Ashley:
This is show number 369.

Ashley:
Today, we are going to be talking to someone who is not just a rookie, but has some great advice for rookie listeners. So father of three, 10 years to financial freedom and how it is possible for you. We’re also going to get an update to the binder strategy. So maybe you guys have heard this guest before on the BiggerPockets’ Real Estate Show, and we are going to get some updates as to how it is achievable for you to do this to get the best rents that the tenant picks. I’m Ashley, and he’s Tony.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, not once, not twice, but three times a week, we’re bringing you the inspiration, motivations and stories you need to hear to kickstart your investing journey.

Tony:
Now, in today’s episode, we’re going to talk to a landlord who says it’s been five years, been inside some of his rental properties. We’re going to figure out how to get your tenants to ask you for rent increases. And most importantly, we’re going to talk about why rookies and how rookies should evaluate a market as a whole and a heck of a lot more. So today we’ve got Dion, who is a boot camp TA extraordinary. He’s helped Ashley a lot of her boot camps. He’s a go-to name in the Real Estate Rookie Facebook group and so much more.

Tony:
Dion, we’re excited to have you on, brother, but we’ve heard that you took on a new strategy, so let’s get into that first.

Dion:
Howdy. I’m so excited to be here. I love that you called me not a rookie because I originally applied to be on the Rookie Podcast. This is where I think my information helps the most. I only have eight properties. It was 16 units when I retired in 2022 that produced a little over $200,000 in profit. So I think I love BiggerPockets. I love being on the BiggerPockets podcast, but a lot of the people that are on there have huge portfolios, have done many massive things, and I think I focus on the person who’s just starting out.

Dion:
And I really take my strategy from the book One Rental At a Time where that book talks about get to four. If you get to four properties or four units, learning those basics, just getting the, how do you find tenants, how do you screen tenants, where do you get a lease from, what’s a landlord utility policy, just the basics down. That’s when a person can decide, “Do I want hundreds of units or am I happy with what my goal ended up being was the right amount of cash flow from the least amount of units?”

Ashley:
Now, Dion, do you suggest getting all of those four units at once or is this, we get one, we get it set up and then we take on the next one?

Dion:
I call myself the lazy investor. I started from a really bad position. I made it to 40 without ever investing. I had been laid off from law enforcement because of the 2008 housing crash. Found out about $89,000 in bad debt in my name I didn’t know existed until the divorce, was a single parent with three kids, started teaching at a CDL school making $17 an hour. So there was no way I was going to acquire four properties all at once. And I think there’s a lot of people that aren’t in a great position, but if you found this is your first time watching this podcast or hearing any information like this and you started today, it doesn’t mean you buy a rental tomorrow.

Dion:
When I started at 40, the first duplex house hack took two years. I had to work in the new industry for two years to become bankable with lenders. I had to save a down payment. I moved from my house into an apartment and rented out the house so that I can get rental income on my tax returns. That got me the bad debt-to-income ratio of all that debt I didn’t know about. And so two years to buy the first duplex and then two years to buy the next duplex. So once I had those two duplexes, I realized this is a concept I think I hear people hope for, is real estate investing is not passive. Real estate ownership is very close to passive. To self-manage my rental properties, it takes less than two hours a month. But to buy that first duplex was hours of podcasts, audiobooks, networking with investors, working on my credit score, learning how to save, working overtime in a side hustle playing World of Warcraft and selling things online to make extra money on the side to get that first down payment.

Dion:
And no, I don’t think it’s something that’s going to happen very fast, but once I got to those four, I really knew that I didn’t want a hundred units. What actually allowed me to retire early was that bright cash flow. And most people focus on their freedom number. For me, there’s really two numbers and I always hear the freedom number. Financial independence happens when work is optional. But I wouldn’t want to retire early. For me to live my life since I house hack, drive paid off cars, takes about $4,000 a month. If my cash flow hit $4,000 a month, the last thing I want to do is retire. One health concern, one major expense, one recession. So the financial independence number can happen when your work is optional. But my retire early happened when my cash flow passed my retire number, which was for me four times my cash flow.

Dion:
When my rental started producing more than $16,000 a month, I felt kind of silly going to work even though it was a job I loved. I just realized there’s all this time freedom. I could have 15 hours a day that were mine where the average person and what I had was about four hours a day. So I was tripling the amount of time that I was going to live in the next year.

Ashley:
And I think there’s a lot of people that are going to want to hear more about how you started and the beginning of your journey. So I’m going to refer them to episode 448 on the Real Estate Show.

Tony:
Dion, first, I just want to give you some kudos, brother, because you said a lot of amazing things in these first three minutes here that I don’t want our rookies to kind of gloss over.

Tony:
First, you said that you’ve got a portfolio that’s doing $200,000 a year in profits to you, which is phenomenal. And I think that’s what everyone’s going to fix it on. It’s like, “Man, Dion’s crushing it, $200,000 a year in cash flow. I need to be like Dion.” But they’re probably going to gloss over everything you said after that, which was, “It took me two years to buy my first rental. It took me another two years to buy the second one. I invested a tremendous amount of time listening to podcasts, reading the books. I moved out of my primary residence so I could get the DTI income calculation to work.” So when you think about that $200,000 in total, what was the total timeframe to get you to that point, from the day you decided, “I want to invest in real estate,” to the day you actually said, “Okay, I’m at a point where I can leave.” How much time did that take in total?

Dion:
Eight years was financial independence where I started making more than 4,000 a month, right? It starts really slow. The first five years suck. It just doesn’t happen fast. We hear of a lot of investors like Cody and Christian from their multifamily strategy where Cody had 30 rentals before he could buy a beer. So I stress often that the first five years are going to suck, but the next five years are worth it when that income snowball kicks in. And it’s not… When I hit the 10-year mark, I’d had that duplex for eight years. Eight years of rent increases, eight years of appreciation and principle pay down. The next duplex that I got when I was four years in had six years of appreciation, rent increases, refinance to lower interest rates.

Dion:
At 12 years, it was a 12-year journey to hit that 200,000. It was 204,000 in 2022 when I looked at my income and I thought for most of my working career, I’ve been in the Marine Corps, I’ve been in law enforcement, I’ve been a truck driver and teaching CDL’s drivers, I usually made around 40 to $50,000 a year and saved to invest and raised three kids. So when it hit 200,000, I was running the CDL squad, been demoted all the way down to the president of the company. I could run my own schedule. I had a job I would’ve wanted my entire working career. But time freedom was more important.

Dion:
So I hope people understand that yes, the end result is completely worth it for me. We can’t stress enough how much time, energy and effort goes into those first five years, and that’s when I think most people quit. Most people want to buy the first rental now don’t realize those first two years to save and invest, you don’t have proof of concept. You think it’s theoretical. You might run into some other people who’ve done it because right now today, if you started today, that means you’re closing in 2026. What’s going to happen to the market between now and then? What’s going to happen to interest rates between now and then? What’s going to happen to your work between now and then? That’s the time commitment that comes in.

Dion:
But when you get close to that 10 year mark, I think financial freedom is possible for anybody in 10 years or less, almost no matter what your starting position is. But what are you willing to do? Are you willing to house? Are you willing to work overtime, change companies for a bigger pay increase, move to a less cost of living area especially with remote work being as optional as it is now more than any point in our lives? And there’s a lot of people who want to make those choices. And because of that, they’ll end up working 20 or 30 years longer than I think they need to.

Tony:
Dion, so much gold in what you just said, brother. And I hope our social team just chops up as much of that as they can to share that message with the world because that’s what I was hoping you would get at, is that there’s this infatuation in our society with getting rich overnight. There’s this infatuation with finding the easiest, the path of least resistance. But oftentimes that path of least resistance leads us to an end result that isn’t necessarily what we want. And a lot of times the true success that we’re looking for takes a little bit of sacrifice, takes a lot of hard work, takes a little bit of doing the things that maybe you don’t want to do today.

Tony:
So if there’s one thing that I hope rookies take away from this episode, it’s first to be patient. Second, to understand what you said. Most people quit before that kind of escape velocity happens, right? And then third, if you stick with it long enough and you follow the right process is your chances of being successful are relatively high. You just got to have the grit to see it all the way through, man.

Ashley:
So we understand you got into a new strategy recently that you haven’t done before. You had to deviate and kind of pivot based on this deal you were working on. So when we get back, I definitely want to hear more about that.

Ashley:
Okay. And welcome back from our short break. So Dion, please tell us about your most recent deal.

Dion:
So whenever I talk about the strategy, I think I offend a few people. I’m not somebody who’s done the BRRRR strategy. One of the reasons I get so much cashflow is I’ve never done a cash-out refinance. I’ve never taken out a home equity line of credit and I’ve never sold to do a 1031. I like to recycle cash flow instead of capital.

Dion:
So after reaching financial freedom and after retiring, I thought, “I could probably do the BRRRR strategy now.” Because here’s a problem I hope everybody has around that 10 year point, I had the rentals, I had the cash flow, work was optional. And that’s hard to say that this sucked, but there was about 500,000, that was $480,000 sitting in the bank that I wanted to invest. But I don’t want a lot more units. I want the right amount of cash flow from the least amount of units.

Dion:
So I was thinking, first I thought, “Why don’t I go and buy in another country? I’d like to spend a few months a year in Colombia, a few months a year in Thailand. I do a lot of scuba diving.” And I thought, “I’m going to try Portugal.”So I thought I’ll go there and I’ll buy cash. And I had a two-month time in Portugal studying the real estate market, realized I didn’t want to buy there. Instead, I used a strategy that I call my travel house hack. Instead of buying in a foreign country so I could travel there, I thought I’d buy a local house hack, add another duplex to my portfolio that I take the income from that duplex and use it to pay for Airbnbs and midterm rentals when I travel. So this is my travel house hack BRRRR.

Dion:
I was looking in my market and I couldn’t find deals that worked, but I’ve seen the biggest shift recently is remote work. I mentioned this, remote work is more of an option now than at any point in our history. So I invest near Tacoma, Washington. Seattle is a very high cost of living area. Real estate’s very expensive. It’s basically, to the people who live in my area, it’s unaffordable. It’s why they commute. Well, remote workers have pushed out how far people will rent. So rents 45 minutes to an hour and a half away from Seattle have gone up 20 to 30%, but home prices haven’t because the remote workers, well, they’ll move further out, rent a bigger place, only have to commute into the office once or twice a week instead of five days. They don’t want to buy, because their office, their company might call them back to the office next year. So they don’t want to own a property. They’re not looking to become landlords.

