to have this expense, but that’s what you’re expecting, just like you’re setting expectations for the guest, the property management company or Mitch needs to set expectations with each other so that you’re not blindsided like this. And if the property management company simply doesn’t understand medium term rentals, then maybe this isn’t the right property management company.

Tony:
So Mitch, a lot of insights there, a lot of perspectives here in all that. What do you feel is maybe the best path forward for you?

Mitch:
Yeah, thanks so much. I love all of these answers here and it’s really helped me put together a plan, and I can’t say it enough, it sounds like the crystal clear communication is just key, but just going back and approaching it with the positive intent and maybe a place of we’re looking to learn and taking a little ownership, but I think really getting back and setting the expectation there, getting in and writing and agreeing on it together, what our goals are. Are they realistic? Maybe we are missing something at the property. Maybe they didn’t realize there was a locking storage closet and it sounds like maybe they did have it out and the guests took advantage of it, but talking about how we’re going to communicate with each other in the future. Yeah, like Mindy mentioned, definitely a red flag that the restock was done and there was really no communication on it. So yeah, I love these answers and I think getting back to the contract, looking deep into it and then approaching the property manager with the positive intent and really defining what that relation looks like moving forward.

Tony:
Yeah, I love that mention and I hope you’re able to find a good solution with this property manager. I just have one funny story on an owner’s closet that I want to share with you guys. One of the first Airbnbs that we bought there was an issue with the owner’s closet door lock. So it was reversed. So basically it was always set to be unlocked, right? So we couldn’t get it to lock itself, and whenever you put in the owner’s code, it would only unlock it. So the door was just always unlocked. So we took it live with it being open. Luckily we didn’t have any guests that rummage through it, but just triple check before you take your listing live that your owner’s closet actually locks. Alright, this next question is from Jared. Jared says, what’s up Ashley and Tony, I just graduated from college with a degree in engineering.
I’ve been listening to your podcast every day on my way to and from work, sometimes even at the gym. I want to get into real estate investing, but I’m currently paying $2,000 a month in student loans and will not be able to receive a bank loan. I’m so young. So my goal is to house hack, but I don’t see a way to accomplish this at the moment. Do you think I should wait a few years to pay down my loans and get my DTI more manageable? Please help. Alright, since we’ve got a few voices on the podcast today, we’re going to do this rapid fire. So you guys got 60 seconds top. I’m going to have the producers cue the Grammy music if you guys start going too long. So Ash, let’s go with you first. What do you got for Jared?

Ashley:
Okay, so the first thing I’m thinking about,
So the first thing I think of is myself personally. When I started investing, I had farm equipment debt, I had student loan debt, and what I did was I simultaneously invested and I used any cashflow that I had to pay off all of my loans. So that worked for me. In this case, what I would do, the first step would be to, if you can actually get approved for a loan, if you have money for a down payment and you can get approved for a loan even with your high student loans, then I would definitely recommend going in house hacking because you are going to hopefully, if you get the right deal, decrease your living expenses and you can use that extra money you’ve saved to rapidly pay down your student loans.

Tony:
Great job. Tama. You’re up next. What do you got?

Tiamo:
Yeah, I would say something pretty similar. It sounds like $2,000 a month, probably a bit too much for you to actually qualify for the DTI, but there’s a lot of programs out there that you can actually have quite a high debt and also you could have quite small amount of loan payment or loan down payment to put down. So I’d recommend that if not think about for the next year, live as cheaply as humanly possible. Could you be house sitting for people? Could you be dog walking their dogs and sitting for them? So I’d recommend live as cheaply as possible because I think house hacking is your next best option to get that started. I would not do any other investing beforehand because it’s a little bit too risky for having $2,000 a month of debt.

Tony:
All right, Mindy, what do you got for Jared?

