Henry Chin, Asia-Pacific head of research at CBRE, says, however, that the uptick came mostly from mainland China and Japan.

David:
This is the BiggerPockets Podcast show, 841. What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast. The biggest, the best, the baddest real estate podcast on the planet. Every week, bringing you the stories, how-tos and the answers that you need to make smart real estate decisions now in the current market. I’m joined today by my co-host, Rob Abasolo, with an incredibly insightful show on the topic of bringing you up-to-date information. We have Ben Miller of Fundrise who is talking about our current economy, what’s going on with it, and how we can position ourselves to survive or maybe even thrive in the face of some pretty serious changes. Rob, what are some of your thoughts after today’s show? What should people keep an eye out to listen for?

Rob:
I think that we’re going to get some mindset changes from the people that have been in very aggressively acquiring, that set of investors make change how they think and approach real estate over the next couple of years. Very good, insightful, philosophical talk from Ben. He really brought it man. This guy is, I mean a recession genius, if you will, which is a very weird accolade to have, but he knows his stuff.

David:
Although this is a bigger new show, it’s more like bigger conversations and Ben brings a lot of insight as someone who has studied actual recessions. You don’t find a lot of people who have dedicated so much of their life to studying something so depressing, but I’m sure glad we got them. Before we bring Ben in to talk about what’s going on in the economy and specifically the world of real estate, today’s quick tip is very simple. Take some time to redefine what success looks like for a decade. We have only defined success by how much real estate you acquired, and it may be time to look at if keeping the real estate that you have or improving your financial position, if cutting down on your debt might be a bigger flex than just adding more. Let’s get into it. Ben has a long career in real estate and finance/tech. He’s the CEO of Fundrise that currently has over $3 billion in assets under management. A father of three who resides in Washington, DC. As a fun fact, his dog Zappa is the company mascot for Fundrise. Ben, welcome to the show.

Ben:
Yeah, thanks for having me.

David:
What kind of a dog is Zappa?

Ben:
Pound puppy.

David:
I remember pound puppies. Rob, are you old enough to remember those?

Rob:
Are they puppies that weigh a pound? Just kidding. Just kidding. No, I don’t know what a pound… Are you saying like a pound? Do I remember the concept of a pound?

David:
It was a toy for kids. It was like a type of stuffed animal that were called pound puppies.

Rob:
Got it.

David:
They still have them. I actually saw it in the Target toy section. They’ve made a comeback there again. Have you noticed those, Ben?

Ben:
I didn’t even realize when I said that it was like dating me.

David:
Welcome to my life. Rob always pretends like he doesn’t know anything I’m saying. He’s only five years younger than me, but he acts like he’s 25 years younger than me. What are you referring to? A pencil? What is that? How does that work in a tablet?

Rob:
I’m so sorry. A pencil? Ben, you mentioned you’re obsessed with the recession. I don’t think I’ve ever really heard those words in that order when it comes to recession. Why are you obsessed or what are you obsessed about? Just to clear that up for us.

Ben:
I guess it’s a little bit like somebody who’s hit by a car or something and they’re afraid to cross the street afterwards. I’ve been through two major ones. I went through 2001 and 2008. I worked for a tech company in ’99 to ’01, and that company went out of business and tech basically was destroyed. Destroyed for three to four years after that. Then I was in real estate after that and real estate was destroyed, absolutely destroyed in 2008, ’09 and ’10. I came away from those experiences saying 80% of what happens in the world happens during these crises. We just saw it. The last few years has been, it’s just been crazy. The amount that’s happened in a short amount of time. It’s just made me obsessed with these periods.

David:
It’s the fear of it happening again and being exposed when the music stops and you got no chair to sit in.

Ben:
It’s a combination of fear or I would say appreciation of the full power of the ocean, like if you swim, if the ocean is so vast. Also, opportunity. Because I watched a lot of companies survive and flourish out of recessions, a lot of people. It’s like most of the time you spend your day-to-day doing the same thing, it’s pretty stable days. Today is like tomorrow, yesterday was like today, and then sometimes it’s not. It’s really like those times of not that’s the greatest risk and opportunities.

Rob:
David, you mentioned you’ve been a skeptic for a while. The past couple of weeks you’ve changed your mind. Specifically, is that because of anything that you’re experiencing in your market or anything like that?

David:
I don’t know if I’d say I’d changed my mind yet. I hold these things with an open hand. As I’m looking at it, I see like, it looks like we’re heading in this direction, but I’m not going to be making these videos that we are heading to dooms day and it’s going to be the worst ever. Because you go back five years and there’s people that have been calling for these crashes the whole time and they don’t happen. Then some news comes out that changes things like what if tomorrow all of a sudden, they drop rates from seven and a half to three? Probably would have an impact on our economy. I can’t guarantee that it wouldn’t stop a recession, but it very well might. It’s hard when you’re trying to predict what’s going to come in the future with all of the moving pieces that we have. My take on a lot of this, or I guess to answer your question Rob, of why do I see this happening? I’m noticing a lot of companies are laying people off.
In my 40 years of wisdom in life that I’ve developed, what I’ve noticed is that a lot of the economy is a momentum thing, and it depends on psychology. When you feel wealthy, you spend money. When you spend money, you make other people wealthy, they feel wealthy, they spend money. Your real estate goes up in value, you feel like you’re wealthy. Your stock portfolio goes up. You go out to eat more often. You buy a more expensive car. The restaurant owner and all the waiters, they get more money. The person who sold the car, they get more money. Now they take a vacation. The hospitality industry does well. They start hiring more people. Those people start to get more money. They can pay higher rent on their houses or they go buy a house. Everyone does better when money is changing hands faster.
When we raise rates, we slow the velocity of money. Money starts changing hands slower. People feel less wealthy, they spend less money. Now the momentum is going in the opposite direction. It’s often psychological. It’s very difficult for us to pin and say what we could do to stop it. It’s often what you could do to make people feel like it’s okay to spend money or how you get money changing hands. Frankly, I’ve just noticed a lot of companies have been looking at their PNLs and saying, we don’t need this many employees, and they’re laying people off. People at one point were complaining about having a W2 like it was the worst thing ever. They were a victim because they couldn’t get financial freedom by 25 and they had to have a job. I think a lot of these people are now saying, “Oh, man. I wish I had my job. Can I get another job?” It could get a lot worse. How does that sound, Rob?

Ben:
That’s good. I think you’re getting at this point that I call it magnitude, but you described it a similar way, which is essentially there’s a feedback loop. What happens I think, is that when things go well and things get hot, they get hotter than anything could possibly make sense. We saw that with meme stocks and crypto and things just got crazy in 2021. The exact reverse can happen too. When things go bad, they can just get totally illogically bad. I think that when people are looking at the odds of recession, they’re not adjusting for the magnitude of how bad it could get. It’s just not logical. It would get as bad as it does in 2008 or 2001. We got beyond logical. It’s because it’s not logical. You said it’s psychological, it’s emotional. People are forced sellers by events outside their hands. That magnitude, I think it’s really hard for people to appreciate without going through one or two yourself. Every time I think of my odds, I always try to adjust them to the scale of the risk, the scale of the problem, not just the odds of it happening.

David:
You’ve studied data from the past nine recessions. Based on that, you’ve come to some conclusions. What are some of those things that you’ve realized after looking at other recessions, patterns that you’ve picked up for what to expect?

Ben:
Well, so one of the things I’ve learned is that if you want to understand the future, you should look at the past. I was convinced there was going to be a recession. I’ve been convinced since basically when Russia invaded Ukraine. I was perplexed by why there hasn’t been one yet. I just went back and looked at the last, I guess I went back to how far fed data goes. Fed data goes to mid-1950s and there’s been six, maybe if you think March 2027 recessions in that period since 1969. They actually all follow a pattern and the pattern is really clear. This was the thing that surprised me because I didn’t know. The Fed starts raising rates because they’re trying to cool the economy down.
They raise rates slowly and it usually takes them about a year to 18 months to fully raise rates. Then once they finish raising rates at a peak, there’s a lag. There’s a lag that lasts on average 10 months from the peak of when they raise rates. They peaked raising rates in July and the average lag is 10 months. 10 months from July is when the recession would on average hit. That’s like May 2024. That’s a long time from now. That’s what happens. It happened in 2006, it happened 2000, in ’89 in 1980. I was like, “Oh, wow. I didn’t appreciate, that’s such a long lag.

Rob:
Why is that, Ben? Why does it take 10 months or however long you’re talking about? What’s the reason for that?

Ben:
I mean there’s general reasons and specifically what’s happening today. The general reason is that monetary policy is a very indirect way to affect the economy if you get into it a little technically, like basically nobody borrows from the Fed. No, people do. Banks are the one who borrow from the Fed. You have to slow banks down and then the banks have to then slow down consumers and companies. That credit channel they call it, it’s really slow. We’ve seen it. We’ve seen from 2008 to 2020 interest rates were relatively zero. That’s like almost, what is that? 12 years. Took a super long time for all that monetary, it’s like printing trillions of dollars. It took a long time for that to feed into the economy. It’s actually funny, I’ve been reading this paper. Milton Friedman, famous economist, he’s a conservative economist, some would say monetarist. He has this famous quote. I just found it reading this paper, “The central empirical finding in my conclusions that monetary actions have a long and variable lag on economics and economic conditions.”
He wrote that in 1961. Generally, that’s how it works. Then specifically, we just have $5 trillion of stimulus, fiscal stimulus that went into the economy. That has to work its way through the economy. Then it’s like, we juiced the economy. That’s working against the monetary policy that’s trying to slow everything down. Those two things will eventually, that fiscal stimulus will and has, it’s going away. Student loan payments are resuming. I don’t know if you saw this, but child poverty rates, we’re at 5.5 I think a year ago and they’ve jumped to 12.2. They’ve doubled in the last 12 months because a lot of the program supporting SNAP and welfare and stuff have basically diminished. There’s a lot coming out of the economy. The essence of it is that just 350 million people, hundreds of millions of different actors, companies, it’s slow. It’s so slow.

David:
Is this something like where somebody eats a pot brownie and they’re like, there was nothing there. I don’t feel anything. Let eat three more of them and there’s a lag and then it all hits you, all that stimulus hits you at one time. Is that what you’re describing?

Ben:
That is not the analogy I was imagining, but that’s a decent one. Then the problem is you can’t really unwind it. You just have to work your way out of it slowly too. Because by the time it’s hitting you, hitting the economy, to unwind it has the same long and variable lag. The Fed, just to look at what’s happened recently, inflation hit the economy May 2021. If you’re in real estate, you saw it in your rents, just everything. The economy woke up May 2021 with the vaccine and all this stuff and it just roared. We had inflation, I don’t know what it was, I feel like rents were up 20, 30% for us. That’s May 2021.
If Fed doesn’t start raising rates till a year later, a year. There was zero all through that period. You look back and you’re like, “Well, that was crazy.” Now just flip that. Inverse it is what Warren Buffett always says, invert it. You flip that and say, now all of a sudden, everything’s going bad and they keep rates high despite all that. There’s a great quote, I know if you know this quote, the Fed talks like a traitor, but acts like an accountant. They talk a good game, but they always look in the rearview mirror when they make their decisions.

David:
If we’re understanding the lag well, it’s because when you make the decision, the effect isn’t instant. Again, an oversimplified analogy here. We took some caffeine and it took a minute to kick in and we just kept right to zero and then we feel great and we realized we’re feel a bit too great. This kid needs to go to bed at some point, let’s give them some NyQuil. Then there’s a period of time after you take the NyQuil before the NyQuil kicks in and these economic decisions that they’re making are always, well, we have a problem. How do we fix the problem? It takes a minute before that kicks in. As we’re sitting here making financial decisions, trying to decide what we should buy, what we should invest in, where we should put our money, we’re trying to make those decisions in real time. Your argument is that there’s going to be a lag after the Fed makes big jumps and so you’re not going to feel it right away. Is that pretty accurate?

Ben:
Yeah. That’s 100% accurate. The debate I thought we were going to have, David, was like there should be a soft landing because unemployment is so low and job growth has been so strong and households are so healthy. Even though that’s always how it has worked, this time is different because it’s just like a special moment.