Dion:
So I looked out, I pushed my market out about another 35 minutes, found 11 new markets, two of them made sense. Found a bunch of deals where with the new increased rents and still kind of last year’s home prices. I found deals and started making offers. The biggest shift was for the last decade, speed mattered. You wanted to make an offer fast. I had several agents with auto searches set up. I wanted my letter of pre-qualification and docu side offer in within an hour of me finding the property.

Dion:
That’s not the case anymore. The big shift now is days on market. I’m watching. I specifically set my searches up for properties that were on the market more than 91 days, meaning the person relisted it. And so I found a couple properties. This duplex that I ended up buying was on the market 147 days. And I figured this is the type of property that can take what Patrick Bett-David calls the disrespectful offer. It was listed for 500,000 so I offered 400,000. So I went in with an 80% offer. They counted it 477,000. I offered 400,000. They said 444,000 and I said 400,000. Back and forth all the way down to where I canceled the deal and they reached out and said, “We’ll take 400,000.” So I closed on it for 400,000.

Dion:
One side is livable, the other side is a rehab, and it’s my first. I usually buy properties, and this is why the binder strategy exists. I buy properties that have tenants in place that doesn’t need a lot of work. Maybe 1,000 or $2,000 because I was working full-time raising three kids and I would fix a few things. I’d put in coded locks, motion sensor, LED lights, ask the tenant if there was anything they wanted fixed. And two months later I’d do the binder strategy and get the rent increased.

Dion:
So this was my first time taking on a project of learning that we have to ask our government for permission to improve our properties, which the permit process is very frustrating with. So I technically call this my first and last BRRRR. This is going to create over $250,000 and I don’t want to do it again.

Dion:
So if there’s somebody out there who enjoys the BRRRR method, this is how I did it. I expanded my market, I watched days on market. I made offers that made sense at numbers to me, got this accepted. I’m doing the repairs while living here, the contractors, the learning, the time schedule. I used my own money. So this is where I think my biggest, my personal problem… Not a problem, but my problem with the BRRRR strategy is, if you use hard money, you’re on a strict timeline.

Dion:
And I looked at this, I had an estimate come in with a contractor. They said, “It’ll take about three months and $30,000.” Well, I’m over six months in now and over $50,000 and it’s not done. So if I had hard money, I would’ve tripped up. But since I’m using my own money, if I refinance at the end, it’s going to end up being about a 12% cash on cash return. If I leave all of the money in, which is what I think I intend to do, it’s going to be about an 8% cash on cash return, but I’m going to use that money for traveling.

Dion:
And so doing the BRRRR method for me, it’s more of an experiment after reaching FI. Had I done this early in my investing, I don’t think I’d be FI now. I think I had so much to learn that learning curve in the beginning of what a repair takes, how to find contract. I used the Thumbtack app to find my contractors. Didn’t know about that for the first probably five years. And I think I’ve hired 11 different contractors to do parts of this rehab all from the Thumbtack app and that I’ve now used on my other rentals since I’ve had this project.

Dion:
It’s not that it’s a new strategy, it’s a new strategy to me being the BRRRR strategy that a lot of other people have had success with and challenges with. My friend Millennial Mike, who is a first responder law enforcement, lives in the Seattle area, but invests in Gary Indiana. His first two BRRRR methods, interest rates almost tripled from when he started his two BRRRR projects to when he finished. He was able to do it because it wasn’t his first couple of deals. He was five or six properties in when he did that. So I waited until I was financially free, had the resources to do it, can completely mess up and won’t have to go back to work.

Dion:
But I think the things that people can take away is if you expand your market, remote work has changed that, change from making quick offers to watching days on market and making offers that make sense to you. Hunt for the deals where someone else misses the value. When I found this listing, this was to me the perfect fine. All of my deals are from the MLS, no driving for dollars, no mailers, no extra. I’m the lazy investor. I was working full-time raising the kids, so I got used to just having auto searches set up. This property came in. And from the listing there was the word duplex in the description one time, but it was listed as a single family house. There were no pictures of two meters, there was no pictures of separate entrances.

Dion:
The one image showed the top half and it looks like a single family small house because it’s on the side of a hill. The whole bottom half of the duplex is downstairs. It’s my first up-down duplex. I literally had to drive to the property to figure out if there was a duplex here or a house and couldn’t tell from the street.

Dion:
So this was an accidental thing. I called the utility companies and I said, “I’m trying to verify. Is this a single family house or a duplex?” And the utility company said, “We can’t tell you. You’re not the owner.” But they told me that the gas service has been off since February due to non-payment. So they weren’t willing to share with me that there were two meters, which there are, but they would share the personal financial information of the owner, which helped me because I knew financial distress, stick to my numbers, they’ll come down to 400,000 eventually. And so there’s a lot of little things in there that are kind of unique but can be applied to almost any property that you’re looking at.

Tony:
Dion, I just want to comment on that because you bring up something that I think is a unique strategy. We had Ariel Herrera back on episode 349. Her entire investment strategy when it came to acquisition was identifying those properties that were misrepresented on the MLS. So like how you said, you couldn’t tell if this was a single family or duplex. That was her whole acquisition strategy to where she would look for properties that were listed as one bedroom, but maybe the square footage was 2X the normal one bedroom square footage. So that was her strategy.

Tony:
Something I want to quickly go back to though, Dion, is you said that you changed your buy box to look at properties that have been on the market for 90 plus days. I think it’s incredibly smart, but I know for a lot of new investors there’s this almost stigma or fear around offering on a property that’s gone stale in the MLS because they just assume, “Well, if other people didn’t want it for the last three or four months, there must be something wrong with it.” Did you question that? Did you worry about that stigma? And if so, what gave you the confidence to move forward anyway?

Dion:
So I make sure, I want to give credit where it comes from. Sean Cannell of Think Media has a YouTube channel on how to grow YouTube channel. So he’s not in real estate. But he says these four words, and these four words I applied to real estate in a hundred different ways. Confidence comes from competence. When you are competent at studying your market, you’ll have the confidence to make offers. When you’re competent at studying a new market… I had to look at 11 to find the two that made sense, then I was confident to make the offer. When I was competent at using the Thumbtack app to find contractors and handymen to do a BRRRR, to do a rehab, then I was confident to do the BRRRR. So it was gaining the competence at the tiny little tactics that come together to make the strategy where the confidence comes in.

Dion:
It’s kind of like for me, there’s six steps to getting starting in real estate and it all comes from when you get good at when you move to the next. We learn to save. Once you know how to save, it makes sense to look at your credit score. Once you know your credit score, it kind of makes sense to go talk to a lender. Once you’ve talked to a lender and you know what your options are, it kind of makes sense to pick a market because you know how much you can borrow. Once you know your market, then you can pick a strategy. Once you have a strategy, now you go talk to an agent. All of those little skills come together when you become competent in each one, it gives you the confidence to go to the next step.

Dion:
And that’s pretty much what brought me into this deal, is in the beginning I didn’t have the Thumbtack app. I didn’t know how to find contractors. So starting a BRRRR would’ve been… I would’ve needed a partner. I would’ve pulled in Ashley. I think reached out there to the person who has the skill set that I don’t and come together that way. I didn’t do that. So once I had the skill, it made sense to I know how to find contractors, I know how to get good quotes.

Dion:
Here’s a behind the scenes thing. Before I joined the Marine Corps, my whole family owns tree services. My dad owned one, my two brothers owned one. I joined the Marines because that was easier work than working in trees. But I was the estimator. One of my jobs was I’d go out and I’d estimate the job. The reason I use multiple contractors for any job with any of my rentals for the last 10 years or this BRRRR that I’m doing is because I know that I would never want to work with one contractor. Because when you’re working with a contractor, your price isn’t determined by the job. Your price is determined by how much work they have on the books.

Dion:
As a tree estimator, if I went and we had two months worth of work backed up, prices went up because if it was going to take me away from another customer, I needed to justify the time. If I was going to have to work on the weekends, it was needed to justify the time. If we don’t have a job tomorrow and then no more work lined up, prices hit rock bottom because we need to eat next week. And that’s how most contractors are. So I want at least three quotes every time I do a project, not because I found a good contractor, I’ve got a roofer that’s done my last two roofs that I had done, he’s probably going to do the next one, but he’s going to have two competing bids. Because what if when I go to do that roof, he’s got six months worth of work lined up and my price will be jacked up? So I hope that answers the question of the confidence comes from competence, learned a little skills, and then the confidence comes naturally.

Ashley:
Dion, back to this deal, what were three things that went wrong with it that our listeners can learn from you? What are three things that mistakes that you made that you can tell them, “Don’t do what I did, but do this”?

Dion:
Three mistakes with this deal, the first one is even when you have a home inspector, you can find things that they can miss, and there’s a valid reason. The previous owner of this house had some rot in the framing that they had repaired. And that’s a two story, so that’s a fairly important one. It’s on the lower floor. And they had the siding done in that area. So the home inspector had no way to know that there was a beam missing that was held up by a 2X4 that had perfect siding cover.

Dion:
It’s a big scary thing when you think of framing, but it was probably one of the smallest expenses that I’ve had here. So expect more expenses than you find in your home inspection. Even when you get a 72-page detailed report, you are going to find things that maybe the home inspector couldn’t find.

Dion:
The second thing is I’ve always… And it’s funny I didn’t think of this. I’ve said this for a decade. All of my properties are between Tacoma and Olympia and Washington, but not in Tacoma or Olympia and Washington. I don’t want to own inside city limits. Different regulations, rental inspectors, those kind of things. Well, I’m in a new town called Port Orchard. I’m inside city limits. About three houses down in the unincorporated area, the permit process would’ve taken four or five weeks. There’s somebody here doing work and they’re done and they were done within a month and a half. Since I’m inside city limits, I’m dealing with a different entity.