Mindy:
Well, first I have a bit of a self-promotional plug. I host the BiggerPockets Money podcast where we talk about money questions and money problems all the time. So Jared, you need to be listening to me in addition to Tony and Ashley and their awesome show. Now I’m going to plug specifically episode BiggerPockets money 35 because Craig Curl up came in and shared his story, which is almost identical to yours. He had, and it’s been a minute since we recorded with him, but it had something like $80,000 in student loan debt. And instead of paying that off, he bought a house hack, lived in it, rented one unit and lived in the other while Airbnbing that other unit and threw all that money like Ashley said, into his debt. So he was able to eventually pay off his student loans by his investments. But also house hacking isn’t a one-way.
Street house hackers need tenants too. So you can reduce your housing expense by being what a house hackee a house hack tenant. Also, there are plenty of cities in this nation where the Airbnb rules state that you can only Airbnb your primary residence, and there’s a lot of people who own duplexes who would love to Airbnb half of it, but can’t because they don’t live there. So I would look for that sort of situation where you can either get a break on your rent or even a portion of the short-term rent that the landlord is collecting simply because you’re helping manage their property. Then bonus, you get short-term rental experience at somebody else’s short-term rental. So sorry, I know that wasn’t 60 minutes. Go ahead and play the music.

Ashley:
No, it definitely wasn’t 60 minutes. You were great. You were under 60

Mindy:
Minutes. Yes,

Ashley:
I came out of 60 minutes. Mindy, one thing I do want to add though is that you forgot to mention with Craig is he also slept on the couch that he rented out all the bedrooms too in his unit. So that’s to take it even to the extreme,

Mindy:
Yeah, he was hardcore with his house. Heck, and you don’t have to be that hardcore, but you could. One last thing is the $2,000 a month your minimum payment, or are you throwing extra money at it to pay it off quicker? Maybe you pull back if that’s the case and you start saving some of that money for your down payment.

Tony:
Yeah, Minnie, you wrap my mind. That was my next question as well, because two grand does feel a little bit high. So Leah, to your point, can you pull that back to just pay the minimums to reallocate those resources somewhere else? If you guys are looking for a good episode on the house hacking and using creative financing, almost episode 2 61, we had Nancy Rodriguez, she was from Love Is Blind, one of the seasons, right? But she used a loan from a company called naca, NACA, the Neighborhood Assistance Corporation of America. And guys, NACA has I think, the best loan product that I’ve ever seen for primary residences, it’s 0% down. There are zero closing costs, and their interest rates are usually about a point lower than prevailing interest rates, and you can use it for multifamily up to four units. So Jared, if you can go out and get approved for this NAL loan, now you’ve got a loan where you don’t have to worry about your down payment, right? You got literally almost no closing costs. I think Nancy got a refund at closing because she got a credit from the seller. So if you can check episode 2 61 with Nancy, look up the naone. It’s a great resource, Jared, to help you start house hacking the way that Mindy tmo and Ashley all talked about.

Ashley:
We are going to move on to our next question, but before we do, we’re going to take a short break and we’re going to be back with somebody who actually built their first property with new construction and now they want to be a developer. Okay, thank you so much for coming back with us for our next question with April. So April said, I just bought my first home, a new construction in September. My plan is to rent it out after a year eventually. However, my goal is real estate development, despite having a good credit score, I currently lack the funds needed for this venture. I’m considering using seller financing for the land. But the challenge is that even with this arrangement, I still don’t have sufficient funds for both the new construction and using the land as collateral. I’m seeking advice on to whether to pursue this path or if you have an alternative suggestion to help me achieve my goal of becoming a six-figure developer. Any guidance would be greatly appreciated. So tmo, I’m going to kick this one to you first since you do have some experience in commercial development.

Tiamo:
So a little bit less of the residential. It sounds like this question might be tied a little bit more residential, but I used to do commercial development in downtown Denver. So think about some of the best breweries you’ve been to think about some of the coworking spaces, self storage, that kind of development. And so the one thing I’d say is definitely talk to your city. Go to the city, figure out some of the opportunity zone thinking about residential. Make sure that you know what you can and can’t build in certain areas because even by going to some of those events within the city, downtown Denver has a downtown Denver partnership. You can actually learn quite a bit from those organizations to make connections with some of those developers that are around you. So city, lots of requirements, lots of rules, lots of regulations. You should know them, you should get really familiar and very comfortable with them, but I think that would apply also to residential.

Ashley:
Okay. And Tony, what are your thoughts? I know you’ve looked into doing some kind of development when you were looking at that property in West Virginia, so what would be your advice about building from the ground up?