David:
Well, let me give you the fight you were looking for because that is going to be more fun. I don’t want this to be clipped and someone puts it on TikTok and say, “David is saying there’s no recession.” That’s always the fear you’re going to have. Let me play that hypothetical role. I do think there is a chance that some other president gets elected and says, “I need to make the economy look good. I’m going to come in and I’m going to lower rates again and we’re going to create some new form of QE.” Maybe they don’t do the exact same thing because that would look reckless, but they come up with a fancy name and they do it a different way. It effectively is a new form of stimulus. Then just when we were supposed to crash, we go and then the plane flies even higher than ever, which theoretically could cause an even bigger crash later. What do you think about that?

Ben:
A different way to say is like, during these lags, new things can happen. We have peace in Ukraine. That’s another thing. I think that’s actually could be the most positive dis-inflationary effect. In your specific scenario, it would still be lag. You’re talking about 2025. This is why it’s so hard because you have to take in the psychology of the institutions we’re talking about, is the Fed likely to want to drop rates again? We know about the Fed, if you’ve read about their history, because there’s a lot of history. I understand the Fed, there’s great, great books about the history of the Fed. Thing institutional character of it is that they are slow, super slow and they have biases or preferences, if you want to call it preferences.
For example, they idealize Paul Volcker who was a fed chair in ’79 to ’88, I think. He’s a fed chair that battled inflation and won and goes down in history. Everybody wants to be like Paul Volcker. Then there’s this other guy, Arthur Burns, who was fed chair before Volcker. He goes down in history as being a disaster. What he did, there was rampant inflation in the 70s, like 20%. There was a recession in ’74 and inflation came down and they then dropped rates. In ’75, he drops rates again because inflation had come down and inflation came back. That goes down to one of the fed’s biggest mistakes in history. All institutions always fight the last battle. They don’t fight. That’s just the bias towards fighting the most recent. I just think there’s a huge institutional bias or preference away from dropping rates and QE, even if there’s political pressure. Anyways, let me go back to the magnitude point. If anybody knows Nassim Taleb, who wrote Black Swan and Antifragile and tons of really good books, I recommend all of them.
He has this point he makes, which is that when you look at the risk of drinking a glass of water, I said there’s a 1% chance, it’s a really small chance, 0.1% chance that it’s poison and you’re going to die. What’s the chance you’re going to drink that water? The magnitude matters more than the chance. Whether you have a business or your career, we’re talking about real risks here. We’re not talking about if it’s going to be really good or kind of good, we were talking in 2020 or in 2019 or ’18. We’re talking about real risks. The downside risk is not worth what you’re getting paid to taking it. That’s why I’m obsessed with the magnitude. Then I always adjust my chance by saying, I say 80% chance of recession. I don’t mean probabilistically, I just mean on a weighted adjusted basis. Because you look at all of the countervailing factors in the world, China, Russia, inflation, deficits, and I say, well, this is a time for caution. That’s just my bottom line.

Rob:
I’d like to follow up on that. The interesting thing in the real estate side of things, it seems like a lot of people are scared of selling their property because then they can’t get into a new property and they’re going to have a higher interest rate. Going into the recession, do you feel like real estate itself will be impacted pretty adversely or do you think the housing stalemate will continue?

Ben:
Real estate is typically highly impacted because it’s very sensitive. Interest rates and things that are sensitive to capital flows are more impacted. Things that are not impacted, just an example, like food. Food is typically not very, or liquor not very impacted by this type of change in the economic environment. Typically, real estate, which has a lot of debt and that’s why it’s so interest rate sensitive, is heavily impacted by it. Then some real estate is worse than others. You asked about housing. Housing is actually usually less impacted, but it depends on what kind of housing. It’s already, real estate, at least in the commercial world or institutional world, is definitely in a recession. The institutional real estate is in a recession. That’s a fact.

Rob:
Can you define what institutional real estate is for everyone at home?

Ben:
I would say it’s when it’s being bought, owned or sold by a company, by a certain scale, I would say. Like when you’re talking about in the tens of millions or hundreds of millions or billions. Not individual who’s buying a house or two houses.

Rob:
You mentioned that typically things that are so interest rate sensitive are going to be hit. We’re talking about real estate in this capacity. Can you help us understand, because it tends to sound a little doom and gloom, which it’s a recession, it’s a very serious thing, but how can investors take ownership during a time like this? Do you have any tips for people that are looking to get in the real estate space or looking to just maintain what they have?

Ben:
My theme here is caution and I’ll just go to the greats, the GOAT here. Warren Buffett and Charlie Munger, they always talk about being patient. They say sit on my hand, sit on my butt. I have this quote from Charlie Munger. He says, “It takes character to sit with all that cash and do nothing.” I believe that it’s going to get worse before it gets better. Stanley Druckenmiller who’s a famous investor also, he says he’s waiting for the fat pitch. I think that being patient is very much underestimated. It’s undervalued by people because they feel like the activity is what drives value. Then the older you get, the more you realize that it’s activity during certain periods that really matter. It’s like if you think back, look on your career, list the top five decisions you made that were most impactful to your life. You can know it’s super concentrated. It’s a magnitude thing again. I think it’s not what generally you get from social media, that’s all this activity that’s going to matter. It’s actually inactivity. In 2021, most people should’ve been more inactive. All those day traders.

David:
It’s a contrarian stance. It’s saying, if you follow what everybody else does, you join the party and then there’s a lag that you may be jumping in during the lag and then once you planted your flag there, the consequences hit and you’re caught off guard, in a sense.

Ben:
There’s another quote for you by Andy Grove who’s one of the founders of Intel. He says, “Make reversible decisions quickly and irreversible decision slowly.”

David:
You know what? I’ve heard of that described by Jeff Bezos in Amazon. He has a policy, because Amazon is growing incredibly fast, they almost cannot keep up with the speed of their growth. With his leadership team, he talks about one-way doors and two-way doors. A one-way door is the decision that once you go in that way, you cannot come back out. It cannot be reversed. A two-way door is a decision that you make that if you realize this isn’t where I wanted to go, you can come right back out. What he says is, if this is a two-way door, if you could make the wrong call and then reverse it, just make it.
Don’t sit here in six months analyze what to do. This is a one-way door, you need to stop and actually put the time in to making sure you made the right decision before you invest a significant amount of resources, capital, energy, whatever the case may be. I thought that was really good. When it comes to our own point of making decisions, if it’s a two-way door, it’s okay to go a little bit quicker. What I’ve told people before is when it comes to house hacking, for instance, here’s a practical example. I don’t know, do I want to buy in that part of town or this part of town and what if I end up not liking my neighbor and I don’t know about the color of that?
They just sit there, and for five years they’re analyzing what they should do. When I look at it, that’s obviously a two-way door. You buy that house, you rent out the rooms to other people or it’s several units. If you don’t like it, you just make it a rental and you move out and get another one. As long as you make sure it would cash-flow if you didn’t live there, that does not require an intense amount of decision making. Or you start a business very low actual money that you had to put into it, it’s just going to be elbow grease. You don’t like it, throw it out the door, go somewhere else. Versus some investments, significant down payment, going to be very difficult to sell to somebody else. That’s when you really want to take some time to think about. Ben, on that note, what are some areas where you see could be two-way doors and some that you see could be one-way doors moving into a potential recession?

Ben:
I love all the things you just said. A lot of times that first step, you don’t realize it, but actually what you’re buying is learning. You’re trying to get up the learning curve to mastery. I’ve learned this entrepreneuring in the beginning of Fundrise. I was obsessed with trying to plan things out and then I learned that you can’t plan anything out and that you have to learn by doing. Taking many low risks is really smart because you actually end up learning more than you think. Being inactive doesn’t mean you’re not putting yourself out there. A lot of people I find what they’re worried about is actually looking dumb. They’re worried about making a mistake, they’re going to be embarrassed by. That’s a huge barrier. That doesn’t matter. The sooner you can get to that place, the sooner you’re going to actually get to mastery and excellence. If you’re trying to basically get started, I would just say go and then just size the opportunity to the amount you can afford. Don’t get over your skis.

Rob:
What about in terms of if you are deploying money during this economic climate, where would you recommend people deploy money outside of real estate? Are there other ways that people can be diversifying outside of the real estate side of things?

Ben:
Well, we are a real estate investment platform. We have $7 billion real estate and I think we have 37,000 doors or something. We have a lot of real estate scale and I can talk really specifically about what we’re seeing in real estate, which you asked. I got to the philosophy. We launched a venture platform, so we’re investing in late-stage tech. Because I think tech is actually going to do pretty well even if we have a recession because AI is a generational breakthrough, like the personal computer. Goldman Sachs, it says it basically has a chance of being 500 times more productive than the personal computer. I’ve been actively investing for our investors in high-tech. I can name companies, Databricks and DBT, and that’s been I think really, really productive and I think it’s been awesome. Then on the real estate side, probably going to have confirmation bias for you guys, but I’m going to bear on downtown cities. I’m old enough to remember when DC and San Francisco and New York and LA were just absolute horrible. Downtowns were just like, you didn’t go there.

Rob:
LA, for sure.

Ben:
That cycle is happening again. It’s not going to be the same. Something like that is happening because the work from home is not going away. It’s going to get worse. Better, worse, whatever your perspective is. Because soon we’ll have immersive VR and we’ll have AI and you’re not going to go to the office. I think that if I were buying and we are buying, I’d be buying in housing for families and riding the demographic trend, trying to build being in the suburbs. I’d be focused on rental housing, not for sale housing, not flipping. Flipping, I think has got a lot of risk right now because I think the music could stop. Absolutely stop. That’s what happens usually in a recession. Music stops and you don’t want to be in a position where you have an expensive loan and you can’t sell the house.

Rob:
I’m feeling that a little bit. I feel like I’ve seen so much changes in the flipping thing. What I like about the rental side of things is at the very least, we’re trying to break even here. If it does go south and you aren’t exactly hitting your numbers, it’ll take a very long time to really feel that impact. Whereas if you go into a flip, it’s possible to lose a big sum of money, 30, 40, 50, 60,000. I know people that are going through that right now and that’s a very difficult thing to absorb in one gut punch.

Ben:
Actually, one of my big learnings about real estate, I’ve now done it for 20 years, is that you really want to get in a position where time works for you in real estate. Time is at your back. It’s a tailwind. There’s a lot of real estate deals where time is working against you, speed. I think that’s always a mistake. It may work out occasionally, but really, the power of real estate is this compounding growth over time. It’s sneaky how much that can really work for you. I always try to look for deals that are like, well, if it doesn’t go well and I have a year, the next year will be better. Time is the most valuable asset. The bottom line is time is most valuable thing in the universe. Seeing it at that, it’s so powerful. Once you see the power of time, whether it’s I’ll wait the person out or I’ll wait. That’s why rental housing I think is ultimately the much better risk-adjusted return. I don’t think you make that much more money on flipping, considering how much more risky it is.

David:
How much more taxes that you pay, how much more closing costs you have. It’s a very inefficient way. I like to look at money like water in a bucket, just because to understand how much money is worth is so tricky when the value of the dollar moves around so much. Instead of trying to figure out exactly how much money this would be, I think about how much energy it would be. In a flip, I buy a property below market value where I added some energy to a bucket and then I improve the condition of the property, which hopefully, improves the value, which adds more water in the bucket. Then when I sell it, I pour all of that water into a different bucket, which would be my bank account. During that process of selling, you’ve got all of these hidden costs that you weren’t expecting. You’ve got the closing costs of the realtor, you’ve got capital gains taxes, all that water spills.
Even if you did a great job of putting the water in the bucket originally, which is the part you control. In the best-case scenario, your win is still a lot less than what it should have been, versus what you’re describing buying rental property and waiting for a long time. The energy stays in the bucket. When your property goes up in value, you’re not taxed on that. You have options of getting the energy out of the bucket like a cash-out refinance that you’re in control of. You do that when you want to. When rates benefit you. You don’t have to because you have to sell this property. Where the market is, is where it’s at. It really gives you the control to monitor the stuff you’re talking about, Ben, the condition of the economy and make the decisions to extract your water and reinvest it somewhere else when it benefits you. Is that what you’re getting at when you’re talking about playing the long game with real estate?