Dion:
So before you invest in an area, and I’m not saying invest in or outside of city limits, I would say I would recommend reach out to contractors that work in an area that you’re going to invest and ask the contractors that have had to pull permits, “What’s it like to work with this municipality? Is this somewhere I want to invest or is this somewhere I need to pad my timeline because of that?” So my mistake was not reaching out to… And I’ve said it many times before because I’ve done it in the past, reach out to contractors and say, “What’s it like to work with them here? How long will this take?” And I didn’t do it on a property I was buying, but I’ve done it on properties I already owned.

Dion:
And the third thing, and this is the thing that I can’t stress enough, there’s two times house hacking is really important. There are a lot of people say, “I can’t house hack.” Well, these two times make it more important than others. One, if you don’t make a lot of money. For me to get started to get through that first 10 years since… Until the eighth year, I don’t think I ever made more than 50,000. In the eighth year, I made 61,000 off of my W-two job. It wasn’t until the last couple years they started making good money. As soon as my employer found out I was making more on rentals, they started giving me increases to try to keep me, which is another reason to have rental income. But I actually walked away from $2 million in golden handcuffs and don’t care. That’s how freeing cash flow is. I share that all the time with everybody. They had those handcuffs and I said, “Those are great, but I can do anything I want every day and that’s more important to me.”

Dion:
So house hacking, if you’re not making a lot of money, it’s probably what I would call the cheat code to wealth. And the second time house hacking makes a lot of sense is if you’re in a high cost of living area. So I invest in Washington. I mentioned my friend Millennial Mike. He invested [inaudible 00:25:40] because he can buy a $68,000 triplex and each unit rents out for $1,100. Or I could buy one duplex in Washington where the down payment is $68,000 and the cash flow is about the same.

Dion:
I’m house hacking for the third time. I house hacked a duplex to get started and get around the debt-to-income. About year six or seven, I house hacked a fourplex. I lived in the fourplex until last year and now I’m in this duplex and I’m house hacking so that I can travel.

Dion:
So the people who think they don’t want to house hack because they hear somebody like me, I call myself a serial house hacker, you don’t have to. It might be once or twice to get the ball rolling. But then, the best thing about house hacking is when you move out of your unit into your forever home, you get to rent that unit out, which could be the unit that’s paying your mortgage where you’re living.

Ashley:
So Dion, you’ve touched a lot on markets throughout the episode so far. So I want to get more into what are some tactics you use when you are identifying markets. Do you have kind of a mini little crash course as to some things rookies should look for when they’re identifying a market and trying to find where they should do their first or next investment?

Dion:
So everyone should have an elevator pitch on what your buy box is. When somebody says, “What are you looking for?”, you should be able to rattle it off really quick so that not only you know it well enough to speak it simply. So I can rattle that, but there is one metric that matters the most and I’ll talk about that after the elevator pitch. I want to invest in a market where I keep my properties at least 10 miles apart, so I’m pulling tenants from multiple sources. So I don’t have all of my units close together. They’re all within an hour, hour and a half so I can self-manage. But I want all of my units close to what are called economic drivers, sources of tenants. So a base, a port, college, hospital, Boeing, Amazon, large population, two or three of those at least. And so that’s the market aspect.

Dion:
When it comes to the physical aspects of the property, I don’t like tenant turnover. That’s one of the reasons why I use the binder strategy because happy tenants don’t leave, right? So help limit tenant turnover. I want physical aspects of the property. Normally, I want side-by-side properties because you don’t have noise complaints. You don’t have over-under like the one I’m in now. So I’ll have to be more concerned about sound or a plumbing issue here can impact two units instead of one. I want washer dryer hookups inside the unit because the tenant using shared laundry or a laundromat is waiting for a place to open. I want at least two bedrooms and usually a garage or carport because in Washington, since it rains so much, that becomes storage or gets you a better rent. So those are the physical aspects of the property.

Dion:
But we all have this kind of elevator pitch on which market I’m going to pick, but here’s the metric that matters the most. And this would determine whether I’m going to buy locally or at a distance. And even my friend who invests at a distance, this is how he did it. The most important metric, trusted boots on the ground. My friend that invests in Gary Indiana, you can see a property listing that looks great, but there might be a street that has eight condemned buildings and two good ones and one of those is the one you’re looking at. And the next street over, literally one street away might have 10 properties with two condemned buildings and you’re buying one with the eight that’s better.

Dion:
And so you’ll have less tenants run over better tenants. How do you know that if you don’t have somebody on the ground? I invest locally, I’m the boots on the ground. And I could manage from a distance because I put my systems in place living here. If I was going to invest at a distance, I would do what my friend Millennial Mike did. He had a friend investing for years, watched him, and then piggybacked on his network. So he had the trust of his friend who’s an investor. That person had the contractors, the property managers, the handyman, the agents, all of the elements that you need to have the trusted boots on the ground. So if you can’t go to the market to be those boots on the ground, you need to have somebody there.

Dion:
And the level of trust that I’ve heard referenced in the past probably here on this podcast is somebody you trust so much, you think they’re probably going to be at your funeral. That’s the level of trust that you want. And that’s what my friend Mike did, is he watched his friend for years and then he used his systems so he might not know the people that are in place on the ground, but he trusted his friend that was the investor.

Dion:
One of the main reasons I invest locally is I’m in a high cost of living area. So that’s kind of the last thing to look at, is what are the properties cost. My friend and his name’s literally Millennial Mike, which means he’s a millennial, he’s got that dopamine hit. “I want to buy three, four properties. I want to have…” This feel, he’s only been investing I think five years. He’s got 15 rental units, so he’s going much faster, right? I wanted the right amount of cash flow from the least amount of units, which meant one property, one duplex where the cash flow is over a thousand dollars a unit. So I had 16 units when I retired that were producing over 17,000 a month in cash flow. Less units. But two years between purchases I don’t have, I think, the drive to have the more transactions happening now.

Tony:
Dion, I really want to dive into the buy box piece and just the process for building that out-of-state team once you get back from this ad break. So hold that thought, we’ll be right back after this ad.

Tony:
All right, Dion, you’ve shared so much great information so far. And one of the questions that’s really sticking out to me is the buy box piece because I think for a lot of new investors, they hear the word buy box, they understand that it’s important, but the actual mechanics of creating that buy box I think can be a little confusing. And while you were talking, I actually pulled up the buy box for our first commercial deal that we were trying to buy. We wrote this down last summer, June of 2023. We ended up closing on that first commercial deal in December, so six months later.

Tony:
We wrote down that we wanted to raise no more than 1.5 million. Our market type was either an urban destination or a true vacation market. We wanted somewhere between 10 to 30 units on this commercial property. We only wanted seller financing or assumable debt. We wanted a value add opportunity. And then we had some targets for cash on cash and IRR. We ended up closing on a motel, a boutique property that was a $600,000 capital raise. It was in a vacation market, 13 keys, seller finance the majority of the profits. We checked all of these boxes for our buy box, but it took us failing two times first to try and raise capital for other deals before we really landed on that, that buy box had made sense.

Tony:
So I’m curious. Ash, I’m going to go to you first because I want to know what did your buy box look like and how did you land on? And then Dion, I’d love to hear from you. But Ash, for you, when you’re acquiring properties today, how do you build out that buy box for what makes sense?

Ashley:
Yeah. When I first started out, my buy box was literally what the investor I was working for was doing. So it was a very, very limited mindset as to I need to buy a property in cash because I didn’t know that you could actually go to a bank. But also it was, I knew that I wanted more than one rental unit in the property because I wanted less overhead of having different properties and I’d wanted more under one roof. So having a two to four unit was very important to me. And then also investing in the area where I was already managing properties for another investor because I was so familiar with the market. And also I wanted to be in the affordable housing range because that was the type of area there was more of a demand for housing than getting something luxury. And also starting out, I didn’t know a lot about rehabs remodel, so I was looking for turnkey properties.

Tony:
Dion, just really quickly, brother, just how did you define your buy box? Because I know you’ve got the binder strategy, we definitely want to get into that. Before we do, just really quickly tell us how did you create your own buy box and how can rookies replicate that process?

Dion:
So I think this is probably one of the most important things that we do as an investor. I take this from the Michael Zuber’s One Rental At a Time of learning your buy box, studying it for 60 to 90 days to learn what an average deal looks like so that you can hunt for one that beats it. And the lumberjack landlord told me one time, because I used to say, “Well, that means you get a good deal.’ And he says, “No, that protects you from getting a bad deal.” I thought that was great, but you don’t know if it’s a good or bad deal until you know what the average deal looks like.

Dion:
So here’s my twist on the buy box chronology. When you’re starting out, what are your resources? We talk about the end goal. What do you want? Financial freedom or bragging rights for a unit count? I want it to buy single family houses every couple of years because I understood it. Rent one out, lived there for a couple of years, rent another one. And in 10 years I’d have five properties. Well, in my area, single family houses don’t cash flow. They just don’t. And they didn’t have the resources to save 20 or 25% down for an investment property.

Dion:
So I learned about through BiggerPockets, small multifamily gets single family lending. And I went for the duplex. I didn’t have the funding to do a fourplex. I didn’t want to use FHA. I preferred conventional loans so I could save 5% down for a duplex. And I did a 5% down. So my buy box was duplexes in my area that when I move out and both units were rented, what’s my cash on cash return and does it beat the area average? So in some areas that could be 3%. In my area it was 10. And some areas like the Lumberjack landlord who’s in around the Boston area, he’s getting 25% on some of his deals. And so you have to know what your market is because you can’t say the market because there’s over 300 of them. You know what works in your market and what asset class performs the best.

Dion:
So I house hack and purchased a couple of duplexes, but then my resources increased. So I looked at a fourplex and did 20% down owner occupied on a fourplex. And then as my resources increased, my buy box also changed with all of the things I listed off earlier. But I can buy in more and more expensive places. As my down payment, closing costs, immediate repairs and money for reserves grew, I could increase what I’m searching for.

Dion:
And then as I started having that huge, to me, lump sum of cash in the bank, and to me half a million dollars was a huge amount, I had never seen more than 10,000 until the last few years when the cash flow from rentals was way more than I needed, that’s when I shifted my buy box to, I’m searching for another fourplex or I could self-fund a BRRRR, which is what I ended up doing. And so I think you need to look at what your end goals are, but what are your current resources and how does that impact your buy box because your buy box will shift as your resources grow.