Tony:
Yeah, April, I think that this is your goal, super commendable. Don’t feel like it’s out of reach just because you don’t necessarily have the capital. The funds are just one piece of the puzzle. So I think if you can find a killer deal and you can kind of map out that vision, then the next step is just finding a capital partner who can kind of bridge that gap for you. Because if you find a good enough deal, I would assume there’s a lot of people out there who have money sitting in their savings account right now that’s gotten eaten up by inflation over the last 12 to 18 months. Who would be happy to put this into real estate, which is appreciated over the last 12 to 18 months pretty substantially. So find that capital partner. So maybe just start small, do some infill development. I can’t remember which episode it was, but if you look up Donovan a Dero, Donovan a Dero, we interviewed him on the rookie podcast and he was doing infill new construction like town homes in Texas. So go back and listen to that episode. But he financed all of that new construction using partnerships. So don’t feel it just because you don’t have the funds of April that you can’t make this happen.

Ashley:
And Mindy, what would be your advice for April? Okay,

Mindy:
My advice is to connect with a developer. I love Tia O’s suggestion to learn the rules and regulations of whatever city you’re looking to start developing in. But connect with a developer and ask them if you can start learning from them. But here’s the caveat, don’t just say, Hey, would you teach me everything? Make a list of the skills that you have. Not real estate skills necessarily, but any skill that you have, make a list of those and offer to do things for the developer in exchange for learning from them, connecting with the developer and just asking them, Hey, can I learn? Everything is a great way to get shot down when you don’t have anything to offer. Some developers are, this is going to sound ageist, but I’m old too, so I’m going to say it anyway. Some developers are older and not very good with social media or technology.
And if you can help them in areas that they have pain points and relieve their pain points, they might be more than excited to help you out. Just sharing their knowledge and how do you meet developers? Go to meetups, TBOs suggestion for the neighborhood development area, the BiggerPockets forums. Put it out there that you’re looking to meet developers and you will be surprised at who is all of a sudden, oh, I know a developer, I’d love to introduce you. It’s Bob. He’s right over here, let’s go talk to him. But just putting it out there and being friendly and being open to connections is huge.

Ashley:
Yeah, I 100% agree with you, Mindy, and just asking the people around you, it might surprise you who, your sister, your brother, or your parents know. My dad has the most random associations with people, and it is always great to make those connections. So great advice. Well, thank you very much panel. And we’re going to move on to our next question. And this question is from Kai Menser. As a rookie, I’m becoming overwhelmed by the best process and sequence of events that need to take place from interest in buying a short-term rental in the first booking. What is your recommended sequence of events? So is it remodeling, acquiring accountant, cost segregation study? When does material participation start? When do I start checking costs? If and when do you start an LLC? When do you ensure it, et cetera? So my strategy is basically where do I want to a vacation or where do I want to live when selecting a short-term rental? So today we’re going to turn it over to the experts that actually use data and analytics to choose a short-term rental destination. So Tony, let’s start with you.

Tony:
So Kai, first thing I’d say is you’re thinking about step 30 when you should really just be thinking about step one. And I think that’s an issue we see from a lot of Ricky Investors is they start, we get people who start asking about, well, I’m so worried about how am I going to buy my third property? And I ask, well, how many properties do you have today? They’re like, zero. Well, why are you worried about property three when you should be focused on property one? So I think the very first thing Ka you should be doing is choosing your market, right? That’s the very first thing you should be doing because I see a lot of rookies who, they’re scattershot all across the country. They’re analyzing the deal here, doing one over there, doing one up there. So choose your market first, and that really comes down to knowing what your purchasing power is.
So how much capital do you have available to deploy? What loan amount can you actually get approved for? You put those two things together, you get your purchasing power, and then think about what your specific motivations are for investing in real estate. Is it cashflow? Is it the tax benefits? Is it depreciation? Is it you just want to subsidize the cost of your vacation homes? Because each one of those four motivations will dictate a slightly different market selection strategy. So the very first thing you need to do, and I can go on and on, but the very, very first thing you need to do, Kai, is choose your market and make sure that the market supports your ultimate investment goals.