Ben:
Totally. Also, think about it, if you sold in 2021 versus if you’re selling in late 2023, you’re selling in 2021, there’s a hundred buyers and it’s really a good time to sell. I’m closer to the commercial real estate, but I’ve sold stuff in 2021 where I had 30, a hundred bidders. It went for millions above the price we thought we’d get. If you sell now, there’s like maybe two and they’re going to low ball you. Having the ability to basically, sell on your timing. You can be filling that bucket up, but if the tsunami comes and knocks you down, like my experience in 2008, I learned that the macro will swamp the micro. You can spend so much energy doing that flip and having the perfect design and 2008 hits or the pandemic hits. It’s so much more powerful than you are.

David:
That’s one of the things frankly that’s frustrating about being a real estate investor. Because we listen to podcasts like this, we take courses, we read books. We like the feeling as a human of control. If I just learn how to do this. That’s why I think a lot of us, like spreadsheets, is they give you a feeling of control. You can create order out of chaos and it makes you feel safe. The reality is, like you said, it’s maybe 10 to 20% how good of an operator you are, and 80 to 90%, what the conditions are that you’re operating in. We just don’t like it. It’s uncomfortable. I was thinking when you were talking about the nature of commercial lending. It’s got balloon payments and it’s based on the NOI of a property. You can have a property that has a really solid cashflow, you’re crushing it. Your balloon payment comes due and you got in at a 3% rate.
Now rates are 8% and it’s not going to cashflow at that time. Or it happens to come at a time like right now where office space is not as desirable as other spaces. We’re in this flux period, there’s a bit of a lag there. Is office valuable? Is it going to be valuable? Where are we going? Are people going to work from home? No one knows. No one really wants to jump into that game until we get some stability there. You could have a property with office space that you’ve increased the NOI on, maybe you’ve doubled your NOI. You’ve done everything an operator is supposed to do. You’re a stud. Like you said, the macroeconomic conditions work against you. The tidal wave wipes you out no matter how much you’re working out your legs and how strong you got. It’s a bummer. I don’t know another way to say it when somebody has committed themselves to mastering their craft and then some of the decisions that happen from the overall economy just wipe it out. Is that what you’re getting at?

Ben:
Definitely. They lemonade out of the lemons thing is like, that’s definitely going to happen to you anyways in your life. It happened to me. Essentially, the learning you get out of it and the reputation you get from how you behave during that period and you see a lot about other people. You see how this person behaved in that situation. I mean you get a lot out of those periods. It doesn’t feel like it at the time. You’re probably in your 30s. You have decades left to make it up. That’s why I’m obsessed with the recessions. Lots of people worked a decade to get here and they can get wiped out just because of the tidal wave. I don’t think there’s going to be a tidal wave. I’m not saying it’s going to be as bad as ’08, but it is for office. It’s worse. The lack of control is something people, emotionally, it’s a cognitive bias, you don’t want to believe how little control you have over your life.

David:
It’s a solid point that you’re getting at there. I think we judge people that fail a lot of the time as don’t look at this person, they failed. Based on what you’re saying, you’re making a good point. Sometimes the best person to trust is the person that has already failed. They learn the lessons who you can trust when something happens. How to maybe see it come in the next time a little bit better than the person that’s never failed that has this. I guess maybe an analogy could be you have a fighter that’s undefeated because they’ve only fought bad opponents. Gives this impression that they’re the best. The person who’s fought the best in the world may have much more losses on their record, but they’re going to be the better fighter. I think when it comes to finances and real estate investing, there’s an argument to be made for that.
You see things coming that other people wouldn’t. What I’ve been thinking about lately is just how do I start playing more defense? The last 10 years, the metrics of success we measured. How many doors did you get? How much real estate did you buy? How much cashflow could you acquire? That’s what everybody at every meetup or every event or on social media, everyone’s posting the same stuff. Like, this is how much I acquired. As we’re slipping into what could be a recession, and by the way, we didn’t get into it, but I do think we could go into an economic recession and residential real estate could still stay strong. That might’ve been the fight.

Ben:
I agree with that.

David:
We can’t fight over that either, unfortunately.

Rob:
Dang it.

David:
As we’re heading into recession, victory to me looks like surviving. A lot of the competition is going to get wiped out. How many of our assets, our businesses, our net worth, how much can we hold onto? You just have to assume you’re going to lose some. Rob, what are some steps that you’ve been thinking about taking when it comes to a recession? The fact that you and I are both heavily exposed with short-term rentals. That’s probably going to be a factor that’s more sensitive to people feeling like they’re less wealthy. They’re less likely to go take a vacation to a nice property if they feel like they’re poor. Now’s the time to start thinking defensively. Let’s get some ideas from you about how you’ve positioned things.

Rob:
Sure. Well, first and foremost, most of where I invest are national park markets. The Smoky Mountains and stuff like that. I think that those markets tend to be a little bit more resilient, simply because people are always going to go to the Smoky Mountains. Maybe they can’t buy plane tickets for eight people in their family and go to Disney World, but they can go to what I always call, Mother Nature’s Disney World, like national parks. I think for people that are looking to maybe get into the game, those for me always seem to be markets that perform relatively well. I’m not acquiring quite as viciously as I was, but for a multitude of reasons. It’s not necessarily because I’m scared or I’m like, I don’t want to buy things during a recession. I actually am such a big believer. I’ve just had this realization over the past few months, which is a very simple realization, by the way.
What I’m about to say isn’t really the newest idea. I think the best defensive tactic anyone who’s already heavily invested in short-term rentals or really anything is just portfolio optimization. I think that this is a huge, huge thing for me right now. When you put into perspective of a short-term rental, let’s say you’re buying a $400,000 house, well, you’re going to need 20 to 25% down. You’re looking at $100,000 to close on that loan, plus another 20 or $30,000 to actually set it up and get it ready. 130,000 bucks, that’s not a small amount. Then on that 130,000, you’re trying to make a 10 to 20% return. That’s what we’re fighting for in any deal these days on the short-term rental side. What I’ve come to the conclusion that instead of doing that and spending a ton of money trying to get a great return on a new house, what could I do to actually raise the revenue of my current portfolio? How can I make more money with my portfolio?
I’ve talked about this a bunch of different ways. I’m adding amenities to my properties that cost way less than buying a house but will have a really big impact on my revenue. I built this really crazy tree house deck. An outstanding amenity at my house at the Smoky Mountains. I think that it will increase my revenue by 15 to 20,000 because we added a hot tub. If that is true, I’ll have a 50% return on that specific investment. When I start calculating my portfolio, I’m like, what are these five to $20,000 investments I can make to make that much more every single year in gross yearly revenue? My defense is just really solidifying every single property and maximizing revenue to the highest extent. I think a lot of people do get into this mindset of, I need to get another short-term rental. I need to get another door. It is a very, very popular methodology and mindset. Not enough people focus on just making the most amount of money from the actual properties that they already have. That’s what I’m doing right now. What about you?

David:
I think I’m operating under the pressure that inflation is probably going to keep happening even as we raise rates that it’s odd that we’ve raised rates this much and residential real estate values haven’t dropped, and food is still more expensive and gas is still more expensive and cars are still more expensive. It’s odd that raising rates hasn’t actually dropped the price of a lot of things. It’s just caused money to change hands less frequently, which has caused people to feel less wealthy. I feel like you have to still put your money in smart places. Now, that doesn’t necessarily mean buy more real estate. That could mean putting it in reserves. That could mean doing exactly what you’re describing, Rob, if I spend X amount of dollars here, I can increase my ROI in this place.
I’m thinking about the type of asset I’m putting it in, much more than just how do I maximize ROI? I think that when your economy’s doing very well, your thoughts are, how do I get the most return on the money I possibly can? As we head into a recession, I operate under the understanding that I want to keep as much of this as I can and be positioned when we come out the other side to be able to go run after the stuff you’re getting and get into the acquisition and play offense again. Ben, what’s your thoughts on victory in a recession is winning at defense? Do you think am I off on that? You’ve studied this a lot more than I have.

Ben:
I think you’re right on the money. You just said this, Rob, your goal is make 10 to 20% on your investments. You can go get that in the market today. There’s good mortgage REITs that have yields of 13%, current. If interest rates fall, which I think they will, that will appreciate and they’re liquid, you can then sell that and get into a property. Same with treasuries at 5%. It just seems like the Fed wants you on the sidelines and there’s the saying, don’t fight the Fed. Go on the sidelines because they’re going to punish you for not being on the sidelines.
Any good sports team, they’re good at defense and offense. The team that only can play offense, you watch them, you’re like, and they just get beat time and time again. I think that’s right. I wanted to say one more thing, David, you said about two-way doors. The funny thing about two-way doors is that a lot of times people, they get invested in the decision they made. It’s called the endowment effect. It means basically, once they made a decision, they feel like to unmake it, they made a mistake. If you own, I don’t remember, Rob, maybe you own 10 short-term rentals and you need to sell one at a loss, so now you have cash to hold the other nine. That’s okay. That’s the long game.

Rob:
Interesting.

Ben:
You said portfolio thinking, it doesn’t matter what you paid for something. You look at this exact moment, what’s the best decision? Are you a buyer? Are you a seller? Because interest rates are so high, it pushes you into the liquid market.

Rob:
It’s mega interesting that you say that. Because as real estate investors, I think over the last few years, we have been in this mindset of deploy, deploy, deploy. If you have cash in your bank account, you’re a dummy. You need to be moving that cash and making money. That’s this mindset that I’ve always had that I’ve been deploying a lot and recently, I’ve been holding onto a lot. I’ve been saving a lot. I’ve got multiple companies, I pay a lot of people now. I have a lot of real estate. I just like to make sure that I have reserves. I was talking to Codie Sanchez a couple of weeks ago and I told her, I was like, “I feel weird being a real estate investor that has any amount of liquidity because I’ve always been trained to just deploy it.”
She was like, “Yeah. Real estate investors are kind of weird like that. Rule number one, don’t go bankrupt.” I was like, “Wow, that’s a good rule.” She’s like, “Keep money. Hold onto it. Don’t go bankrupt. That is rule number one above all the other real estate principles or investing principles. It’s never going to be a bad thing to have some cash in your savings.” I think I am starting to move into this mindset a little bit more of saving. It’s interesting that you say, maybe I sell a property at a slight loss or I take an equity hit so that I have reserves for the other 40 properties. I think that’s honestly, something I hadn’t really considered.

Ben:
The CEO of Zoom, if you ask his advice, you’ve seen him on a podcast where he said, “Survive. Survive, survive, survive, survive.” He repeats it like 12 times. Look at Zoom, I mean just like, he was in the right place at the right time. He had to get there and that fat pitch came and worth whatever, tens of billions.

David:
Such a good point. You know what, Ben? It comes back to your perspective that the macroeconomy is so much more impactful than the micro. In an environment of plenty of prosperity and peace, winning is about acquiring more wealth or more friends or better relationships. Whatever you’re measuring, it’s by getting more. If you’re in a war, winning is about surviving. Nobody’s in a war worrying about, I want to be driving a Ferrari instead of a Civic. They just want to live. I think the environment dictates what the rules of success are. What the question that we’ll get a lot here is, David, how do I make money in this market? Well, that’s a good question.
It also presupposes that the goal is if we’re going into a recession, you should be trying to make as much money as you can. I would tend to think the goal is how do you keep as much of the wealth as you’ve been able to create? How do you survive this and position yourself so that when we come into a time of peace, you’re ready to go forward? Now, none of us are going to turn down an opportunity to make money in a recession. I think my expectations just drop that I don’t feel bad if I’m not increasing my net worth by as much or I’m not adding more doors as it would be if we were in a time where it was easy to do that. Right now, holding onto the real estate you have, not losing as much money, seeing your revenue not drop as much is a win. Have those thoughts crushed your mind yet, Rob?

Rob:
Definitely. That’s the big one now. It’s like, you grow at such a fast rate when things are going well, I guess it is just a weird feeling to say, it’s still a victory to just have what you got. If you’re keeping your net worth where it’s at, that’s much better than losing it. I think it’s just a lot of people are having to kind of, they’re being forced to settle a little bit. I think that makes people feel like they’re failing, but it’s the opposite. I think it’s the very opposite of failing to hold onto what you have. It’s a new thing that I’m going through myself.