Ashley:
Now Dion, you have mentioned the binder strategy throughout this episode. I know you talk about it on your BiggerPockets episode that you did, but could you kind of give us a brief overview of what the binder strategy is? And then also I’ve been told you’ve did some updates to the strategy too, so new and improved that maybe nobody has heard about yet.

Dion:
I’ve actually made several updates to the binder. So what I did is I spent about 10 grand and made a free course. So there’s no charge. I’m not trying to sell you on something, but if you go to diontalk.com/binder, it actually has how the binder works, how it works with section 8, how it works from a distance, how it works with a property manager when you close on a property, when you should use it again after the first time. My goal with the binder strategy is to share the information with as many people as possible because it helps the tenants and it helps the landlords.

Dion:
Most tenants live in fear of somebody buying their property, coming in, kicking them out, saying they’re going to rehab the property. Kicking them out, saying “I’m going to move in” or raising the rent so much that they have to leave. And so what I have today is I’ll do the quick Cliff notes version so we don’t make the video too long of how the binder works. I actually just did this. And it’s funny, I don’t feel good about this, but I’m doing this because Washington State is threatening rent control. So because of the threat of rent control, I did the binder strategy with my entire portfolio again.

Dion:
And so the threat of rent control is going to make me more money. That’s what I don’t feel good about. But the binder is… I called it a binder because it’s actually done with a three ring binder. Now you can do this through email and you can do it through texts. When I use it with section 8, I’ve done this through emails. I had section 8 actually tell me, “The most we can pay for that unit is 1,800.” I use the binder strategy, they agreed to 2,200. And that was a few years ago. Now that property is listed for 3,000 with section 8 because of the binder strategy.

Dion:
So the idea is the tenants and the properties that I buy are usually I’m buying them because the old landlord doesn’t want to kick the tenant out, hasn’t taken care of the property, probably hasn’t raised the rent. So they’re not making enough money to keep the assets that’s why I’m buying it. So a lot of investors will run the rents at where they’re at and it’s not a good-looking deal. But I’ll run the rents 10% below what area average is and then all of a sudden it becomes a good cash floating deal because so far I have not had an experience where the rent doesn’t go to at least that much.

Dion:
The front page of the binder is, and this could be the top portion of your email as well, is from Redfin or Zillow and it shows the property. It’ll actually show the current estimated value. I share it with the tenants and I say, “This is the property you’re renting. This is what it’s worth. This is what my property taxes and insurance are based on.” The tenant doesn’t care. Our expenses do not set rents. That’s something new investors usually get wrong. They think, “My mortgage is this, I need to charge this.”

Dion:
If our expenses impacted rents, a paid off property and a property with a mortgage would rent for a completely different amounts, but they don’t. The tenants don’t even know if you have a mortgage. I’m sharing this because it’s transparency. This is information the tenant can then go look up when I’m done talking so they can verify my information.

Dion:
The next page in is the fair market rents from housing or HUD and what their current increases for the next year to say, “This is what the housing authority would pay me for this unit.” Then the next few pages are the actual lists of rentals in the area.

Dion:
Now this is an actual binder that I just did about a week and a half ago and I’ll share the actual experience. Tenant is at 1,400, area average rents are 1,900 to 2,100. So if I go in as a landlord and I say, “Hey, it’s 2024, I’m really sorry they’re talking about rent control. So I’m going to raise your rent to $100.” I’m a jerk. $100 increase would make me flamed on Facebook. My tenant might leave, they might break something before they leave.

Dion:
But I go in and I share the binder strategy, I show them the front cover, I show them what fair market rents are for housing authority, I share them the other rentals in the area that are as similar as possible, same bedroom count, garage, no garage, whatever the tenant is in, I’m sharing them what they can then go and look up and I say, “You’re paying 1,400 area average right now. If you moved out, I’d have to spend some money, fix the place up. I’d probably get 2,100 because that would be the newest shiniest rental in the area. I don’t want you to leave and to make sure you don’t get too stressed out. I don’t want to raise your rent to 1,900. That’s not what we’re doing today” because that’s the first knee-jerk reaction they’re going to have as well. “You want to take the rent to.” And I say no.

Dion:
So here’s the magic question. Just say, “What do you think would be fair?” I’ve never had a tenant say, “I want my rent to go down,” or “It should stay the same.” I’ve had a couple of tenants say, “Well, let’s go up five or $600.” And I say, “That would be great. I think that’s too much. Why don’t we go up 400?” Because they see how the disparity is between where they’re at and what it’s going to cost them if they move and what I could get if they move.

Dion:
On average, most tenants will ask for about 60%, that if they don’t quite cut the difference, they get a little closer. Once in a while I’ll have a tenant ask for something less and it’s a conversation I could say, “Well, that does seem fair to you. Do you see how far you are away from area average?” And then they’ll come up a little bit more.

Dion:
It’s more common that they ask for too much. So this last tenant said, “Well, why don’t we go from 1,400 to 1,800?” And I said, “How about we go from 1,400 to 1,700? So we’ll do a $300 increase this year. Next year we’ll look at rents again. Maybe there’ll be a small increase.” Or maybe, and this is what a tenant did when I did the binder strategy about three weeks ago, asked for a two-year lease. It was $250 increase for her, and she said, “But I’ll do this if we do a two-year lease.” I’m totally happy with a two-year lease. I’ve got a tenant longer, less tenant turnover and she is protected from the rents going up next year. The idea with this is, if I went into the tenant or just sent an email to the tenant saying, “Hey, your rents going up a hundred bucks,” I’m a jerk.

Dion:
I have a conversation. Include the tenant in the conversation. Ask them what they think is fair, have educated the tenant on what the rents are. I’ve educated myself making the binder right? If I did the binder strategy, the tenants could use this. If you’re in an area where your rent is 2,000 and you find a bunch of rentals just like yours for 1,800, you should make a binder. Talk to your landlord and say, “Hey, here’s what everyone else is paying in this area. How about this year my rent goes down?” If a tenant approached me with that, I would understand the logic.

Dion:
My goal is I buy properties where the rents are significantly lower. I don’t have to kick the tenants out. I don’t have to do rehabs. Like I said, this is my first and last BRRRR because that’s not what I generally like to do. So this has been used by hundreds, I have hundreds of screenshots of people in the BiggerPockets Facebook forums saying, “Another successful use of the binder strategy.” And it was the most recent one was tenant was at 900, they went to 1,300. A $400 increase, which is in this case click like 30% or so, whatever the actual math is on that, with a happy tenant. Happy tenants don’t trash your property and happy tenants don’t leave. So my goal is to share this. That course, like I said, is free. There’s no charge for it.

Ashley:
And does that include the new updates that you have done to it? What are the new things that you’ve discovered recently for the binder strategy?

Dion:
Thank you. Yeah. So the things that I’ve discovered recently is I wasn’t using the HUD before the fair market rents. Here’s the math on the reason why I hadn’t even thought of it before. As fair market rents were going up 5 or 10% every year, section 8 will pay more, a little bit more. And so there’s two things actually that have changed. The first one is fair market rents. Thank you for asking because I have memory issues.

Dion:
But the housing authority, the HUD uses seven years of data, but they don’t consider the last two. So they look at these five years of the last seven and they get an average and they say, “This is what fair market rents are.” Well, in 2020 we had an eviction moratorium, a rent freeze, and could change rents on 2021. Rents spiked in most markets 30 to 40%.

Dion:
So I did the binder strategy there again because of a black swan event. And I experienced the smallest increase was 20%. The largest increase was 28. So 28 to 28% at tenants request. So watch for black swan events on when you’re going to use the binder again. But this year, look, go to the fair market rents. Maybe I’ll put a link. I can’t put a link in your comments. Maybe you guys can put a link in the description below on where the housing authorities get their fair market rents based on county and based on state. And look at the increase for 2024.

Dion:
I have the binder here. And so here’s one of the biggest reasons why I use the fair market rent now in the binder, is because of that increase in 2024, they were paying 1,643 last year. Because they’re now using 2021 data, it’s going to 1,987 for a two bedroom in my area.

Ashley:
So over a $300 increase per month.

Dion:
And basically how this is going to work is in the next six months, that will impact recycling leases through the year of 2024.

Dion:
And so here’s the second thing that’s changed with the binder strategy as well. If you live anywhere near a base or a college, BAH, basic allowance for housing for military in 2023 went up 12%. It’s going up 3% in 2024. So that’s kind of a big increase that you can also reference with your tenants when it comes to the binder strategy. So also paying attention to those other things impacting your local market that could tell the tenants what a more fair rent for both of you is.

Ashley:
Well, Dion, thank you so much for all of the information that you have shared with us today. This is an amazing episode for rookie investors to listen to.

Ashley:
So I want to recap some of the lessons that I learned. And for other rookie investors, here are some takeaways that you guys should be thinking about as we wrap up this episode. So using days on market as a filter for searching on the MLS, using an app to find contractors. Thumbtack was the example given. And then learning one strategy and sticking to it until you can afford to make mistakes. And in Dion’s example, he was financially free at that point. Creating a buy box pitch that has market and physical aspects to it. And then the metric that matters the most to Dion for analyzing a market is having a trusted boots on the ground. And then lastly, using the binder strategy for raising rates.

Ashley:
So if you want to learn more information about Dion, we’ll link his information in the show notes. You can check that out. You can also find mine and Tony’s social media accounts. You can find those there.

Ashley:
Dion, thank you so much for joining us today on the show. And if you are in the Real Estate Rookie Bootcamp, you may get to know Dion there. You can chat with him in the community member group. So Dion, thank you so much. I’m Ashley. He’s Tony. And we’ll see you guys next time.

Shujin Chen, Jefferies’ head of China financial and property research, says it shifts some of the responsibility from the banks to local governments when it comes to the screening of projects.

At the beginning of 2023, we reported on the advent of #Airbnbust, a term coined by Amy Nixon and amplified by vacation property operators on social media to describe falling revenues per host due to a rapid increase in the supply of rental homes. Last July, we also dug into conflicting data that sparked a viral debate on whether the short-term rental market was crashing or reverting to normal. 