Tiamo:
Yeah, tying off of that, I would say choose your market and educate yourself on that market. And then shameless plug, build your team on biggerpockets.com, and if you want to go in talking to a lender or an agent, knowing what you know. So there’s a bunch of research that you can do. You can inform yourself. Don’t just call an agent, call lender and say, you tell me all the things I don’t know. Go in educated. Once you pick your market, once you’ve done some of your research, they’re going to guide you, they’re going to help you and support you, but you want to make sure you do a little bit of research and then find exactly what Tony said, know what your purchasing power is going to be for this property, but find an agent, find a lender and get started. Because why are we talking about a cost segregation? What it maybe short-term rental isn’t for you? Maybe a long-term rental isn’t for you. Maybe we don’t want to do a cost egg at all. Maybe there’s other things that we want to be doing, but let’s start with educating yourself about the market and what maybe a rental in that market’s not going to work for you. So start there and then definitely build your team from that. I

Mindy:
Like what both Tony and Temo had to say. This sounds like a classic case of analysis paralysis. He’s got a lot of the lingo down. And like Tony said, you’re on step 30. Let’s go back to step one. You’re interested in buying a short-term rental. Why do you want a short-term rental? And where do you want it? Like Tony said, what are the rules there? Because I want a short-term rental in downtown Denver. Well, the rules say you can’t have one there unless it’s your primary residence. So make sure the rules of the location that you’re looking at, and then start from there. Start looking like Tiao said, get an agent and start getting listings and start looking. Know what a good deal looks like in the market that you have chosen because you’re not going to be able to pounce on a great deal or a good deal or even a mediocre deal if you have no idea what’s going on in that market. I’m a huge advocate for learning the market that you’re interested in. And maybe there’s two, you’re not sure if you want to do it in San Diego or in Fort Lauderdale. Great. Start getting both of those, but don’t start getting listings in a hundred different markets and trying to juggle all of this stuff. I think that this questioner is trying to get ahead of himself, and really you need to go back to the very basics. Where are you going to buy? What are the rules there? How much can you afford? Like you guys said,

Tony:
Mindy Tiao is super grateful that both of you joined us today. So before we let you go, we got to get one last piece of wisdom, Minnie, we’ll start with you. So give us one piece of parting advice for the rookie audience.

Mindy:
Oh, for our rookie audience. For your rookie audience. I want to say education is imperative. You need to educate yourself what you’re doing by listening to the rookie channel, but also you need to know your market. I am such a huge proponent of learning what a good deal looks like in your market so that you can be ready to pounce as soon as it pops up online. I’m a huge proponent of the MLS and finding deals online there. So get an agent, start getting listings and start learning what a great deal looks like in your market so you are ready to act as soon as you can.

Tony:
Love that. Tiana, how about for you? What do you got? For us,

Tiamo:
I would highly recommend going to biggerpockets.com, but I would recommend for talking about Kai specifically, I would say go to back slash smarter S-A-R-T-E-R, and that is a step-by-step, starting with your strategy, your market, your acquisition, if you’re renting or rehabbing, tracking it all the way to exit, and then how do you do it again and again, I would start at smarter. It will connect you to the calculators and the forums to learn and educate yourself and all the different finders that we have to connect you with various folks. It’s a step-by-step guide, wherever you are, maybe your past strategy, maybe you’re past the market phase, it’s going to guide you in those other additional advanced steps as well. So I’d highly recommend going to.com/smarter.

Ashley:
Thank you so much, Mindy and TMO for joining us today. And also a big thanks to Mitch to coming on and asking his question. It’s not always easy to be vulnerable that your investment is not going the way that you had actually planned. So we really appreciate Mitch taking the time to come here and share what he had going on, and hopefully some rookies can learn from his experience and what to do if they come across that. Thank you everyone for joining us for this week’s rookie reply, and we will see you next time.

“I always thought stealing was wrong,” real estate investor and developer George McCleary remarks at the end of a viral video posted on social media last month, “But turns out, if you steal a house, it’s not even against the law here.” 

The video details how McCleary easily broke into a rental listing in Portland, Oregon, fabricated a lease, put the utility bills in his name, utilized a taxpayer-funded legal assistance program to avoid eviction, and was ultimately given $10,000 to leave the property after nine months without facing any legal consequences. 

Commenters speculate that McCleary, a boutique real estate firm owner who has worked in real estate for the past two decades, didn’t actually break into a rental home and trash it, but the scenario he presented was nevertheless a realistic possibility, given robust tenant protections in Portland. The video exposes the dangers of widespread efforts to expand tenant rights in cities as a response to the housing affordability crisis. 

How Squatters Take Over Rental Properties

In McCleary’s video, which was widely shared and collected more than 6 million views, he explains how he navigated to a vacant rental property listed online and followed YouTube video instructions to break into the lockbox. He then forged lease documents and called local utility companies to put the bills in his name. 