Ben:
Like a race car driver. If you never hit the brakes, you would definitely crash. An all-around player plays the highs and the lows.

David:
That’s a great point. Nobody in a race car is smashing on the gas when they’re in the middle of a hard turn. It’s when you hit the straightaway. I love that analogy right there. Some economies are a straightaway and it’s all about how fast can you go. There’s other economies that are dangerous with a lot of twists and turns, and it’s all about how safe can you go. You make wealth in the straightaway as you maintain wealth when you’re in these turns and studying the track lets you know what you should be doing. I really appreciate being here, Ben, to explain why this is important to study. If people want to reach out to you and learn more, where can they go?

Ben:
I’m on Twitter, BenMillerise and fundrise.com. Hit me up.

David:
Awesome. Rob, what about you?

Rob:
You can find me over on YouTube at Robuilt, R-O-B-U-I-L-T, on Instagram, too. Depends on what you want. You want short form, funny reels, or do you want long-form videos that teach you how to do real estate? You can pick your poison. What about you, David?

David:
Find me at DavidGreene24, the most boring, yet stable screen name in the world. Going into recession, you definitely want stability. Go give me a follow on social media at DavidGreene24, or visit davidgreen24.com and see what I got going on. We here at BiggerPockets are dedicated to giving you the real, the raw, what’s actually happening and racking our brain to come up with strategies that will work. In times of feast or famine, there’s always something to study and there’s always something to do to improve. Ben, thank you for being here today and sharing your wisdom. It’s not often we get to talk to someone who actually studies worst-case scenarios and how to survive in those. Everybody, go give Ben a follow and reach out and let him know that you appreciate him on today’s show. If you’re watching this on YouTube, leave us a comment. Let us know what you thought. This is David Greene for Rob, the short-term speed racer, Rob Abasolo, signing off.

Dave:
Hey, everyone. Welcome to On the Market. I’m joined today by James Dainard for the start of short-term rental week. I feel like we need echoey music for that, or some sort of big announcement for our first ever short-term rental week. I’ve talked about this with Henry, James. Are you a short-term rental guy? Staying in one, not investing in them. Do you like staying in short-term rentals? Do you prefer hotels?

James:
I have no problem staying in them. I’m definitely good staying with them, but I go with whatever’s cheapest is what I go with, especially when I’m traveling for work. Now, if I’m with my wife and kids, they like hotels, the amenities trump it all, and so we do hotels on vacation. But I will do them. If I can find them and they’re cheaper in hotels, I will definitely rent them.

Dave:
That is something that we’ll get into throughout this week, but it’s interesting to see how Airbnb and hotel prices compare to one another. Because I think Airbnb started as sort of this cheaper option, but both have gotten so expensive that you never know, depending on what market you’re in, which is actually a better deal.

James:
Yeah, I feel like for me, I look on both and they seem like they’re about the same. But one thing I have learned, if you plan ahead, it’s way cheaper than hotels. If you’re doing it last minute, it ends up being flush. So, whatever I can do to save a dollar is what I’m chasing.

Dave:
Yes, of course. Well, this week we have two excellent episodes for you to talk about short-term rentals. Today, James and I are going to be interviewing Jesse Stein, who is the global head of real estate for Airbnb. So, we’re going to be talking about what’s going on in the short-term rental market. And Jesse’s also going to share with us a couple of strategies, new developments, new products at Airbnb that I think are really interesting, particularly for investors and particularly for people who are just trying to get into short-term rental investing right now. They have a new product line that we’re going to get into.
So, that’s what we got for you today. Interview with Jesse Stein. And then, on Friday for our second episode this week we are bringing on Vacasa, which if you don’t know, is one of the largest property management firms for short-term rental industry. And they’re going to be sharing with us some research about the best markets to invest in for short-term rentals. So, we’ll be diving into market data on Friday. So, hopefully these two shows combined will help you understand the state of the short-term rental industry and where the market is going in 2024, and what opportunities might exist. James, are you ready?

James:
I’m ready. I really do love this concept we’re jumping into. It’s save money, reinvest it. It’s a great way to do it.

Dave:
All right. Well, with no further ado then let’s bring on Jesse Stein, Airbnb’s global head of real estate.
Jesse, welcome to On the Market. Thank you for being here.

Jesse:
Thank you guys for having me. I look forward to the conversation.

Dave:
Well, we’re excited about it. So, Jesse, you have a very cool title. You are the global head of real estate for Airbnb. Can you tell us what that means?

Jesse:
Yeah, it’s a great question. I mean, what does the global head of real estate for an asset-like company actually do? Because we don’t own any real estate.

Dave:
I didn’t want to say that, but yes, that’s true.

Jesse:
But I joined Airbnb from the private equity community. I used to lead investments for a private equity company, investing in hotels. I did that for roughly a decade. I was really brought on to be the conduit between the institutional real estate community and Airbnb. Airbnb has grown from zero to 7 million listings without ever partnering or creating opportunities to partner with large institutional real estate investors. So, I was really brought on to create a team, to come up with new verticals, to bring the institutional real estate community to partner with Airbnb. And that’s kind of been my role for the last couple of years. And my team consists of software engineers, policy individuals, marketing individuals, as well as a go-to-market team. So, across all assets, I’m basically a general manager within Airbnb in the real estate area.

Dave:
Very cool.

James:
That’s pretty vast. That’s the bigger money in the Airbnb space. Hey Jesse, real quick. So, you came from the hotel business. How similar is the hotel business to the Airbnb or is it a totally different game when you’re looking at operating those?

Jesse:
I would say I have different roles in each different organization. And when I was in the hotel space, I was in charge of investments, so I was really running around the country, looking for opportunities to buy real estate, renovate real estate, stabilize real estate, and sell real estate. So, it was very detail-oriented on a micro market. So, for your consumers, if they’re looking to buy a single family home or they’re looking to buy a duplex, I was basically doing that on behalf of institutional investors, mostly college endowments. So, at Airbnb it’s a little bit different. Airbnb, the overall offering, we are a travel company at this point in time. We are starting to blend into more of a living company, but the majority of our business is travel, which is akin to hotels. But over 50% of our nights booked offer for stays over seven nights at a time across Airbnb.
In our hotels, the hotels we owned, I don’t think we ever had a stay over seven nights in any of our hotels. We were an urban hotel company. The name was Kimpton Hotels. And it was mostly corporate consumers staying for two or three nights, and then we got the leisure consumer on the weekends. At Airbnb, it’s really a different use case for travel and that’s kind of accelerated with COVID. So, similar dynamics and also different, because now I’m overseeing a team which is growing supply, where previously I was leading a team to actually make investments and dispose of real estate, and make returns for our investors.

Dave:
Jesse, I do want to jump into what you and your team are doing, but given the name of the show and the focus of the show, I want to just take a step back before we talk about what’s next, and just talk about what’s going on in the short-term rental industry. Is there anything Airbnb and you and your team have uncovered that you think our audience, a lot of whom are short-term rental investors, should know about market trends?

Jesse:
From a macro perspective, the marketplace has never been stronger. In Q2 of 2023, yes, that’s the year we’re in, I lose track of time sometimes Q2 of 2023, we grew our host base more than we’ve ever grown our host base from a nominal perspective and consumers booked more nights and experiences than ever before. So, the marketplace is strong and we are continuing to grow. So, I would say that the consumer now may have less disposable income than they did historically, but they’re choosing to spend that income on travel and experiences, where during COVID it was more on Home Depot, renovating a house, so on and so forth. Today, the consumer’s strong. The consumer is traveling on Airbnb. And our hosts are looking at the opportunity to host to keep up with the cost of living and the cost of inflation, and it’s really a healthy marketplace at this point in time.

James:
And I think that’s fairly interesting right now because I think a lot of people’s perception is that it’s not right, because the transactions have slowed down, travel’s slowed down a little bit. And a lot of that’s sometimes just all mental where people are like, “Okay, this is going bad. I’m going to shift out,” and it kind of becomes this trend or in the headlines. They put the rainy day out on all these investments. Have you seen many hosts pull out recently because of changes? Even though it’s strong, I feel like we’ve been seeing some operators selling off their properties over the last six, 12 months, wanting to get out of the space, which really contradicts… If it’s strong, you’d almost want to keep your money there with the inflation and the other economic factors going on.

Jesse:
Yeah, when I speak to it, I speak more on a global perspective. And at the end of the day, more hosts were added in Q2 2023 than ever before from a global perspective. Now, consumer trends are shifting. So, consumers are starting to travel to different places. So, what may have been a good investment a couple of years ago may not look like a good investment today because consumers are looking to go to different places. So, I would say from a macro perspective, the marketplace is really strong, consumers are doing really well, hosts are doing really well. From a micro perspective, it just depends on where your investment may be. And the old rule of real estate, location, location, location, it really, really matters. So, some individuals may have bought homes in X, Y, Z market, and that specific market may be down a little bit year over year, but other markets are up year over year. So, from a macro perspective, the marketplace is strong. And obviously, there’s pockets that are doing better than others.

James:
Do you feel like right now since travel’s increased a lot globally that the US local market is slowing down compared to… You’re seeing some markets are doing better than others. Is it more of an international presence that’s still growing, or is it also locally still staying strong? I’ve definitely noticed when I travel overseas, the planes are packed and everything’s packed, but then when I travel throughout the US, it’s actually a little bit less busy in a lot of cities.

Jesse:
Oh, really? That’s interesting because every time I fly, James, there’s never a seat left on the plane. I don’t know about you. Domestic or international, I always somehow end up in 42B on Southwest because I’m in section C, to be honest. So, we are seeing it strong across the board. And as we announced in our last earnings call, the US is still growing. So, it may be growing in different pockets than it was during COVID, but from a macro perspective in the US, it is still growing. And obviously, some other places were later to open up after COVID, international, for example. People feeling more comfortable going cross border. So, that is doing really well. But I would say domestic is also doing well.

Dave:
Jesse, there are some pundits, me, who loudly believed this year that there is going to be risk of oversupply in the short-term rental market just because we saw it, like you said, really rapid acceleration of owners. And I get that total revenue is probably up, but on a per property basis, are there declines in occupancy rates?

Jesse:
What I really would like to speak about is more so Airbnb-friendly apartments and where we’re seeing occupancy in adoption of that space. So, when it comes to broader Airbnb, I think we’ve kind of disclosed in our earnings call how we’re doing, and I’ll stick to that data and I would say it’s strong. Obviously, some markets may be oversupplied. But where there’s supply, usually demand follows. So, that’s the greatest thing about the marketplace, supply and demand are kind of in balance to a certain degree. And obviously, during times of compression, things are more occupied than not.
But when it comes to Airbnb-friendly marketplaces, and maybe we can shift to that conversation, it’s really providing an opportunity for renters that haven’t historically had the opportunity to host to get their feet wet. I was looking at BiggerPockets today, actually, and one of the questions I kept on seeing is, “How do I get started? How do I get started? How do I get started? How do I get started?” And Airbnb’s never made it easier to get started in your journey and Airbnb-friendly apartments is really part of that opportunity to grow because you can now host your primary home part-time on Airbnb.

Dave:
Okay, cool. Well, so that is something we did want to talk about. So, can you just explain this to us? This is Airbnb-friendly apartments, and this is for primary residences exclusively? Is it a different product offering?

Jesse:
It’s a totally different product offering to a certain degree. It’s really getting back to our roots of Airbnb. When Brian Chesky started Airbnb in 2008, he started it to really pay his rent. Airbnb has been so successful, Airbnb has now basically been banned in 45 million rentals across the US. That’s the overall rental stock in the US. So, we wanted to create a product that allowed consumers, like Brian, when he was 28, to get started in their journey to keep up with the cost of living. So, we partnered with some of the largest landlords in the country, Greystar, Equity Residential, UDR, household names, Starwood Capital, Brookfield, so on and so forth. And we now market their buildings to our consumers for 12 month unfurnished rentals.
So, now consumers can go to Airbnb, find their next 12-month unfurnished rental that embraces and encourages them to host part-time. And once they move in, then they can start their hosting journey. And we’ve built all the tools to ensure it’s actually a primary residence, not an individual looking to rent a place and run a dedicated Airbnb in there. It’s really meant for the individual trying to keep up with the cost of living and get their feet wet in their investment journey. When I was 28 years old, when I was 35 years old, I lived in an apartment and I was struggling to pay my bills. If I had the opportunity to Airbnb it when I was traveling, or when there was a event in town, I could have paid the majority of my rent for that month by hosting one weekend. So, it’s a really new opportunity and it’s really catered to primary home individuals that want to host part-time.