Did the trending term correspond to an industry-wide shift in vacation rental performance that would put most rental property owners out of business? Or did it merely reflect the sentiment of eager, inexperienced hosts who fully expected the rapid growth in demand and average daily rates (ADRs) to keep pace without any impact to the supply side?

From the beginning, here at BiggerPockets, we’ve been skeptical of cries that the sky is falling on short-term rentals as a real estate investment strategy. But we’ve also been aware that an oversupply of available units has created a very real threat to the revenue streams of many Airbnb hosts in certain areas of the country. We’ve also been keeping an eye on the impact of a wave of short-term rental regulations and the behavior of travelers during an uncertain economy, either of which could tip the scales in an investor’s decision to buy a new vacation rental property. 

More than one year after the panicked warnings of short-term rental hosts flooded social media, AirDNA data shows that, despite an uptick in demand and bookings, revenue per available room (RevPAR) was down year over year in December 2023 due to an increase in the supply of vacation units. There was even a slight overcorrection early in 2023 when occupancy levels sunk below 2019 levels, but the trend stabilized by September. And indicators of slowing supply growth could even lead to rising occupancy rates in 2024. 

The data points to the fact that, despite the business-shattering impacts of restrictive regulations in cities like New York, the short-term rental industry appears poised for an overall upward crawl. Here’s a closer look.

Occupancy Rates Are Stabilizing at 2019 Levels

Occupancy rates reached above 60% in 2021 as demand for hotel alternatives surged in the pandemic environment, but 2019 occupancy rates offer a better standard for a stable short-term rental market without a sudden spike in demand. By the end of 2023, occupancy rates mirrored 2019 conditions. 

The correction was due to an imbalance between supply and demand. In 2023, demand for vacation rentals grew 6.5%, slower than in previous years, while the available nights supply rose 12.6%. That includes growth in available listings of 11.5%, in addition to existing hosts offering their properties for more nights. This increase in supply without strong demand growth led occupancy rates to decline by 5.4% when compared to 2022. 

In December, the average occupancy rate was 49.9%, according to AirDNA data, about 0.6% lower than in 2019. It doesn’t appear, however, that hosts have slashed their listing rates in response to increased competition from new listings. Average daily rates fell 1.3% over the course of the year, but that was due to lower average daily rates on new listings rather than price cuts. Still, the decline in RevPAR was a significant 8.1% year over year as of December. 

Airbnb’s financial data shows a similar story. While a small percentage of hosts reduced or dropped their cleaning fees in response to Airbnb’s price transparency initiatives in 2023, global ADR was flat year over year in the fourth quarter. The company reports an 18% increase in active listings in the fourth quarter of 2023 compared to the year prior. Though Airbnb experienced strong growth in 2023, the company expects revenue growth to decelerate somewhat in 2024. 

Indicators of Slowing Supply Growth Leave Hope for Future Occupancy Growth

Though December showed a small overall increase in new listings when compared to 2022, new listings accounted for a smaller share of available listings than in the previous December. The trend indicates that supply growth may be slowing.

AirDNA expects the gap between supply and demand growth to shrink in 2024, allowing occupancy rates to remain steady and ADRs to increase slightly. This is consistent with data that show second-home transactions, which peaked during the pandemic-era low interest rate environment, have dropped by almost three quarters since August 2023. 

There’s even been a slowdown in tourist hotspots where demand remains strong. As of August, second homes made up 16% of the housing market, a smaller share than the 22% peak in January 2022. Though second-home buyers tend to be less affected by high mortgage rates, lack of inventory continues to present a challenge to would-be rental property owners. 

It’s also quite possible that the sentiment around short-term rentals as an investment strategy is changing. Even cash buyers may be working with decreased cash flow projections due to the fall in RevPAR and higher costs. Once touted as one of the hottest investment opportunities, short-term rentals are getting a bad reputation as hosts in many markets struggle to cover their costs. That change could have a delayed impact on supply growth. 

Regulatory and Economic Shifts Have Changed Which Markets Are Most Popular

Data from 2023 shows that travelers increasingly favor small and midsize cities boasting desirable local attractions rather than visiting urban cores. While this may represent a shift in travel preferences, the impact of regulatory oversight has also been significant. 

New York City provides the best example of how restrictive short-term rental laws can impact a major city and surrounding areas. In September, the city strengthened enforcement measures for a rule that required hosts to be present in units available for a rental period of less than 30 days. Hosts are now required to register with the city, which has dramatically reduced the supply of vacation units in the area. Housing activist group Inside Airbnb reported an 85% drop in available rentals between August and October, most likely due to the effect of Local Law 18. 

AirDNA clocked a stunning 46.1% decrease in demand in New York City, the greatest decline of the top 50 markets. Airbnb notes that the new rules have so far had no meaningful impact on the housing supply in the city and have not led to decreased rents, as supporters had hoped. Meanwhile, hotel rates in the already pricey travel destination have increased, and an underground market for illegal short-term rentals has emerged. 

The legislation may have put NYC, short-term rental operators, out of business, but Jersey City/Newark hosts reaped the rewards of their proximity to New York, realizing a 53.7% increase in demand. Demand growth in the area far outpaced other top markets. These market shifts indicate the sensitivity of short-term rental viability to restrictive regulatory efforts. 

But Jersey City/Newark isn’t the only market that holds promise for potential investors. AirDNA’s roundup of the best places to invest in 2024 shows strong revenue potential in smaller, off-the-beaten-path markets like Columbus, Georgia; Ellsworth, Maine; and Logan, Ohio, all of which boast typical home values below the national median. And occupancy rates are as high as 77% in areas like Anaheim, California, where Disneyland regularly brings tourists in droves.  

Economic Recovery May Impact Short-Term Rental Revenue in a Combination of Ways

Many firms are forecasting flat housing prices or slight declines on a nationwide level in 2024. Meanwhile, Morningstar expects the 30-year fixed mortgage rate to settle down to 4.75% in 2025. Federal Reserve officials are predicting a median of three rate cuts this year, and it now appears likely the central bank will achieve the soft landing it’s been working so hard toward. 

The subsequent improvement in housing affordability could bring new investors to the short-term rental industry, but it could also offer existing operators the chance to leave. From this vantage point, it’s hard to predict the net impact of more housing transactions on short-term rental revenue. 

Strong wage growth, low unemployment, and cooling inflation may also lead to increased consumption in 2024, particularly among moderate-income Americans. But wealthy Americans have been curbing their spending since the summer, a trend that may persist in 2024. 

In addition, a Forbes survey found that while 39% of Americans plan to spend more on travel in 2024, that share is reduced when compared to 2023 survey results. And almost half report they’ll adjust their budgets based on inflation. 

AirDNA’s 2024 outlook points to higher demand in most markets this year, except for NYC and Maui. But while Americans are starting to feel more optimistic about the economy, most still believe conditions are worsening rather than improving, according to a recent Gallup poll. Gallup’s Economic Confidence Index now sits at the highest it’s been in two years. That said, the effects of lingering economic uncertainty could prevent the growth in demand AirDNA is forecasting. 

The Bottom Line

It’s always been true that the success of a short-term rental business is highly location- and property-dependent. But the occupancy rate decline of 2023, coupled with record-high maintenance costs and increased cleaning fees amid a dip in ADRs, has left vacation rental investors with less wiggle room. High borrowing costs and low inventory may also continue to challenge new investors in 2024, even as mortgage rates head lower. 

But if all that leads to slower supply growth and economic optimism improves enough to boost demand, RevPAR could stabilize or even increase. There’s no evidence of an industry-wide catastrophe, and there’s no need to dismiss the short-term rental strategy entirely, as the #Airbnbust movement suggests. Instead, there’s hope that outcomes could improve. 

But, investors should be cautious about where they invest. Be sure to investigate potential legal issues and evaluate the competition within each market.

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

This article is presented by Park Street Homes. Read our editorial guidelines for more information.

If you’ve been paying attention to news in the real estate sector, you will know that new construction has faced many challenges since the beginning of the COVID-19 pandemic. From rising prices of construction materials to labor shortages and, most recently, high mortgage interest rates, the homebuilding industry has had more than its fair share of hard knocks. Indeed, homebuilder confidence dropped for three consecutive months in 2023. 

And yet one of the most respected, successful investors out there invested in three big construction companies last year. Warren Buffett’s Berkshire Hathaway disclosed investments in D.R. Horton, Lennar, and NVR, with a total investment of $814 million. And that’s against Berkshire’s overall wait-and-see approach. 

When Buffett invests, it’s worth paying attention to what he’s doing. Smaller investors have long mimicked Buffett’s behavior, and his decisions have considerable sway over the stock market. Following the disclosure of Buffett’s construction investments, shares of D.R. Horton increased 2.8%, and Lennar’s went up 2%. 

Why Investing in Homebuilding in 2024 Is a Good Idea 

If you’re a real estate investor, what should you make of this move since it seems as if Buffett’s vote of confidence goes against the grain of an overall environment of low confidence in the sector? What does Buffett know that we don’t, and should investors consider copying his strategy? 

On its face, there’s nothing especially controversial about Berkshire’s investment strategy. All three construction companies that were picked for investment are long-standing players in the sector with reliable growth rates. They’re not risky investments. 

However, the fact that Buffett singled out the construction industry from other potential investment opportunities does stand out. Buffett’s decision is, in a sense, a shrewd prediction of where the real estate market is headed. 

The single most persistent factor shaping real estate over the past three years has been the extremely limited housing inventory across the U.S. This limited inventory is continuing to prop up housing markets even after they become largely unaffordable for buyers. Home prices keep going up despite massive interest rate hikes for one simple reason: There aren’t enough homes to go around. 

We are now at an important threshold. 2024 will show us what the longer-term trends for mortgage rates will be going forward. Rates may come down somewhat or stay at their current levels for a while. 

Whichever scenario unfolds, buyers who are holding back for now are likely to just take the plunge and go for it eventually because the need for a home is greater than the willingness to wait for a more auspicious time to buy.