“When the owner showed up, I politely explained that this is my house now, and they need to leave,” McCleary says in the video. The police, after viewing the fake documents and utility bills, let the owner know that this was a civil matter. 

When the owner hired a lawyer, McCleary mentions he called a legal advocacy group, which “gives me a lawyer that’s 100% free and funded by taxpayers.” After a months-long legal battle to evict the squatter, the owner gives up and writes a check for $10,000. 

“I didn’t even have to clean the place up, and that’s a good thing, because I do a lot of drugs, and the house looks every bit of it,” McCleary states satirically. “So I just got nine months of free rent in a house that otherwise would have cost me three grand a month, plus a nice cash for keys check, and I wasn’t even charged with anything.” 

It may seem like a far-fetched tale, but similar scenarios have played out across the country in recent years. The National Rental Home Council estimates that more than 1,200 homes in Atlanta are now occupied by squatters. In one case, the occupants used the property to operate an illegal strip club. 

Here are some more ripped-from-the-headlines cases:

• In Beverly Hills, a group of squatters took over a mansion and threw wild parties, charging for tables and rooms and using a fake lease to avoid being removed from the premises. 
• In Texas, a squatter with a history of evictions locked a homeowner out of her house and forged a lease for the property.
• In Maryland, squatters took over a woman’s home while she was on vacation and sold $50,000 worth of furniture. 
• In Chicago, where evictions can take six months or more, a homeowner struggled to remove a squatter with a criminal history who had changed the locks on a two-flat last year, even after an incident of gun violence at the property. 
• In New York, a homeowner tried for three years to evict a squatter, leaving her with a hefty utility bill by the time the squatter was arrested. 

These crimes rarely lead to prosecution and cause significant losses for property owners. Owners are forced to continue to pay taxes and other homeownership costs, even if they don’t have access to their own properties.

In some cases, the trouble starts with a legal lease agreement. A tenant may move in, pay the initial required deposit, and then violate the lease terms down the road by failing to pay rent, damaging the property, or committing other infractions. 

But even in the absence of grand larceny and fraud, policies that expand tenant rights can have unintended and dire consequences for small landlords—and the wider housing economy. 

The Role of Policies That Expand Tenant Rights

Even before the pandemic hit, rents were rising more rapidly than wages, and renters’ budgets were strained. Everything came to a head when the economic slowdown put millions at risk of eviction, causing lawmakers to put in place $45 billion in rental assistance and a moratorium on most evictions. This turned the tables, and eviction rates declined. 

When the federal eviction moratorium expired in August 2021, many municipalities and states chose to keep the ban in place longer. Rents were still rising, and over 40% of renter households were considered cost-burdened (meaning they spent more than 30% of their income on housing costs). Policymakers also pushed for stronger tenant protections, ranging from rent control measures to free legal aid programs for renters, both ideas that garner strong bipartisan support from the public. 

There’s also been a wave of legislation banning criminal background checks on prospective tenants, as is the case in Oakland, or requiring landlords to ignore a tenant’s criminal history outside a specified look-back period, like in New Jersey. In Minneapolis, landlords can’t consider misdemeanors from more than three years ago when evaluating tenants, nor can they set a minimum credit score for applicants. Low-income renters are also entitled to free legal help if they face eviction. 

Policy initiatives like these make it tough for landlords to prevent issues with tenants and respond to them in a timely manner. And they also benefit scam artists who come to possess a rental property illegally. 

Many cities have made crimes like trespassing a low priority for the local justice department. “In jurisdictions where people know they can get away with crime, they’re much more likely to commit crime,” says McCleary in an interview with NewsNation. 

Though fabricating a lease is a criminal offense, the document creates the possibility of legitimacy, and the dispute between the property owner and the scam artist becomes a civil matter. Even after the fraud is uncovered, the squatters rarely face criminal charges. 

In most states, adverse possession laws require a squatter to live in a property for years before they have any legal right to ownership. But in New York City, squatters can claim their right to inhabit a property after just 30 days of residing there without interruption or objections from the owner. After that, the owner can face charges for changing the locks or removing the squatters’ possessions. That’s how an heir to a $1 million home in New York ended up in handcuffs when she approached the strangers living on her property. 

But even in jurisdictions where property owners have a leg to stand on against fraudulent tenants, lengthy eviction proceedings can destroy a landlord’s finances. 