Dave:
Okay. So, I just want to make sure I understand this. So, normal Airbnb people can and still do rent out their primary residence, but this new product is basically if you’re signing a new lease, you can sign a lease with a landlord who has maybe pre-approved you or is inclined to allow you to sublet or allow short-term rentals within your unit right from the get-go. Is that correct?

Jesse:
Yeah, exactly. So, it’s really creating a quality across asset classes. Most homeowners have the ability to Airbnb or sublet their home if they own it. If you rent it, most leases have a do-not-sublet clause in them. And there’s 45 million rentals in the US, which is 35% of the overall housing stock. So, if you’re a renter today, for the most part, you don’t have the same opportunity to capitalize on the benefits of Airbnb that a homeowner would. And so, this product is really catered toward the renter that wants the ability to make some extra income when they travel, which is the same as a homeowner today that has that opportunity. So, it’s really opening up and democratizing the idea of Airbnb and rentals that exist today in owned assets.

James:
When people are looking at this and they’re looking at this kind of product, have you seen any developers or just specific buildings really marketing for this to that they’re friendly… I kind of hear this as it’s for owner-occupieds, so a lot of owner-occupied are people living there as their primary, as a renter, they don’t want tenants coming in and out around them, but I guess if it’s one big community that’s all doing it, they’re way more open to it. Is this entire buildings or is this just more located throughout specific cities?

Jesse:
So, high level, all of our partners are starting to market the ability to Airbnb your home part-time on their websites. So, if you go to Airbnbfriendly.com, and you were to look at one of our partners’ buildings, there’s a link to their website. So, if you look at an Equity Residential building in Denver called the Theo, they are actively marketing the ability to Airbnb it part-time. With that being said, not everybody in the building does it. It only works for a certain percentage of the building. So, what we’re really, really focused on is ensuring that the people that are not doing it are having just as good of as an experience in the community as the people that are doing it.
And in a certain building, maybe 5% or 10% or 15% of the residents host on Airbnb. We need to make sure it’s a great experience for the other 95%, 90% or 85% of residents that do not do it. So, there are no dedicated buildings per se that 100% of the people are doing it. It’s just providing an amenity to the residents that live there that they’re now allowed to do it if they so choose.

Dave:
Jesse, this is a very interesting concept, very clever. And I want to ask you more about it, but I did want to ask you about if and how you ensure that it’s actually the person’s primary residence. Because you’ve probably heard of this concept of short-term rental arbitrage, where people sign leases and then are subletting out, and are doing this all over the place. Is there any controls against that?

Jesse:
Yeah, 100%. So, our partners enforce night limits. So, let’s take San Francisco at the moment. Currently, you’re allowed to host your primary home 90 nights a year in San Francisco. So, our landlords enforce those night limits on the residence, and it’s virtually impossible to have a rental arbitrage business if you’re only occupied 90 nights a year. It can help really offset the cost of living by hosting 90 nights a year, but the opportunity is really for the landlords to enforce these night limits on the residents to ensure individuals are not doing the rental arbitrage game that you mentioned, Dave.

Dave:
Smart.

Jesse:
The economics just don’t prove out.

Dave:
Yeah. Awesome. So, who should consider doing this? Obviously, people who want to supplement their income, to offset some of their rent payments to, like you said, begin your journey. If you’re interested in becoming a short-term rental investor, this sounds like a good first step. But what makes a successful host? If people are not currently short-term rental hosts, who should consider this line of business?

Jesse:
It’s interesting. I always thought it was for the 28-year-old that was traveling a lot and living a flexible lifestyle. We have a single mother of three in one of our buildings that is hosting on the weekends every so often to help fund her vacations with her kids. So, the use cases are up and down the spectrum. From the consumers of Bigger podcast, you’re thinking about getting into the real estate investing game in the STR space, there’s no better way to test it than doing it on your primary home. So, that’s obviously one use case. Another use case is somebody that travels for work a lot, or if you live in a market like Denver and there’s a big convention in town, you can go up to the mountains and pay for the entire trip. So, it’s across the board the use cases of individuals that do this. From the single mother of three, we have a active duty military in San Diego, she’s hosting to pay off her student loans and actually use the money to create a new business. She created a fitness studio for herself and she’s now doing it.
So, it’s up and down the spectrum. And to get started, it’s actually really, really easy. Airbnb has launched a bunch of new features and tools called Airbnb Setup and other things. And you can easily get started in these buildings. And our partners in these buildings help the residents get started with hosting. And you kind of learn what works and doesn’t work because not every market is the same. Consumers want different things for different markets. So, getting started is number one and using Airbnb Setup to do that. And then, you learn, you iterate, and things come up over time depending on the demand use of your unit.

James:
This is a very interesting concept and I’ve heard this touched on over the years, but it’s kind of like the pre-house hack. What a lot of people do, especially with the short-term rental, was they were optimizing these first-time home buyer loans. They can get into a property with 3%, 3.5% down, or sometimes even zero down State Farm programs. So, that allowed a lot of access for investors or new people to become investors over the last four years. But then, as rates have gone up, the mortgage payment won’t work, and I know the cost of rent’s a lot lower in major metro cities than the cost of purchase.
And so, are you seeing more of a trend right now because A, traditional short-term rentals just don’t mathematically work out? And B, I mean if you think about the average condo, let’s say, in Seattle is going to be like 600 grand, your down payment on that even with a low down is going to be $18,000 to $25,000, whereas you can probably rent that with first last and deposit and get into the deal for 6,000, which will increase the cash on cash return. Is that where you’re seeing some demand for this jump up because you just can’t traditionally do it with the FHA loan in a lot of metro markets right now?

Jesse:
I would say demand is coming from a lot of sources. Right now, it is basically cheaper to rent in almost every market in the US than it is to buy because of where interest rates are and down payments. And so, this is an opportunity for renters that aren’t able to buy yet to try to save some incremental money to get them into their home in the future. We’ve had a few of our hosts that started this way, and then they use the extra money they earned to actually buy a home, that they also host by the way.
The house hack, it’s 100%. I wish this was around in 2010 when I was struggling to save money for a down payment on a home. It was so hard. And I was blessed with low interest rate environment when I bought a home in 2015. It’s so hard to save money for a down payment, and this is a great way to kind of house hack that. And you can use the money to potentially get into that ownership, but that is definitely helping adoption of the program is the imbalances right now in the cost to own versus the cost to rent across the US.

Dave:
All right. Jesse, I only have one short-term rental, but the way I can mentally deal with it is that it’s not my stuff in the house. So, how do people deal with this? If it’s their primary residence and they’re living there, how do people protect themselves or rent out something that they’re also living in?

Jesse:
Yeah, that’s always a question we get. So, from a host perspective, a lot of our hosts store their special belongings, whatever that may be. And our partners have storage lockers, so our partners do offer storage lockers in a lot of buildings to the hosts, or our hosts lock a closet. So, small simple things can really enhance your security. And if something were to go wrong, which by the way, UDR is a large partner of ours [inaudible 00:23:36]. They’ve had over 10,000 nights in their portfolio so far it with zero issues. So, it’s kind of like the boogeyman in the closet kind of concern. We do have protections if for, on some forsaken reasons, something happens, like AirCover, where we protect our hosts in situations like that.

Dave:
Jesse, I mean it sounds like a very interesting strategy and hopefully it creates mutual benefit between guests and hosts. How much of this is a reaction to some of the regulations around short-term rentals that are mostly focusing on allowing primary residence rentals and in many places, not everywhere, obviously, disallowing or discouraging the investor driven short-term rental, taking up all the supply, I guess?

Jesse:
I wouldn’t say it’s reactive. I would say it’s proactive. Where regulation seems to be going with some of this primary home thing that is beneficial to the program to a certain degree, because that’s the nuance of the program, but really the integrity of it with or without regulation because our partners still have enforced night limits in markets that do not have night limits, they still do that, is really to create affordability for renters in today’s market. Because even though it’s cheaper to rent than it is to buy, it’s still really expensive to rent and that really has to do with just the lack of overall housing and we just need to build more housing. But it is really helping these renters afford their homes, and we’re really focused on that at Airbnb.

James:
And Dave, sometimes you just got to use the cashflow to buy new things. You’re saving a ton of money-

Dave:
That’s honestly what I do. I’m just like, “This is not my house. This is purely an investment. I’m just going to take the cashflow and I’m going to buy a new shovel because someone decided they wanted my snow shovel.” I don’t know.

James:
Jesse, as you guys are expanding this out, what regions are you guys really focusing on, or is there certain areas where this doesn’t really make sense? Every asset class, it can work in every market, but sometimes you avoid different markets. Like flipping, for me, I avoid different types of markets just because of certain things that impact the deal, and I could do it there, but it’s just not worth it. Do you feel this is going to be more affordable housing areas or more mostly focused on those metro expensive areas where that $100,000 a year to $150,000 a year renter is trying to subsidize it, right? Because back in the day, if you were making 100 grand a year in college, or at least when I was in college, I thought I was rich. Now you need four roommates. And so, do you see this more growing in the metro areas or every type of region?

Jesse:
You know what’s really interesting about that is it is totally different than house flipping? And I want to make that clear because house flipping is so localized. Here, it really does work everywhere. I think the question is what is success? And so, we have buildings in Addison, Texas, which is suburban Dallas, and there’s roughly 30 hosts in one of these buildings, and they’re making pretty good money relative to their rent. We also have buildings right in the heart of the Gaslamp District in San Diego, roughly the same amount of hosts. But what’s interesting is rents also kind of ebb and flow based on urban location, city center, suburban, so on and so forth. So, the percentage of money one can make is kind of relative to the location they’re in. So, it really works everywhere. We have hosts in Addison, Texas. We have hosts in Downtown Miami. We have hosts in Downtown San Francisco and we have hosts in Cleveland. So, it’s across the board. And it’s not really a flip, if you will. It’s trying to make incremental income to go buy a shovel, like Dave’s doing for his Airbnb.

James:
Yeah, I was more talking about different asset classes. Sometimes it’s just not worth it as much. I’m a firm believer, Airbnb’s location, location, location. If you’re going to start a short-term rental business in itself, it should be in an area that has demand or a reason people are coming there, not just to do it to do it. Because we have seen that over the last four years, people just went and bought a property because they could. But this is also not just subsidizing your rental, this is an investment strategy. Build up cashflow so you can build up some extra cash to go buy your next house. I think it’s a great pre-step for house hacking, but depending on how fast you want to move and depending on what you rate as success, that’s going to tell you where to go.
Because if you want to get out of the renter pool, but you want to be in the best possible area you want to focus on… If I was a tenant right now going, “Hey, I want to subsidize this and buy in two years,” from your guys’ analytics is being in those metro, it doesn’t matter or is it more like those metro areas are more attractive because rents are a little bit lower versus purchasing power, or there’s a bigger gap between there they can cashflow a little bit better and save more money versus affordable… A lot of the affordable markets, cost of rent and cost a buyer are very similar, so there’s not as much spread. Whereas I’m looking as the rent is the spread on this.

Jesse:
What’s actually really interesting is we’ve built a custom calculator for this program. So, we’ve kind of outlined what rents are for each one of the buildings and what you could make by hosting part-time. So, a consumer can go to a market… Because a consumer might not move from Dallas to Miami to potentially make an extra 500 bucks a month or whatever it may be, just making up locations. A consumer lives where a consumer lives. So, he or she can go to Airbnb-friendly apartments and look at our custom calculator and then kind of determine which building is right for them. So, obviously if you live next to American Airlines Arena in Dallas, you’ll probably make more money than you do in Addison, Texas, but then you have to take into account the cost of the rent in that building as well, which may be higher.
So, this custom calculator really helps our consumers understand what the underlying 12-month unfurnished rent is and what they could potentially make by hosting on Airbnb. So, I would just recommend that consumers of the show go and play with it and kind of see what the data is telling them because the data doesn’t lie. The data is based on historical demand in the market and we’re pulling in the actual rents from our partners PMS feeds. So, it’s really interesting. I mean personally… It also depends on their lifestyle. Do they want to be closer to the family? Do they want to be next to the convention center, X, Y, z?