And here’s where the construction industry comes in. Realistically, only increased new homebuilding can satisfy the current levels of demand. Even if and when existing home inventory improves, it won’t be enough to close the supply-demand gap. 

Many existing homeowners simply don’t want to sell because that would mean giving up their pre-2022 low mortgage rates. Buyers are increasingly buying newly built homes—a behavior that will grow in the coming years. The National Association of Realtors, for example, predicts that new home sales will rise 13.9% in 2024, up from 12.3% in 2023. 

It’s like a mutual confidence-building exercise: Once buyers—and investor buyers—get buying, whatever the interest rates, the construction sector will increase building because it will have more evidence of the profitability of doing so. And once new homebuilding picks up, buyers (and renters) will have more choices of affordable homes, which is exactly what they need.

So, How Can Real Estate Investors Get in on This Trend?

This has got to be the chain of events Buffett is anticipating with his investment strategy. His long-term thinking has paid off many times in the past, so real estate investors definitely should be paying attention to the construction sector. 

This doesn’t mean that you have to buy shares in the same companies Buffett has. You may well get a better return over time if you invest in smaller but promising homebuilders that have the right plan. Look for firms that are prudent with where and how much land they buy and how fast they build. You want to see reliable completion rates in housing markets that are hot (read: affordable and popular with buyers and renters). 

Park Street Homes is one such company. It offers an exclusive opportunity to invest in the future of urban housing and new construction homebuilding for as little as $500. With Park Street Homes, you can make a direct investment in a booming industry and diversify your portfolio. Sit back and watch your wealth grow while simultaneously supporting the growth of sustainable communities through new construction.

It is important to remember that this type of investing is definitely a long game. However, if you’re looking to diversify your portfolio, new construction is a pretty good bet. 

This article is presented by Park Street Homes

Park Street Homes offers an exclusive opportunity to invest in the future of urban housing and new construction home building for as little as $500. With Park Street Homes, you can make a direct investment in a booming industry and diversify your portfolio with real estate. Sit back and watch your wealth grow while simultaneously supporting the growth of sustainable communities through new construction.

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

Pittsburgh-based investor and house flipper John Walker of Turnkey Investment Properties and his business partner, Jim Auten, usually have around 10 flips on the go at any time. When rates were low, and business was booming, that number doubled. However, high rates and low inventory have seen many of their fellow flippers exit the market. 

“It’s a case of the last man standing right now,” Walker says.

According to recent Bank of America research, it’s a scenario played out across the country, with sellers staying put for fear of sacrificing a low mortgage interest rate. About 80% of outstanding U.S. mortgages are at interest rates below 5%.

“It’s a needle-in-a-haystack scenario, with the margins thinner than ever,” says Walker. “You’re buying high and attempting to push the comps as far as they will go to eke out a profit. The good news is that generally, if you do a good flip, you’ll find a buyer because there’s so little on the market. Still, you have to be meticulous on the buy and construction sides to make a profit.”

North New Jersey-based flipper Shaheer Williams of Urban Luxury Development is a 30-year real estate veteran. He routinely has several flips going on. And he says the market is currently tighter than he has ever known.

“Right now, my advantage over many newer flippers is my reputation,” says Williams. “The other metrics, such as construction costs and the buy price, don’t allow much room for negotiation, so I’m getting deals because of my track record and personal network.”

Looking to flip houses but concerned about risk? Here are some tips from Walker and Williams for minimizing risk and keeping deals flowing in a tight real estate market.

1. Use Private Money With a Deed-In-Lieu of Foreclosure

Building a long-term relationship with private lenders who get paid once the deal closes rather than demanding monthly payments takes away the stress of coming out of pocket in the midst of a flip. Using a deed-in-lieu of foreclosure—which guarantees the property reverts to the lender should the deal fail to close—in the lending agreement also puts the investor’s mind at ease while ensuring that none of the flipper’s personal money is tied up in the project. 

Says Walker: “We don’t mind paying 10% to 12% for private money, knowing there are no headaches or additional hurdles to jump. We are 100% funded for the purchase and rehab. We always deliver, even if we have to take a hit on our profit, which happened when rates went up.”

2. Always Close

“Realtors know I will always close, which is why they bring me their deals first,” says Williams. “In this business, your reputation counts for everything. You make your money on the buy side, so when a good deal comes along, a Realtor needs to know there won’t be any hiccups and their buyer will deliver.”

3. Fine-Tune Renovations to Save Money

Flippers should go through every inch of a home looking for ways to save money. Here are a few tried-and-tested tips to minimize the expenses of your renovation:

• Save and refinish existing hardwood floors, or use vinyl plank flooring instead of new hardwood planks.
• Repair rather than replace older windows.
• Reglaze tubs and shower surrounds.
• Refinish kitchen cabinets with paint and new hardware.
• Convert attics and basements to add extra livable square footage. A chic, partially finished basement resembling a trendy coffee shop adds a wow factor and costs a fraction of a fully finished subterranean man cave. Rafters in flat black, exposed industrial can lights and conduit, painted brick walls, and floors covered with a commercial-grade rug photograph well and are a hit with buyers.
• Use gravel instead of asphalt or concrete on the home’s exterior, or repair rather than replace concrete.
• Get your real estate license to access new deals and save on commissions.

4. Reliable Contractors Are Key

Most flippers agree that good contractors are worth their weight in gold-plated fixtures. The cheapest contractor is not always the best if it means they will drag out a project. A fast flip saves money, as it gets a property listed quickly, eliminating holding costs.

“Broke contractors always charge less to get a job,” says Walker.

“Don’t be fooled by their sticker price.” Williams concurs. “I used to manage my own crews to save money, but it was a constant headache and cost me valuable time in the long run when I could have been finding other deals. Now I use a few reliable GCs I know will complete the job on time.”

5. Renovate Based on ARV

Extra bedrooms add value, but pricey chandeliers don’t. Similarly, a high-end luxury appliance isn’t going to move the needle on your ARV. Choose appliances and fixtures that match your sales price. Sometimes an antique or vintage store can unearth low-priced treasures that pop in the right setting.

6. Virtually Stage

Moving furniture in and out of a house leaves scuff marks, and staging can be expensive, especially when a home sits on the market for a while. Virtually staging a home costs a fraction of the price, especially when using overseas stagers on freelance sites such as Fiverr.

7. Stay on Top of Design Trends, and Keep Your Buyer in Mind

No one wants a home that looks dated. Equally, a home resembling a futuristic nightclub might limit your buyer pool. Always renovate with your target buyer in mind. Understanding the demographics of your neighborhood and the people attracted to your home’s price point is critical to achieving a quick sale.

8. Interest Rates Should Determine Your Renovation Budget and Sales Price

Higher interest rates have thrown a spanner into the works of homebuying affordability. Coupled with higher home prices and wages that have failed to keep up, potential buyers are getting squeezed out of the market. 

In June 2023, the cost of a typical home reached a record of $410,200, up more than 14% on the previous year, according to the National Association of Realtors, marking an increase of over 40% from October 2019, before the pandemic. However, that number dropped to $387,600 in November.

Even with projected interest rate cuts in 2024, increases in construction costs mean that if you want to snag a buyer for your flip, you will have to scale back your finishes and buy less expensive homes than when rates were lower.

9. Future-Proof Your Home

Ensuring your home is equipped for the future is relatively cheap but will give you an advantage over other homes on the market, allowing you to push the sales price. 

Future-proofing add-ons include:

• Provide an all-electric home with smart energy-efficient appliances and extras like Nest thermostats and remotely operated camera doorbells.
• Provide Level 2 EV charger-compliant wiring.
• Conserve water with low-flow fixtures, appliances, and greywater systems.

Final Thoughts

Low inventory means that house flipping is still viable, but meticulous attention to detail is needed in every aspect of the process. Buying right in the first place is more important than ever. 

Often, this means getting back to old-school granular techniques like driving for dollars, knocking on doors, and local networking because personal interaction is liable to carry more weight with a seller than AI-generated content on a mass-mailing campaign. Online marketplaces (Facebook and Craigslist), social media, and property auctions are also still proving effective.

During renovation, itemize every proposed upgrade. Investigate ways to save costs. 

Finally, all-cash buyers jump to the front of the line when selling. Consider negotiating a discount to minimize your holding costs to ensure a fast sale.

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Torsten Slok, Apollo Global Management chief economist, joins ‘Closing Bell Overtime’ to talk falling housing starts, the Federal Reserve and the state of inflation.

Dave:
Hey everyone. Welcome to the BiggerPockets Real Estate Show and this episode of Bigger News. I’m going to be your host today, Dave Meyer. And today we’re going to be talking to Natalie Ambrosio Preudhomme, who is a commercial real estate expert at Moody’s Analytics and she’s an Associate Director of Research there and she focuses specifically on climate. And we wanted to bring on Natalie today to this show because climate has been impacting real estate investors forever, but particularly over the last couple of years. I don’t know if you all have heard, but I’ve been talking to friends in California and in Florida and insurance costs are going through the roof. Some insurance companies are just leaving those states altogether. I’ve personally been dealing with this a lot in Colorado where there are wildfires. It’s been really difficult to even get insurance. So we’re going to bring on Natalie today to share some data and information with us all that can help you make more informed decisions as an investor.
And I mentioned earlier that Natalie is an expert in commercial real estate, and I think that’s important to note because this type of data about which places might see floods or which places are going to see insurance premiums increase the most are things that the big institutional investors like BlackRock and some big commercial REITs, they’re all looking at this data. And so I think for us as smaller, I’m just generalizing, most of the people listen to this show are residential investors. And I think the people who listen to the show, no matter how big or small you are as an investor, you should be looking at this data to help you make decisions. One about the cost benefit analysis of any risk mitigation strategies you might want to implement. Or two, help you decide where you want to be investing. So with that said, let’s bring on Natalie Ambrosio Preudhomme from Moody’s Analytics. Natalie, welcome to the show. Thanks for being here.

Natalie:
Thanks so much for having me.

Dave:
Could you start by telling us a little bit about what you do at Moody’s Analytics?

Natalie:
So I’m on our economics and thought leadership team within our commercial real estate part of the business. And so I focus specifically on climate change. And so I do research and market outreach, really connecting the dots on climate risk and traditional commercial real estate metrics that our institutional investors and lenders care about.