Can Robust Tenant Rights Laws Solve Homelessness?

It’s important to note that just as fraudsters take advantage of lax laws in jurisdictions that are soft on crime, some landlords abuse their power in areas with weak tenant protections—there are both bad tenants, with and without legal leases, and bad landlords. And in many municipalities, landlords can evict tenants without just cause. 

But policies should aim to strike a balance between renter and landlord protections to avoid the negative consequences of favoring one party or the other. Research should also focus on the best ways to prevent homelessness rather than attempting to prove that landlords play a role in the housing affordability crisis. 

Case studies conducted in cities where tenants are provided with free legal representation show that these programs lead to lower eviction rates. Cost/benefit studies also show that legal aid programs that prevent eviction help cities save money on other social safety net programs provided to the unhoused.

However, many of these studies fail to consider the financial impact on landlords and the ripple effect on the housing market. Other solutions may have similar benefits without the fallout. 

For example, a Massachusetts study found that the commonwealth saved $2.40 in homelessness costs for every dollar spent on eviction representation for tenants. A new study from the University of Notre Dame shows that emergency rental assistance provides similar benefits, saving cities $2.47 for every dollar spent providing assistance to renters. The latter solution, however, keeps tenants in their homes without costing landlords an average of $3,500 per unit in eviction losses. 

Two recent studies, one from a Clemson University professor and one from a Ph.D. candidate at Stanford University, examined the long-term impact of tenant protection ordinances intended to prevent evictions and found similar results: The cost to landlords led to increased rents and a decrease in the supply of housing, adversely impacting low-income renters and causing a rise in homelessness. 

“On the surface, strict landlord regulation sounds good for tenants, but our paper points out, the solution isn’t that simple,” says Clemson University professor Lily Shen. “The research suggests that conventional thinking on the issue of more regulation may have the opposite effect on tenants.”

Most eviction filings occur due to tenant nonpayment of rent. Yet some researchers point to evictions as a “primary cause” of homelessness. While it is true that displacement worsens outcomes for low-income people, contributing to a cycle that traps people in poverty, it’s misguided to primarily focus on preventing evictions through tenant representation when the root cause of displacement is that tenants lack sufficient funds to pay their rent. 

The Impact on Landlords

Pandemic eviction moratoriums provide an extreme example of how eviction challenges impact landlords and their tenants. These moratoriums disproportionately impacted small landlords, according to the Joint Center for Housing Studies of Harvard University—landlords who owned fewer than 20 properties were more likely to experience catastrophic declines in revenue. 

Furthermore, landlords of all sizes were more likely to sell their properties during this time, and about a third deferred property maintenance, a sharp increase from the 5% that reported doing so in 2019. These consequences were cause for concern about a long-term decline in the availability, affordability, and quality of rental housing. 

Most rental properties aren’t owned by corporations. About 70% are owned by individuals with one or two properties, according to 2018 Census data. Research shows that small landlords file far fewer evictions than large landlords, often resolving issues with tenants directly, and are far less likely to evict tenants due to nonpayment of rent. 

Despite this evidence, the sentiment that “all landlords are evil” and the policies aimed at preventing eviction often fail to distinguish between small landlords and corporations. 

Urban Institute acknowledges that small investors play an important role in the availability of affordable housing, noting that policies should “incentivize capital investment by local residents and stakeholders” and that anti-eviction policies “should target the market’s largest landlords, who likely also have the highest eviction rates.” 

In addition, it’s small landlords who are also more likely to be hurt by scam artists who take advantage of tenant protection laws because they have fewer resources and are less capable of absorbing losses. 

In Seattle, a tenant claimed low-income status to avoid paying rent and keep the utilities on. Meanwhile, the tenant turned a profit renting the unit on Airbnb. The landlord, who was forced to continue paying the utility bills without rental income and couldn’t get help from city officials, essentially became homeless. “I consider myself lucky that I was able to build out a nice little camper van, given the situation,” he said. 

The Bottom Line

In many areas of the country, landlords have more rights and resources than tenants, which may threaten housing security even for honest tenants. But in recent years, dozens of states and municipalities have tipped the scales too far in the other direction, leaving landlords vulnerable to tenant nonpayment and fraud. 