Dave:
Awesome. Jesse, well, thank you for telling us all about this. I have to ask, with your very broad job, is there anything else interesting coming down the pike that our audience should know about in addition to the Airbnb-friendly apartments?

Jesse:
There’s definitely other verticals we’re looking at. We did our first ever Airbnb-branded condominium in Miami with The Related Group, where consumers can go and buy a condo, a second home, and Airbnb it so they know upfront that this condominium or vacation rental allows Airbnb and encourages Airbnb. So, that’s something we’ve already done. We’ve done a couple of those developments in Miami. And there’s a lot more under the hood that we’re going to announce that can’t announce it right now as a public company, but we are definitely expanding the concept. And Dave, hopefully I can come back on the show and we could talk about what we announced.

Dave:
All right, fine. We’re going to drip it out slowly. And so=

Jesse:
I apologize.

Dave:
… we would love to have you back, but we won’t force you into any SEC violations.

Jesse:
Thank you. My comms team really appreciates that, Dave.

Dave:
Yes. So, Jesse, is there somewhere people should find out about it? Do you just go on Airbnb and you can look for these places like you look for a traditional apartment?

Jesse:
You can go on Airbnb and you can go to the host landing page and find Airbnb-friendly apartments. The easiest way to find it is honestly just a Google Airbnb-friendly apartments, and it pops up at the top of the page and you can learn more. If you’re a consumer, you can look for your next rental that allows you to host. Or if you’re a building owner, you can get in contact with my team through Airbnb-friendly apartments, and we can discuss how it could benefit your program.

Dave:
All right. Jesse Stein, thank you so much for joining us.

Jesse:
Thank you.

Dave:
All right. Well, big thanks to Jesse. James, I have some questions for you. But before that, I just want to clarify. I asked Jesse a question about occupancy rates because it’s something I always want to know, and he explained after we were done recording that he can’t tell us that because literally today, within a few hours of recording this, is Airbnb’s investor relations call. So, he can’t disclose that information before the investor call. It is an SEC rule, so that’s why he was not able to answer that question. We will put a link to the transcript to Airbnb’s earnings call, so you can check that out. I will just tell you that anecdotally, we do see some evidence that occupancy per unit is down, but revenue is still doing pretty well. So, it’ll be interesting to see what Airbnb records this week.
James, what do you think of this concept of Airbnb-friendly apartments?

James:
I really do like it because as we go through different phases, because we’ve been hearing for the last 12, 18 months, I think I’ve probably said it, that Airbnb is really tough to get done right now with the rates as high as they are and the pricing has not came down. Median home prices creeping up, rates are up, it’s hard to do. So, this is just a way for if you want to get going and saving on your housing costs, that traditional house hacking method is you can get in and have a lower payment. The lower payment, which is your rent, is going to allow you to actually cashflow it to make it work. So, I do like it. It’s about adjusting how you do the investment to continue for it to grow. Airbnb is not dying, it’s just being changed right now as rates are too high.

Dave:
I think it’s a great idea because a lot of the STR regulations right now are in response to really high rent and the lack of affordable housing and housing shortage. And just to be clear, even with the increase of supply in the market, Airbnbs and short-term rentals make up about 1% of housing units in the United States. So, that obviously impacts people and some markets more than other, but it’s not dominating the housing market. But this seems like a really interesting and good balance. It helps maintain supply of Airbnbs, which obviously there’s demand for. People want to stay at Airbnbs, so having them go away altogether wouldn’t be good because that would probably just sense hotel rates skyrocketing. But at the same time, you’re not taking a potential rental away from someone else. So, this just seems like a really interesting way to adapt to ongoing regulation changes.

James:
Yeah, and people want more affordability in their lives, and so giving them that option of bringing… I mean credit card debts are at all times high. Everybody’s still spending a lot and things are crunching them. So, I think this is a great concept and it’s a matter of making sure… I will be curious to see what big buildings will think of this. Is there going to be more regulation sweeping through because tenants will complain?

Dave:
That’s interesting. Yeah, so you’re in a building with 100 units. If 20 or 30 people do this, are the 70 people who aren’t doing it going to be annoyed by all the short-term rentals?

James:
Will that building have a higher vacancy rate, which then they’re going to say, “No…” But there’s always a season. It could work for 24 months and then things change, then you got to pivot again.

Dave:
I just think this would work really well, and I have very limited short-term rental experience, just one. But a big problem in a lot of vacation towns is the lack of affordable housing. For people who work in the tourism industry, for example, this could work really well for places like that. So, I bet it’ll catch on. But yeah, I guess it will be a market-by-market, building-by-building experiment.

James:
Well, you know what, Dave? I have my first short-term rental coming live. I haven’t had one in seven, eight years. Mine’s coming live in two weeks.

Dave:
I was going to say, I was going to ask you, because you own a real estate business in every strategy, in every sector of real estate investing, but I’ve never heard you talk about short-term rental.

James:
It’s a lot more work, and I believe in it… It’s kind of like when people are like, “I don’t want to flip because it’s a lot of work.” We have a lot of doors, and so we just manage it in a traditional way. But there is a purpose. I’m going to be doing it. I bought a duplex in Bellevue. I travel a lot. I’ll probably be in there 12 nights a month, and the other nights I’m renting out. I mean, hotels are all-time highs right now there, and I think I can get 200, 300 bucks a night.

Dave:
Wait, dude, you can’t do this. You can’t do it. This was the only part of real estate investing where I was more experienced than you because I had one and you had zero. Now, if you get one, we’re going to be even and I have nothing on you.

James:
But that means I still have to operate it in an effective way, so I need to be coached first.

Dave:
All right. Well, good luck with that. I mean, it sounds great. Obviously, you’re traveling back and forth. It’s a perfect way to do it.
All right. Well, thank you all so much for listening. Hopefully this was helpful. And remember to join us again for our second episode this week where we’re going to be joined by Vacasa to talk about some of the best markets to buy a short-term rental in for the following year 2024. James, thank you for joining us, and thank you all for listening. We’ll see you next time.
On The Market was created by me, Dave Meyer, and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content. And we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Hong Kong Monetary Authority chief executive Eddie Yue says the risks rising from negative equity in Hong Kong are “manageable” despite the higher for longer interest rate environment.

David:
This is the BiggerPockets Podcast show, 840. What’s going on everyone? It is me, David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast on the planet for a long time, bringing you what you need to know about real estate to stay up to speed, current, and in the know of what’s going on in this market, which is changing now, more than ever.
In today’s episode, Rob Abasolo and I will be handling it, Seeing Greene style. Now, normally there’s a green light behind me. That’s not the case right now because I am traveling to promote Pillars of Wealth, but that doesn’t stop us from bringing you educational, powerful and free real estate content.
In today’s show, ooh, you’re going to love it. We get into sequencing the work for rehab projects. What is the order that you should do when it comes to getting pre-approved, to getting bids on construction, ratting offers, moving forward with the escrow and strategies you can use to put that in your favor. When cashflow is or isn’t appropriate, this is a really good discussion about the complicated question of, is it okay to cashflow negatively if I’m making a lot of money, and what needs to go into that question?
With the aging population, is real estate a risk long-term? I thought that was a really good discussion that we had as well. Rob, what are the factors that make real estate go up or down in value, and what will that be like in the future if the population of America stops increasing like other first world countries have? And can I own real estate while still renting where I live?
All that and more on today’s show. But before we get to our first question, today’s quick tip is simple. Get your team together, build your core four, and start your journey and BiggerPockets can help. We’ve got an agent finder, which you can find at biggerpockets.com/agents. I’m one of the people on there, so go look for me as well. You can find an agent in your area and ask them if they can help you put your core four together. If they know what that means, it means they probably read my book and you’re off to a good start. Rob, anything you want to say before we get to our first question?

Rob:
This is very fun. This is a very fun format. I can’t believe I’ve been missing out on this for two years. Thank you for allowing me to come on this. I want to do this more. Have me on.

David:
First time you’ve ever put me and fun in the same sentence.

Rob:
Hey, there’s a first time for everything and there’s a second time for everything, too. So if you hold out, maybe I’ll say it again.

David:
The only time people really talk about me being fun is when I’m talking about fundamentals, which people think are fundamentally boring.

Rob:
That’s the name of your 11th book that you’re currently writing for 2027, right? All right, let’s get into the show.

David:
Sean, welcome to the show. What’s on your mind today?

Sean:
Thanks, David. First of all, I’d like to say thank you for taking the time to have me on and answering my question. You and Rob have been instrumental in my decision to get into real estate, so it’s really quite surreal being here and talking to you both live, so thank you.

Rob:
Oh, hey, happy to do it.

Sean:
A bit of relevant background. My cousin and I have teamed up as partners. He is an investment banker living in New York City and I’m a corporate lawyer living in Boston. We have leaned into the concept of long distance real estate investing, given our expensive local markets. We own a couple of properties and want to continue building our portfolio. And we’re looking to enhance our returns on future investments by employing the BRRRR strategy and we are working with an investor focused realtor in an out-of-state market we have selected.
Our skill sets are great on the transactional and analytical sides, but we have little to no experience in renovation and construction, and any BRRRR investment would be made from afar. So we do not have the ability to see properties firsthand, which leads me to my question. Could you explain the sequencing of arriving at a renovation estimate for a BRRRR? Do we try to get contractors to the property and provide bids before we submit our offer? This would provide surety for our offer, but I can see it being hard to send contractors out for every property we want to offer on, particularly if you want to get bids from multiple contractors.
Alternatively, if we cannot get contractors to the property before making an offer, what should we do as inexperienced rehabbers to inform our renovation estimate without a bid from a contractor? We found that given the increasingly slim margins in the current market, picking the wrong end of estimate range could mean the difference between a good deal and a bad one. Any help is appreciated. Thank you.

Rob:
Sure, yeah, yeah. So David, I’m going to let you jump in on this one first. You actually answered this not too long ago because I had this question, if you recall, where I was like, “Well, do we get the offer accepted first and then get the contractor? Or are we trying to get the contractor first and then get the offer accepted?” So you provided some pretty good insight. Can you let us know what your process is?

David:
I love these questions. Why can’t everyone ask me a question that’s simple as, what’s the system or the sequencing? It’s always like, “What do I do because I don’t know what the market’s going to do?” And you’re like, “Well, great. Now I have to try to dive into that ocean of confusion.” This is really easy. Let me ask you before I answer that, Sean. Did you have chat GPT help you formulate that question?

Sean:
No, I did not. I’ve listened to your takes on AI and I agree with you. I wrote that myself.

David:
So you are AI. Dude, that was really good. Anytime someone has to ask you if AI helped you write it, that’s saying that you sound too good as a human to be believed. Are you married?

Sean:
I’m married. I think it’s the corporate lawyer in me coming out.

David:
Yeah, that’s not surprising either. Tell your wife that she married the pinnacle of masculine perfection, at least when it comes to the written word. She’s a very lucky woman. All right. So to simplify this, you’re asking here, do I get a bid from a contractor before I write my offer or do I do it after? Correct?

Sean:
Yes.