Dave:
And why do commercial real estate investors care about climate and climate risk?

Natalie:
So there’s a lot of ways this is really starting to unfold that I can dive into, but at the foundation, there’s both physical climate risks and transition risks, which are both starting to have financial implications. And so just really quickly, I’ll define both of those and then we can dive in. But physical risks are things like acute, severe weather events like wildfires, floods, individual heat waves. And then there’s also chronic stresses that are unfolding over a longer timeframe such as sea level rise or water stress and drought. So those are our physical climate risks that are threatening real estate assets. And then this transition risks, this is the bucket of risks that we face from the transition to a low carbon economy. And so this can take a few different shapes. It includes regulations around emissions reductions as well as shifting technology and then also shifting consumer preferences and demands.

Dave:
Okay. Great. So that’s really helpful in understanding those two different things that you study. And are you saying that both these physical and transitionary risks have financial implications for commercial real estate investors?

Natalie:
Yes, exactly. And so there’s different ways that this is made manifest, but starting on the physical risk side, there’s the obvious impacts of if an asset itself is hit by a flood or a wildfire, then there’s of course lost revenue during the business disruption. There’s increasing operating costs due to the repair and maintenance and all of that. And then there’s also some less obvious rippling indirect impacts. So even if the asset itself isn’t hit, but there’s a hurricane or storm in the region, so transit infrastructure is down or flooded, employees can’t get to work or supply chains are disrupted. And there’s instances of this happening where a manufacturing facility itself wasn’t damaged, but the employees couldn’t get to work after a storm. So it had halt its operations for a couple of days, which of course leads to disrupted revenue. And so that’s a few of the ways that physical risks affect real estate.
There’s also these broader ways such as through increasing insurance costs, which really has broader implications at a market level as well as for asset value. And then just briefly on the transition risk side, we are seeing a rolling out of what’s called Building Performance Standards. They take different shapes, but they’re typically at the city or state level and they put restrictions on the amount of emissions from a building or the energy use of buildings. And there’s fines associated with going over those emissions. And so, again, this is changing the calculus where it’s no longer, “Yeah, it’d maybe be nice to have a green building.” But now it’s like, “Oh, we’re going to get fined if we have emissions over a certain level.” So this is really a financial conversation.

Dave:
I think there’s a lot to unpack here. But before we jump into it, I just want to ask who is looking at this data currently? Because we’re talking about commercial real estate and that’s your specialty, but are the lessons and insights that you uncover in your work also applicable to residential investors and some of the smaller types of investors that make up most of our audience?

Natalie:
Yeah, absolutely. And I think some of the examples we’ll discuss today, it’s pretty easy to see that they are widespread across a physical asset real estate. And I’ve in the past done research on the climate impacts across different asset classes. So all that to say that yes, if anyone is invested in a physical asset on the ground somewhere, then that’s at risk from a lot of these things we’re talking about.

Dave:
Okay, great. So I just want everyone listening to know that even though some of the examples we might talk about are about commercial real estate and perhaps larger assets, that a lot of what we’re talking about may be applicable to even smaller assets or the things that you invest in. Now, let’s talk a little bit about the physical risk. As a real estate investor, there’s always physical risk, so there’s always been risk of fire, of flooding. Can you tell us what has changed recently and the scale of that change?

Natalie:
Yeah. So there’s a few different things to unpack here. I’ll put a pin in insurance because that’s a huge thing to unpack. But taking a step back, like you said, there’s always been, for millennium people have thought about floods happening next to rivers and we’ve always been developing with this in mind. The huge shift in our mindset now is that it’s really evident that the past is no longer an accurate representation of what the future is going to hold. So it’s no longer a reliable indicator to say, “Well, this asset flooded once in the last 100 years, so we should be pretty safe with that in mind going forward.” The increase in global atmospheric temperatures is having a rippling effect there on local conditions and it’s doing that in a way that is really changing the frequency and severity of these events like storms and floods and extreme temperature events.

Dave:
And is that happening universally across the country or is it located more in certain areas?

Natalie:
It is a global phenomenon, this climate change trend, however, the way that it impacts conditions varies locally. And so we do work at Moody’s, we at Moody’s acquired RMS, the catastrophe modeling firm and some other climate risk providers. And so we really leverage an array of data sets including a global climate models and more local hydrological models and things like that that really try to help wrap our heads around and communicate to the market around what the changing conditions are like at a very specific location.

Dave:
And so certain areas may have a major increase in risk and others may be less so, correct?

Natalie:
I always get the question, “Okay, you study this, where should I move?” And I typically say that yes, there are some regions that tend to be less exposed, at least to the hazards that we have a visceral reaction to like hurricanes or wildfires. There are areas, so the Upper Midwest or the Pacific Northwest. There’s some wildfires in the Pacific Northwest, but those areas tend to be less exposed to these visceral hazards. However, my first answer is usually, it’s more about picking your climate hazard because it would be very hard to find a place that’s not exposed to any of these changing conditions. So yeah, you might be trading more intense precipitation for wildfires or things like that. So it’s really a matter of choosing which one you want to prepare to deal with and build resilience to, if that makes sense.

Dave:
It does. So would it be fair to say as an investor, your approach should be just to try and understand the risks as best as possible because then you can mitigate them?

Natalie:
Exactly. Yeah. The first step is really thinking about forward-looking, leveraging forward-looking data that shows you how your assets are going to be exposed to these changing conditions. And then exactly figuring out what to do about that risk.

Dave:
So now that we understand why this climate data matters for investors, we’re going to get into first and foremost, how you can access this information and boil it down to numbers that apply to your real estate decisions. We’ll also talk about some of Natalie’s guidance on how to navigate the increasingly complicated insurance landscape. And we’ll talk about what smart investors can do to stay resilient after the break.
Welcome back everyone. I’m here with Natalie Ambrosio Preudhomme, an Associate Director of Research at Moody’s Analytics. And right now she’s walking us through her latest research on climate and how it impacts investing decisions. So how could a small or medium-sized real estate investor start to understand some of this data and how it might impact their portfolio?

Natalie:
We have tools and there’s other tools out there where, and just using ours as an example, you can put in an address or upload a portfolio of dozens or thousands of addresses and receive back information on that exposure. And there’s two components to that in our data. There’s the exposure layer which shows you based on its location and the broader area, how an asset is exposed to these changing conditions we’ve been talking about. And then there’s an impact layer which shows the estimated average annual damage that that asset will face from a specific hazard.
So yeah, they can leverage tools and really wrap their head around, okay, what is my asset exposed to? And then also what is the financial implication of that? And really having that dollar estimate can then inform very strategic decisions on the investing in resilience or asset level risk mitigation. Because one can look at how much the risk mitigation costs and think about the estimated average annual damage and multiply that out over either the hold period of the asset or the life expectancy of whatever risk mitigation you’re talking about and do some calculations to figure out the best steps.

Dave:
Wow, very cool. So can you help us maybe contextualize this with an example? So maybe if you have another example, go ahead. But I have a property I own. It’s in the mountains in Colorado, wildfire territory. So how could I use your tool or the data that’s out there to better position my property as an investment?

Natalie:
You can start by, exactly, using some sort of data to understand the changing conditions at that property. And so wildfire, there’s lots of different components that contribute to wildfire risk at an asset. There’s changing moisture deficit or changing precipitation patterns as well as long-term drought patterns. And then that combines with your burnable vegetation that’s in the surrounding area. And so understanding those metrics. And again, there’s data sets that combine all of that into a number that shows you your relative risk based on those metrics. And then really understanding your property too. And so if there’s defensible space around that property, so that’s when there’s room between the building itself and any vegetation. Or if there’s outbuildings or different things on the property, making sure those are spread apart. So that’s the first step is just understanding the situation around the exposure to these physical phenomenon and then also what’s happening at your asset.
And then the second step is thinking through, okay, so if I am in a spot that really is exposed to this phenomenon that’s going to make wildfires, how can I implement risk mitigation measures? And that’s why it’s just important to understand, like we started with, to understand which risk your asset is exposed to because it can be overwhelming thinking, I need to prepare for everything climate change has in store. But being able to prioritize based on what you’re exposed to then really helps narrow into, okay, what risk mitigation measures are there? And I can move forward with those.

Dave:
This is super important because as investors, so much of our decision making comes down to essentially a cost benefit analysis. And when I hear about climate risks, and let’s just use this example of my property, it can be hard to know how much money to spend on mitigation and how much risk you’re at. Because my HOA in the area does a great job, they offer these defensible space, which if you don’t know, it’s basically removing vegetation near the house so that there’s no trees really close to the house that might catch and then light the house on fire. But obviously that costs money. And so it’s hard to know, is it worth it? Am I really at risk? So it sounds like whether it’s wildfires, floods or any other climate risk, there is now increasing amounts of data that can help us as investors decide what mitigation approach is worth it and is going to be a positive decision for me over the lifetime of me owning a particular asset.

Natalie:
Exactly. Yeah. Having this data that shows the financials at risk, the cost of this potential damage really helps drive that resilience conversation in a way that’s been a bit challenging in the past.

Dave:
And do you have any sense of, this is probably too broad of a question, but I’ll see if you have any rules of thumb. But is there any data you’ve seen that shows how much more capital expenditures that people need to put into their properties in order to properly mitigate against some of these risks?

Natalie:
So I think that is very context specific. And another important part and a challenging part of this resilience conversation is that it’s very location specific. Again, down to not just the characteristics of your building, but also who’s using the building? What are the activities happening within that building? All of that influences things like energy demand or supply chain considerations, and those are key ways that the costs of climate change translate into financial costs. And so I don’t have a number like that off the top of my head because it’s very specific based on all of these local factors.

Dave:
Yeah, that makes sense. All right. Well, I think hopefully as some of these data sets get built out even more, you can start to at least comp some properties and see what costs what. Now, you mentioned a really important topic for real estate investors, which is the cost of insurance. Can you just talk generally about insurance companies, are they looking at the same data? Is this what they’re looking at? And is this partially fueling why we’re seeing premiums go up so much?