Some of these jurisdictions have simultaneously gone soft on crime, allowing even illegal squatters to benefit from laws intended to protect tenants from displacement. And taxpayer-funded legal aid programs fail to address the root cause of displacement and have unintended negative consequences on not only the livelihood of small landlords but also the rental market and homelessness. Rental assistance programs and other solutions are more likely to keep renters housed without long-term adverse effects.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

The National Association of Realtors (NAR) agreed to a settlement last week that will eliminate its rules on sales commissions. The deal, if approved by the federal court, is likely to shake up the real estate market and could potentially decrease housing prices across the country.

Anthony Panebianco, a real estate attorney at Davis Malm Attorneys, told BiggerPockets that the settlement is unsurprising, as a judgment would have likely led to the NAR’s bankruptcy.

“The elimination of the mandatory cooperative compensation model was predicted before this settlement and now is guaranteed,” he added.

The NAR agreed to pay $418 million in damages and implement new rules by July that will change how real estate brokers are compensated. One rule would prohibit brokers from offering compensation on the multiple listing service (MLS), which critics say led to brokers pushing more expensive properties on buyers. Another rule would require buyer-brokers to enter into a written agreement with their buyers.

“It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals,” Nykia Wright, interim CEO of NAR, said in a statement. 

An End to the Traditional Commission Model? 

The change to NAR rules essentially means the end of the standard 6% commission rate for brokers, and commissions are expected to be cut by as much as half.

In turn, this could open opportunities for alternative selling models. These could include an increase in models that already exist, such as flat fees and discount brokerages, or even completely new models, Nick Narodny, founder and CEO at real estate startup Aalto, told BiggerPockets. 

“They could be everything from subscription to flat just giving consumers more of a power of choice and the representation of buying,” he said.

With all the current issues facing the NAR, Panebianco said there would be traction if other groups were to try to step in and offer other models. 

“Now would be a good time if an entity was so inclined to come up and say we’re different than the NAR, and we will lobby on your behalf and be able to better predict what the future holds,” he explained.

Some brokers feel the news could improve the industry, as less experienced brokers are likely to leave. And the decoupling will also mean more transparency in an often complicated commission system.

“Real estate investors will benefit from only the savviest agents remaining in the industry,” Michael Martirena, founder of the Ivan and Mike Team with Compass in Miami, told BiggerPockets. 

Martirena said this will lead to a “collective leveling-up in terms of education, information, and client service,” as agents can help clients with no hidden costs. “The transparency will benefit investors as much as consumers,” he added. 

What This All Means for Real Estate Investors 

The NAR’s settlement isn’t the end of the compensation debate. While the NAR rules apply to just agency members, not all databases require membership. Other real estate companies, such as RE/MAX and Redfin, have gotten rid of requirements for agents to be part of the NAR in response to numerous lawsuits.

The Department of Justice (DOJ) is still continuing its investigation into the NAR, including its MLS, which it has questioned for stifling competition and potentially going against antitrust laws. In a statement of interest related to the commission lawsuit, the DOJ advocated for an end to cooperative compensation.

Narodny said he doesn’t see the DOJ allowing the settlement to stand. “They want commissions to be decoupled, not have the rules be changed,” he said. “I think we’ll see true change by this summer, and I think commission will be decoupled. This means buyers have to pay their own way, and potentially investors have to pay fees out-of-pocket.”

It’s widely believed that the changes will also help bring down the costs of financing or even overall home prices, which could be welcome news, as the market has been beset by record-high prices over the last few years. Some buyers may even opt to forgo an agent completely. 

Brokers are likely to get paid somehow, even if the price structure changes. While the elimination of buyer’s broker fees should be seen in the purchase price, “I’m skeptical of that being a reality,” said Panebianco. “The market sets the price, rather than the machinations of how the industry conducts a deal.”

Final Thoughts 

Still, industry experts are hopeful that in the long run, the NAR settlement will ultimately be a win for the real estate market.

“With the ability for buyers and investors to now favorably negotiate with their broker on commission fees as a result of the NAR settlement, we are likely to see an increase in the volume of deals, which has been generally on a decline for the past few years,” said Panebianco.

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A recent CNBC survey based on cost per square foot revealed that the United States’ most expensive real estate market is San Francisco’s South of Market, which contains historic Victorian buildings surrounded by Beaux-Arts and neoclassical government buildings. On the other coast, in New York, Brooklyn’s most expensive real estate market is Brooklyn Heights, a leafy neighborhood of century-plus-old brownstones. 