David:
Okay. You want to get a range from your contractor before you write the offer, but you’re not going to get it locked until after. And the reason being is if you try to do it what feels like perfect, which is what most people do. I want the bid before I write the offer because I got to get everything lined up before I squeeze the trigger. Someone else will buy it.
I mean, I’ve broken a lot of hearts in the real estate space by moving in and buying that thing right before somebody else had their offer written because they were taking too long. And then when you’re in contract, you get the information and if it doesn’t work out, you just back out of the contract. Really, I forget sometimes that people don’t realize how a real estate transaction works because I’m a real estate agent and so I do this all the time.
Writing an offer is an incredibly low commitment. I just want to say this again. It is like getting on a first date. It doesn’t really mean a whole lot. If the person smells like fettuccine Alfredo, if they’ve got a lot of nose hair, if there’s something weird going on, you just don’t go back for a second date and you’re out the price of an Applebee’s dinner or whatever it is, right?
People look at it like asking for a date is asking for someone’s hand in marriage and you’re going to have to pay a lot of money to reserve a wedding venue. That’s more like when you wave the contingencies. Two things to keep in mind that on execution, will make this strategy easier.
One, include a contingency so you can back out of the deal. If you can’t put a very, very low earnest money deposit in there, right? As low as you can get, because worst case scenario, if there’s no contingencies and it was a hot deal and it all falls apart, you’re [inaudible 00:07:12] out whatever your earnest money was. You’re not out the potential tens of thousands of dollars or more than it could be if the deal goes wrong and you feel like you’re compelled to close on it.
So my formula is to have a home, to get the property that I see, have someone go out there and make a video. If I like it, get my contractor to go walk it and the contractor shouldn’t need you to tell them every tiny little detail that’s done. They should look at it and say, “Yeah, it’s going to need paint. We’re going to need to frame up a bedroom right here.” What’s your plan for this thing? And I give them an overall vision and they will say, “Hey, it’s going to be somewhere between 25 and 50 grand, depending what you want done.” Okay.
That should be enough for you to make the decision on where to write the offer. You write the offer now during your inspection period, you have a home inspector go out there and a contractor go out there at the same time. This is probably the part that Rob was liking when I was talking about it before. The inspector talks to the contractor and is like, “Did you see that outlet right there is not working? Make sure you put that in your scope of work that you’re going to need to replace that electrical outlet or the panel over here isn’t working or that window is completely done. It’s going to need to be replaced.” And so that goes into the scope of work of the contractor.
At the same time that the contractor can say to the home inspector, “That’s weird. Why isn’t this faucet working?” And he can kind of look at the plumbing. The two of them work together to figure this out. Then they come back with a menu, right? This isn’t long distance real estate investing. Here’s all the work that needs to get done and here’s how much each of these things cost. Not, do the work equals 50 grand.
It needs to be itemized, which I’m sure you as a corporate lawyer, can understand because you guys are always trying to get us to just give you a retainer and waste all of our money and we’re trying to keep… I’m just kidding. It’s not really that bad. So once you’ve got that, now you can decide if you need to drop the price of the home, move forward with closing, or back out of the deal completely. What do you think?

Sean:
Yeah, that works. And so you answered one of my follow-up questions was, if you’ve estimated incorrectly, how do you fix that after the fact, where you say, “Okay. It looks like I just replaced a couple outlets,” but you get in there and you realize you need to totally rewire the place or “Hey, the floor’s going to be five grand.” “No, it’s actually going to be 20 because it’s rotted underneath and you need to rip it up.” You’re saying you’re going to use the inspection contingency that you have to say, “Hey, look. This isn’t what I thought it was. I need to pay you 20,000 less because these cost a lot more.”

David:
Here’s the magic words. Yes, you got the right idea. The execution of it, don’t say, “This isn’t what I thought it was.” Say, “Hey, this wasn’t disclosed.” That’s my favorite thing to say when I’m an agent, “Hey seller. Unfortunately, this part wasn’t disclosed when we made the offer. You didn’t tell us that the electrical’s not working and the roof is leaking and the walls are bad and it’s got rodents. You didn’t tell us. So in order for us to fix these things, we have to make these changes.”
And the listing agent will come back with a, “But why did you write the offer if you weren’t going to close?” “Well, we write the offer assuming that the only stuff wrong with the house is what you told me. You didn’t tell me about all the baggage that it’s coming with. So now, here’s what is going to be worth to us.” And it puts you in a position where they can’t question your motives, if you’re a bad person.
They can’t look at it and say, “Oh, you were never intending to pay that price in the first place.” And also, as a side note, when I’m listing a house, that’s one of the reasons that you disclose everything that you know is wrong with it ahead of time, so that the buyers can’t come back and ask for a discount because I can always, as a listing agent go back and say, “No, you knew about this. The disclosures were given to you. We even did an inspection report before you wrote your offer. You saw all of this. My seller is not going to grant any of those credits.”

Sean:
That’s very helpful. And the other follow-up question I had is, do you have any advice for getting to a sufficiently specific range of an estimate for purposes of submitting an offer? Right, so that’s an estimate that I’ll be creating and I need to go in and say, “Okay, floor is between five and 10 grand and doing the kitchen will be between 10 and 15.”
A lot of times I’ve spoken with people and they say, “Well, every job’s different. And I can’t really give you a good [inaudible 00:11:14], right? I need to see it.” Or even worse. I know you like the places that have five photographs and the [inaudible 00:11:23] MLS that look like they’re taken on a potato and those are the ones that you like to go after because they’re the value add.
Well, that’s really tough for me to estimate a rehab on those five potato pictures and I only see half of the house and I don’t see a floor plan. So can you give some advice on that as well?

David:
Have you read Long-Distance Real Estate Investing? I feel like you haven’t read it yet.

Sean:
Yeah. It’s right over my shoulder, as is BRRRR.

David:
It’s in the queue? Okay.

Sean:
No, no, I have read it and that’s the basis. So I’m trying to [inaudible 00:11:53] Long-Distance Real Estate Investing and BRRRR.

David:
You’re right. It’s impossible to judge by the pictures. The pictures are just like, we’re going to go back to online dating. Okay? I can’t get a good feel for what this person’s like based on their pictures, but I can get enough of a feel… By the way, I don’t do online dating. So if you guys out there see a profile that looks like me, it’s a catfish, don’t fall for it. It’s happened before.

Rob:
Yeah, they got me pretty good with that one.

David:
That’s how Rob and I met, actually. Funny story about that on the next episode of BiggerRomance. You can know enough from the pictures to know if you want to go on a date, but the date’s going to tell you what you need to know. Okay? Those pictures will tell you if you want to look into it deeper. You still need to send someone to the property with a phone to take a video of the house.
Now, if your contractor won’t do it, have the person get really good video and then send that to the contractor. And if they’re like, “Well, every job’s different, I need to look at it.” I’ll say, “Okay. Assume that we have to replace all of these cabinets and all of these appliances, and put a new floor in here. Give me a range from here to here of what you think it’ll cost.”
Now that helps because they’re worried you’re going to blame them if their number’s too high, but they’re also worried that if they go too low, they could have made more money off of you. That’s why they don’t want to give you the hard and fast answer, but if you could give them the video and say, “Give me a range,” they’re much more likely to say, “Okay, well, it could be anywhere from here to here.”
I’m not afraid of telling him something that I can’t actually back up. And then you still have negotiating power to go to the contractor and say, “Well, it needs to be on the lower end because you’re talking to other people.” So they got to still respect you a little bit. Does that make sense?

Sean:
Yes, that’s very helpful. Thank you.

David:
And ideally, you want your real estate agent to be the one that takes these videos for you. One of the reasons that you can use a buyer’s agent. If you just can’t find a way to do that, the listing agent usually doesn’t want to go and take video because that’s going to be helping you in the negotiations over them. So I’ve used people that are in the area from the BiggerPockets forums, if I needed a video taken. You just have to figure out some way to get in the door.

Sean:
Makes sense. Thank you.

David:
All right. Anything you want to add, Rob?

Rob:
No. I mean, there’s no room for someone like me at the top. You answered it perfectly.

David:
Rob, keeping his dollars per word really, really high right now. This is expert work.

Rob:
Awesome, Sean. Thanks for the question. If people want to connect with you on the internet, where can they do that?

Sean:
Yeah, sure. I’m on BiggerPockets. Sean Linnehan, S-E-A-N-L-I-N-N-E-H-A-N, and also on Instagram. Same name. Sean Linnehan, @seanlinnehan.

Rob:
Awesome, man. Thank you.

Sean:
Thank you.

David:
Thank you, Sean GPT.

Sean:
Thanks, David.

David:
All right. Thank you Sean for that incredibly accurate and well-worded statement [inaudible 00:14:27] that you gave there. Thanks for being on Seeing Greene. I thought that was pretty good. Rob, what’d you think about that?

Rob:
It was good, man. Honestly, I think it’s the first time we’ve ever heard sequencing on the show. So there’s a first for everything and now, the sequence of events that we move on to.

David:
That’s right.

Rob:
Favorite… Comments?

David:
Yes. We’re getting into the section of the show where we are going to share comments that you all have left on previous episodes on YouTube. If you would like to be featured on Seeing Greene, we’d love to have you. Head over to biggerpockets.com/david, where you can submit your question.
And remember, if you’re listening to this on YouTube, in addition to leaving a comment, please like the video, subscribe to the channel, and share the video with someone you love.
All right, our first comment comes from Jevon Music Group. I have grown to love my half hour drive to church every Sunday. Thanks to your videos, I learn so much each week. That’s right. Seeing Greene, making even church fun. Glad to hear that. Next one comes from a Davidovich. I love saying names like that.

Rob:
I think it’s a David Ovich.

David:
You’re probably right. I’m doing it completely wrong.

Rob:
Is it possible that you’ve read so many of these over the years that you’ve mispronounced their handle so much that they actually never knew that it was their own comment that they left?

David:
Oh, and so they were thinking that someone else left something brilliant, but it turns out it was them?

Rob:
They have no idea their question was answered. They’re like, “Oh, that guy has a name that sounds kind of like mine. That’s cool.”

David:
Yeah, because it’s much more likely that his name is David Ovich than it is Davidovich. All right, moving on here.

Rob:
[inaudible 00:15:55].

David:
Mr. David Ovich. Thanks for regularly creating great free content. I found a lot of useful information just by listening to you guys. Also, I love the tools that are made available with the pro membership. Yep, that pro membership is probably the best deal in real estate. Couple hundred bucks a year and you get unlimited use of calculators, discounts on all kinds of stuff-

Rob:
Like leases-

David:
Yep.

Rob:
To every state or something.

David:
My team uses the rent estimator tool constantly for our clients that are considering buying houses all across the country and want to know what the rent would be. So if you’re not already a pro member, definitely keep listening to the show and occasionally, you’ll get a discount. Next up from [inaudible 00:16:33]. Thank you David, for all that you do. Your podcast share immense knowledge and provide courage to take the steps necessary. I wish I knew about BiggerPockets during COVID time. I could have started early, but better than not buying ever. Thank you for your guidance. Oh, that’s sweet. That’s so sweet.

Rob:
That is really nice, isn’t it?

David:
Yeah, and look at all the exclamation points that are in there and smiley faces.

Rob:
That’s how you know that they meant it because they didn’t even do the emoticon version. They did the actual… Or they didn’t do the emoji version. They did the emoticon version. Yeah, exactly.

David:
Emoticon.

Rob:
They’re OG.

David:
Is that what happens when a transformer becomes an emoji?

Rob:
Yeah. I think an emoticon is the original emoji before it was like the yellow circles.

David:
Look at Rob with the history lesson for all of us.

Rob:
All right. That’s right.

David:
Moving on to our last comment from BigMike8981. David knows how to tell you the truth and give you the tough conversation that nobody wants to have with you. Bravo, my man. That is probably my favorite comment that we had today because that’s exactly what I strive to do.
And let me tell you, it is not fun to be the person that says, it is going to be difficult. You could get hurt and this is very tough right now when all of the competition is like, “Nah, just go in and buy it and you’ll figure it out later. Jump out of the plane and build your parachute on the way down.”
Rob, do you have any insight you want to add on any conversations we’ve had that you’re like, “That’s not what I wanted to hear?” Or any advice for me of how I can make the medicine go down a little smoother?

Rob:
Well, I invested a lot of money recently into bell bottoms, thinking that they were going to come back in and I was committed to them and you’re like, “Hey, can I sit down with you for a second? You can’t wear those to be BP Con. They’re not working. Stop trying to make them work.” And it hurt and I’ve since, donated them to Goodwill, but I’m honestly, in retrospect, I’m really happy. Thank you.

David:
I’m glad to hear that. That’s what real friends do. They tell each other what they need to hear, not what they want to hear. I recently reached out to you because you’re doing so good with your fitness and your diet and I was like, “Hey, I need to hear what diet you’re on” and your reply was, “You already know what to do. Eat more meat and workout. Leave me alone. I’m working.” So it’s not just me that gives helpful advice. Thank you, Rob, for absolutely nothing.

Rob:
It was a little nicer than that. It was a little, but see, I said that because you’ve done it before. I was like, “Look, you know, we all know. Wake up early, work out, eat healthy, repeat.” That’s the book that I’m going to write. Wake up early. It’s like-

David:
Make an acronym out of that, yeah. I’ll let you do the words while I’m reading the next part here and then you can come back and call it the [inaudible 00:19:02] method or whatever it’s going to be.