Natalie:
Yeah. So we’ve been doing a lot of work to wrap our heads around the insurance landscape. We, similar to you I’m sure, are really seeing this have a tangible impact on CRE transactions. Where lenders are finding that their borrowers are struggling to achieve the necessary insurance requirements without having premiums that actually present a cashflow risk. So insurers have been pulling out of high risk areas. Some of those that have pulled out of California or stopped writing new policies did in fact cite increasing hazards as one of the reasons. And so yes, to answer your question, we are seeing that this is behind the changing conditions. We’ve been doing some research on this that I can dive into if that’s of interest?

Dave:
Yeah, I’m super interested because it makes me really wonder about the future of insurance for homeowners or investors in these markets. In California, we’re just seeing fewer providers. Same thing is going on in Florida. I know in Colorado there’s certain areas where it’s very difficult to get a policy, even if it’s for just a single family home, just a place to live. And so it is confusing about how this might really impact the long-term housing market and potentially, not to be overly dramatic, but I guess if there’s no insurance, it could really impact where people choose to live.

Natalie:
Oh yeah, absolutely. And I think that’s happening to some degree now. Definitely not being dramatic. It’s being very realistic about what’s going on. So yeah, there’s a lot of pieces to dive in here. And so just to keep setting the scene, I guess, a tiny bit around what we’re seeing. So last summer or early fall, we did some research on just trying to understand the landscape of increasing insurance premiums. And so we looked at the insurance line item and operating cost data that we had on CMBS properties, commercial mortgage-backed securities. And we did this across our five key property types of multifamily, retail, industrial office and hotel. And we found that there wasn’t a clear geographic trend in terms of markets that saw increasing insurance premiums. They were really scattered across the country. But we saw that the majority of properties across the country were seeing compound average annual growth rates of over 5% for insurance. And there were a large share that were over 10% of those CAGRs in the last five years. And that was the timeframe we looked at.
And so all that to say that this is a substantial issue that’s really scattered across the country. And so that’s just laying the scene a tiny bit. And then you were asking around what’s going to happen and what the insurers are looking at in terms of data and their reactions. And so it’s really a multifaceted challenge and question because the insurance industry is also, A, fragmented across the different states. And so the markets function fairly differently depending on the state that you’re talking about. And they’re also, of course, highly regulated. And so depending on the state and the hazard that you’re talking about, there’s even been challenges in making it possible for insurers to leverage forward-looking data to set their premiums. So in California, insurers weren’t historically allowed to use forward-looking models to determine their wildfire premiums.

Dave:
Really?

Natalie:
And so that presents significant challenges. And so there’s a lot of conversation, dialogue, happening right now between policymakers and the insurance industry and homeowners or borrowers and scientists even. Really trying to figure out next steps for this and thinking around changing some of these regulations and just thinking about different ways to really combat this question of, “Well, some areas are just going to keep getting hit and so are we going to keep developing there?” Something needs to give. I think the industry has reached a point where it’s clear that something needs to give and now we’re working to identify the way forward.

Dave:
Got it. Thank you. Yeah, I think for everyone listening, this is something really important to watch because it really does have an impact. I have a friend who’s a big real estate investor in Florida and told me he’s planning to sell most of his properties because even though he had good cash flowing deals, the increase in insurance premiums has really damaged his business and there’s no end in sight necessarily. Hopefully things start to slow down. But he told me on a certain property, it more than doubled, he had one that almost tripled in a single year. And so it makes it really difficult to predict, just very difficult to know one of the major expenses in your business. Now so far, this has mostly been the big high profile ones, just so everyone knows, have been in California and in Florida.
But I imagine in Colorado, I know there’s wildfire risk. A lot of the west, there’s wildfire risk. So I am curious to see if this continues. So something that we’ll have to keep an eye on over the next couple of years. All right. So now we’re really in the thick of it and we’re about to take another quick break, but when we come back, Natalie’s going to tell us about what she expects to see in terms of new building standards and how this fits into the bigger picture of housing supply and affordability. So stick around.
Welcome back. Natalie Ambrosio Preudhomme and I are talking about trends in major weather events and what the latest research means for investors. Let’s pick up where we left off. Now, Natalie, I want to switch to something you talked about earlier, which is about building and building standards. So you said Building Performance Standards are changing. And I have a lot of questions about that. But can you just give us a little background context on that and how building standards are changing?

Natalie:
The Building Performance Standard specifically is referring to buildings’ climate operations or emissions. So specifically these are related to emissions reductions at buildings or reducing energy use at buildings. They take different forms whether they’re actually assessing the emissions or the energy use, but the end goal really is to reduce the emissions of buildings.

Dave:
Are these at a federal level, state level or how are they implemented?

Natalie:
So in the US, they’re rolling out in a fairly fragmented way. In terms of how they’re rolling out to date, there is what’s called the National Building Performance Standards Coalition and that’s a group of state and local governments that have committed to publishing Building Performance Standards by Earth Day this year, so in April of this year. And then there’s a second cohort who have committed to it by 2026. And this isn’t to say that there aren’t any published already, there are a handful of cities around the country and a few states who do already have Building Performance Standards. And so all that to say it is rolling out in a very fragmented way, but we do expect to see an acceleration of this rollout in the next couple of years.

Dave:
And what is the objective of most of these programs?

Natalie:
The root objective is to reduce emissions from the building stock. Buildings’ emissions are responsible for a large share of cities’ emissions. And so these are feeding into their broader climate commitments that many cities have made. But yeah, it’s really focused at the building itself and reducing emissions.

Dave:
From the little I know about constructing large projects, I am a more small-time investor here, when I hear about these building standards, it strikes me that adhering by them might be a more expensive form of construction. If it’s just even a more energy efficient appliance, it usually is more expensive.

Natalie:
Yes.

Dave:
Or I don’t know, energy-efficient windows are more expensive or HVAC systems.

Natalie:
Totally.

Dave:
So my question is, is the total construction cost going to be higher for these types of buildings?

Natalie:
Absolutely. And we’re thinking of it a lot because a lot of these apply to existing buildings. There’s a lot of conversation around the retrofit costs to then comply with these laws to avoid the fines. And that’s something that we are looking at closely and that’s what our clients are asking. “Is it better to just pay the fine or to actually retrofit?” And so we were talking about cost benefit analysis on the physical risk side, and this is cost benefit analysis on the transition risk side. I will say there’s a lot of opportunity in this space to look at all of these numbers and then move forward strategically. And so things like replacing your various appliances at the end of their useful life. And just when it’s time to replace them, replacing them with energy-efficient versions.
And that’s just one example, but there’s ways to really plan this out in a strategic way that makes the best use of the costs and the benefits. One other thing I’ll say on this in terms of construction also. There was just an example that I was writing about in Boston. They did include numbers that showed how much more expensive it tends to be to develop this type of very highly energy-efficient building, but then also the fact that it uses so much less energy that those costs will certainly be recouped in the lifespan or before the lifespan of that building. So the savings were significant even in light of the increased cost of construction.

Dave:
Interesting. Yeah, because I think one thing that I think about quite a lot is that there’s a shortage of housing in the United States and there is of course this effort to reduce emissions or improve the resilience of buildings. But if that makes it even more expensive, it’s already very expensive to build, if it makes it even more expensive, is that going to dissuade people, developers from developing and just further exacerbate the housing affordability problems that we have right now?

Natalie:
Two things I will mention there. One, and this gets back a bit to resilience, where it is an investment up front, but that the savings are substantial. And the interfacing of both the sustainability or transition risk side and the resilience side. Things like reducing energy demand and things like that. Yes, they reduce emissions, they’re sustainable, but they also prepare for increasing heatwaves and surging costs we’ve seen in energy demand through the summer. And things like affordable housing or just any housing, it’s particularly important to ensure that the asset is resilient and that those who are using the asset will be safe and be able to function during these extreme events. Like power outages. Yes, they create a substantial commercial disruption, but they also are a human health and safety concern.

Dave:
I agree and see the long-term value of making more resilient, more energy efficient buildings. I think what hangs me up sometimes is just the details of how the industry works. Where what might happen is the developers who take on the most risk will face increased construction costs while the eventual owners and operators of the building or the tenants of the building are the ones to enjoy the benefit. And so that’s what worries me is that there’s not an incentive for developers to build if it’s just more expensive for them only to save other people money. Does that make sense?

Natalie:
Yeah. So a few things on that. We are seeing with this increasing demand, so tenants are increasing their demand for greener, more resilient buildings. Again, large corporations are making climate commitments and the need to have their offices or their facilities in buildings that allow them to comply and meet their commitments. And so with this increasing demand, there is already some research that shows the greenium or the fact that folks are willing to pay more for these green buildings. And we expect more research to be coming out on that as more and more folks really focus on this issue. So that’s one, just a relatively simple fact that increasingly they will be able to sell or at least the greener buildings for higher prices. And again, this has already shown to be the case.
The other thing I’ll mention too is this green financing. And so there are a variety of incentives from the Inflation Reduction Act. There’s also various rebates and utility incentives. And then there’s also things like PACE, Property Assessed Clean Energy, which is another thing that’s rolled out at the state level. And so it’s only authorized in certain states. But that’s a specific financing mechanism for green properties that allows for the financing to be received upfront without any payment. And then it’s tacked on to the property taxes of the property, essentially. And that’s how it’s repaid. And so there is a variety, it’s a fragment in space that needs to be a little bit better understood frankly and fleshed out, with the resources, getting to the right people. But green financing for buildings is a space that can help with this as well.

Dave:
Well, Natalie, thank you so much for sharing your research and knowledge with us. Before we go, is there anything else that you think our audience should know from your recent work?

Natalie:
Yeah. Thanks so much for the conversation. I will just really underscore that we’re working hard to connect this exposure to climate hazards with the financial implications. Really doing work that demonstrates the impact on things like vacancy rate, asking rents, operating costs and then net operating income. And so I would say this is a really exciting and important space to keep watching and paying attention to, and it’s only going to become more important in the coming years. So yeah, thanks so much for having the conversation with me.

Dave:
Absolutely. And if you want to learn more about Natalie and her team’s work, make sure to check out our show notes, which you can find below, which we’ll link to all the research and report and great work that she’s doing. Natalie, thanks again for joining us.

Natalie:
Thank you.