Both have designated historical status, meaning their period architecture cannot be changed. However, not all older neighborhoods are historic. For investors looking to maximize equity appreciation, the key is buying an older home on the cusp of receiving the historic designation. 

Historic Districts Can Gain 20% Appreciation Per Year

There are more than 2,300 local historic districts in the United States, and new ones are being considered constantly. Every state has them, and they aren’t out of most investors’ price range. The government often offers grants, low-interest loans, and tax breaks to renovate homes in these areas. 

A real estate analysis of Washington, D.C. by economist Donovan D. Rypkema showed historic districts can increase property values. Indeed, a 2011 study of Connecticut historic districts and property values found this designation could raise it almost 20% per year in some areas. 

The first step in becoming a historic district is to be designated a “landmark” status. Neighborhoods with historic churches and older buildings are particularly good candidates, as they are most likely listed in or eligible for listing in the National Register of Historic Places. 

Becoming landmarked is not fast or easy, but it’s a resource that investors often overlook. Once a neighborhood is afforded a historic designation, the older buildings attain prestige because they are immediately protected from developers. Preserving architectural gems can profoundly affect property values in cities with new, gleaming condo towers like New York. 

Crown Heights North, a gentrifying neighborhood in Brooklyn with a reputation for crime that is also filled with brownstones and old churches, was given historic status in 2011. All metrics point to a massive shift in not only property values, which occurred throughout Brooklyn but crucially, household income (the largest demographic earned below $20,000 annually in 2000, compared to $100,000 to $250,000 in 2021). Poverty had dropped to 14.8% compared to 18% citywide, while rents increased by 48.8% between 2006-2021.

Things to Be Aware Of When Buying an Older Home

If you’re buying a home in a landmarked designated or historic district, it’s likely older and needs renovation. There are a host of potential issues you could incur. Here are some considerations.

You might be entering into a restoration rather than a renovation

Buying in a historically designated neighborhood or a landmarked one means adhering to a strict code. 

Common stipulations for rehabbers include using wooden window casements that match the original ones that came with the home instead of model metal and vinyl ones. Exterior railings, gates, and doors will likely be replaced with like ones or restored to their previous condition. Ditto goes for moldings, motels, and fireplaces. However, mechanical walls, such as plumbing and electrical upgrades, will likely be unaffected and can be upgraded with modern materials. 

Homeowners insurance could cost more

Home insurance rates can be higher for a historic home due to the cost of building to historic specifications in the event of a total loss. Also, if the home is larger, with various outbuildings as part of the parcel, this will also increase the insurance cost.

Getting Financial Assistance for Your Renovations

The good news is that grants and loans can help investors with renovations. Your state Historic Preservation Office (SHPO) should be your first stop to learn about funding advantages. 

The National Trust for Historic Preservation’s Historic Tax Credit program (HTC) is also an invaluable resource. Historic preservation easements are also worth looking into, and if they apply, they can also bring additional tax benefits. 

A Historic Home Can Be a Good Investment for a Vacation Rental

If you own a historic home in a scenic part of the country or in a bustling downtown city neighborhood, consider a vacation rental business.

With cultural tourism (defined by the United Nations World Tourism Organization as “movements of persons for essentially cultural motivations such as study tours, performing arts and cultural tours, travel to festivals and other cultural events, visits to sites and monuments, travel to study nature, folklore or art, and pilgrimages”) accounting for 40% of tourism in some countries, rental sites Airbnb, VRBO, and Joybird have sections dedicated to historic homes that appeal to travelers looking to avoid sterile corporate hotels in favor of a character-filled, welcoming stay. Marketing your home’s historical status and choosing tasteful interior designs will appeal tremendously to visitors. If you own a historic home, you could also get the advantage of state websites (here’s one example from Pennsylvania) promoting your rental to attract visitors.

Final Thoughts

Historic homes are character-filled and often located in the scenic or older parts of towns and cities where most people want to live. This results in rapid appreciation and high rental demand. Check with your city’s rental laws to ensure your home can accommodate guests.

Entering a historic home renovation requires time, patience, and experience when following the city’s guidelines. As an investor, you can be certain that if you maintain your property, it will likely increase in value far faster than other non-historic homes in the area.

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Invitation Homes CEO Dallas Tanner joins ‘Money Movers’ to discuss the state of the rental housing market and its impact on home affordability.