Rob:
Yeah.

David:
All right. Let’s get back to the questions from you, our audience and see what we can do to help you build wealth in your journey. Rob, I hear we have an update from you live on scene with the new method. What is it going to be?

Rob:
[inaudible 00:19:19]. Wake up early, eat healthy, and repeat. [inaudible 00:19:24].

David:
The [inaudible 00:19:24] Method. Whoop, there it is. All right. Our next question comes from Idan in LA.

Idan:
Hi, David. My name is Idan from Los Angeles and my question for you is, if I’m purchasing a rental property in a good growing area, area that should appreciate very well… For example, in North Carolina, I have a few neighborhoods that I know that they’re very good. If I’m purchasing a property that after all the expenses, I’m running the calculations through the BiggerPocket’s tools, after all the repair, CapEx, vacancies, mortgage, insurance, taxes, after everything, I’m negative cashflow 300, 400, 500 because of the interest today and the high prices. This is a very good area and I’m buying it in market prices not below too much.
Obviously, I’m trying to find a creative way to add value, but if I’m negative cashflow $300, $400 and I can afford it. I’m okay with it. I don’t need the cashflow right now and I’m counting on appreciation in the future. Does that make sense to do something like that, if I can afford it? And it’s important to me to be in a very good location. Any help about it will help. Thank you so much for everything you do for us. Thank you.

David:
All right. Idan bringing the most controversial question in all of real estate investing right to our doorstep. This is probably going to go viral as half of the country will love us and half will hate us. Welcome to the controversial firing, Rob. What do you have to say?

Rob:
Let me rephrase the question. Should I buy a property and lose money on it, if I believe that it will appreciate like crazy over the next few years? My answer is no. Because the thing is, when you are accepting of a loss… Listen, and again, I’m not going to fault anyone who does this, but given the current economic climate, I would say this. Losing two or 300 or 400 or 500, I don’t know what he said, dollars every single month, feels okay when you’re making a lot of money and that you feel like you can absorb it.
But it doesn’t feel so good when your other income sources deplete or whenever you lose your job or whatever happens in the next couple of years affects your financial situation. That two or $300 a month starts burning a hole in your pocket. I would not bet on appreciation in 2023 as your savior in this situation. Had you told me that in 2019, 2020, 2021, absolutely. But I think we got to be a little bit more conservative with that. I’m fine with breaking even, I will say that. Losing money, I’m out. What about you?

David:
All right. This is a little more nuanced than it sounds because it’s not as simple as, can I lose two or 300 a month if I might make more money somewhere else? I have lost money in real estate, especially lately with how things have gone, but it has never been from the cashflow not being enough to two or $300 a month. It’s been from city regulations, construction projects going wrong, permits not being given, work being done incorrectly that needs to be redone. There’s lots of ways you can lose money in real estate outside of just the cashflow not being there. But that doesn’t get discussed.
We typically only talk about, well, the calculator said that my cashflow would be this much and it was less than that. I’m losing money. The reason that I am not as worried about this particular gentleman losing two to $300 a month is because in general, that is the amount of money that somebody can make picking up an extra shift at a restaurant once a month or picking up a coffee shop shift twice a month. It’s not something that’s going to cause you to actually lose a property.
I’m more worried about a tenant destroying it, things going wrong with the property that you don’t have the money to fix. Getting into the short-term rental game without reserves to where you can’t keep up with what your competition is doing and slowly falling further and further behind and not having the option to rent it out, in a traditional sense. Those big things are much scarier to me than the possibility that he might lose a little bit of money.
I’d also say that if he’s banking on appreciation and there’s no reason to buy it, that’s speculation, okay? But if he’s buying it in an incredibly good area with constricted supply, increasing demand, where it is reasonable to think that rents are going to go up and you’re going to get a very good tenant, that actually makes the investment safer, even though it’s losing a little bit of money.
So we didn’t get quite enough information to give this particular gentleman a take on if he should buy the property or not. I would’ve needed to know the actual city, the ability that he could create revenue in other ways. Is there a value add to this property where he could add an [inaudible 00:23:45] to it?

Rob:
He said that there wasn’t really a value add and he said that he believed in the city itself. So I think it’s like… Assuming that those two things are correct, it’s a great appreciating city, he can’t add value, I think that’s sort of the particular situation here.

David:
Well, my take would be the X factor is, the money you’re making now isn’t necessarily the money you’re going to make in the future. Okay? So he says in the note here that he is a contractor making very good money in Los Angeles. Now, if that was going to continue, yeah, it’s okay to lose two or $300 a month for the short term because you’re going to make money later. The difficulty becomes if you lose your job and you can’t make that money. But then again, is two or $300 a month going to actually kill you, right?
You could probably cancel a couple cable subscriptions or eat out a little bit less. You could probably take that money out of the budget you have. That’s not the most dangerous thing. The most dangerous thing would be if your tenant doesn’t pay rent at all. We get focused on the numbers aren’t working in the calculator. We don’t think about what if the tenant just stops paying and it takes four or five months to evict them. That is so much more significant than $200 a month as far as how much money you’ll actually lose. Rob, does that weigh into your advice on the location of the property and the quality of the tenant?

Rob:
Kind of. I guess, what you’re saying is absolutely true. If the tenant doesn’t pay, they’re not only losing the two or 300 bucks, they’re losing the actual rent, too.

David:
Like 2000 or $3,000 a month and that, over three or four months-

Rob:
That’s significant.

David:
Yeah, that’s way more money than a couple hundred bucks.

Rob:
But I think that extra $300 on top of the payment… Sorry, the tenant not paying, is a lot more painful in that moment than the 300. And that’s why I’m like… Listen, I’m an aggressive investor, all right? I’m not the kind of person that makes very conservative purchases or investments, but I don’t… No matter how aggressive I am, rule number one is to never lose money. There are some situations where I have and there are some situations where the tax benefits make it to where I actually save a lot of money, but in general, if I could break even, that’s at least requirement number one. I think that’s always a fair way to approach it, no matter what, especially in 2023. But I could be swayed.

David:
It’s a hot topic, right? I don’t know if there isn’t a right or wrong answer here. It really does depend on the person and their financial position, right?

Rob:
No, no. There’s a right. It’s what I said. No, I’m just kidding. What if I just came in like guns blazing? Listen to me. I agree. There’s no wrong or right. There’s just what’s right for you.

David:
Yeah, because you could always just put more money down and the property cashflow is [inaudible 00:26:12], but the question becomes like, “Okay, now it’s cash flowing a hundred dollars a month instead of losing $200 a month,” but you had to put a hundred thousand dollars into the property. Is that a better use of your money than putting that same a hundred thousand dollars in reserves and you can get by if it doesn’t cash as much, right?

Rob:
Totally. Someone asked me yesterday if they were like, “Hey, can I just ask. Is it stupid for me to put half down on this house?” And I was like, “Look, maybe a year or two ago I would’ve been like, Hey, don’t do that. And right now, I’m kind of like, I mean, that’s fine. Honestly.” Could you make more money somewhere else? Yes. But could you be a lot happier if your mortgage payment was a lot lower and you didn’t have to worry about a high mortgage payment every month during whatever’s coming in 2023, 2024? I’m good with it. Honestly.

David:
So would you rather have the theoretical a hundred dollars a month of cashflow instead of $200 a month of losing money, but you had to put $75,000 down to get it? Is that 75 grand in reserve safer or is the cash flowing element safer? That’s the question that I think people need to be asking. And if you had to put 75 grand down to make it cashflow, most people would say, “Well, then I don’t want to do it.” Now you’re not buying real estate at all, and that’s kind of the circles that we’re going back and forth in right now, right?
So let us know in the comments. What do you think about this negative cashflow? What’s the right perspective to take? What would you have told Idan in this question and let us know. Should we do an entire show on the cashflow conundrum to cashflow or not to cashflow? That is the question.

Rob:
Thy question.

David:
Thank you.

Rob:
I believe.

David:
Or the question, as you would often say. Rob wants me to change my Instagram name to thedavidgreene24.

Rob:
Yeah. T-H-E-E.

David:
Yes. The dork game is strong with this one.

Rob:
Our next question comes from Josh in Baton Rouge.

David:
I always think of Gambit from X-Men whenever I hear Baton Rouge. Let me know in the comments, if any of you think of Gambit from X-Men every time you hear of Baton Rouge.

Rob:
What is that? X-men? I don’t remember that from my childhood.

David:
Oh, really? A dork like you, doesn’t remember [inaudible 00:28:01] X-Men. Not likely. The comments are going to be exploding right now with Cap. No way. All right. Josh here has a couple of short-term rentals in vacation markets in Arkansas and Florida, as well as a long-term rental in Louisiana. What are your thoughts on how the supply and demand for real estate will change in the coming decades as the baby boomer generation ages?
Some fear that this will result in a drastic enough change in population, that there’ll be an oversupply of many goods, including real estate, causing prices to fall rather than the fairly steady increase we’re all used to. I strongly believe that real estate will ultimately survive economic cycles, but I fear the effects of this on the medium term outlook for investors like myself in our 30s and 40s.
Do you think this is a legitimate concern or are the other forces at place strong enough to counter this effect? Thank you for all you do and thank you for all your resources. Wonderful question. I love this, Rob.

Rob:
Yeah, it’s good.

David:
What goes through your head? What’s your perspective here?

Rob:
Yeah, I was nervous you’d asked me first. I guess I would say that ultimately, real estate has existed since the beginning of time. People build houses and they sold them, lived in them, rented them. I don’t know when real estate truly became prevalent, but I mean, it’s been around for, in its current form, I would say at least a hundred years, right?
So it has survived many things. It has survived the Great Depression. It has survived World Wars, it has survived recessions. It has survived big booms in the economy. I would say yes, there’s a legitimate concern in some capacity, but I don’t think it’s anything that would really destroy the real estate market in any significant way.

David:
Well done. That’s a great answer for being unprepared for how you were going to… Did [inaudible 00:29:43] got that? Did you just start talking and then figure out where you wanted to go when you were halfway through it?

Rob:
Exactly. Well, I have a list of answers that are always kind of laminated by me that have just been waiting to use over the last year and a half since being on the show. So, that was it.

David:
In case of emergency, break glass and pull out laminated-

Rob:
Exactly.

David:
That was pretty good.

Rob:
Exactly.

David:
Yeah. I’ve actually thought a very similar thought, maybe six, seven years ago where I was like, you overthink things, right? I was buying in Phoenix. Are they going to run out of water? Should I not be buying in Phoenix? And then you start Googling Phoenix water supply and you get all these crazy conspiracy things about what the government’s doing to stop the water. It’s really hard to get information that you can rely on.
This is another one because while everything you said is true, Rob, it is also true. I don’t know in the last a hundred years… Please don’t quote me on this, I’m not sure. I don’t believe that population growth has ever been a concern. It’s now starting to become a concern in many developed countries, population growth is not only slowing, it’s going the wrong way. Okay?

Rob:
Definitely.

David:
So it’s one thing to consider here. If we don’t have as many babies, we’re not going to need as many houses. And I think I love his last point. Is this a legitimate concern or are other forces at play strong enough to counter this effect? Because that is the question. Okay, there’s opposing forces here, pros and cons, and you’re trying to weigh which one of them is stronger. So I think population decreasing is a legit concern and threat to real estate wealth.
Now let’s talk about the other side of that. First off, if we just stopped having babies completely right now, no babies were born. It would be like 25 years before that would act, that lag would hit us because you’ve got all the one and two year olds that still need to grow. They’re still going to need a place to live. So it’s not like if babies stop being born immediately, we’re in trouble. It’s going to be a long time before it catches up with us.
So if the population does slow, this doesn’t change tomorrow. In that much time, your property’s probably almost paid off, which is going to reduce some of the threat right there. Another thing would be, when I was looking at this, I assumed that what a dollar was worth is what a dollar would always be worth, but that is a shifting target, too. As inflation continually makes money worth less, you need more of it to buy the same thing.
So in 30 years, if we do have population problems, well, how much have properties appreciated and how much has rent appreciated? And is that threat as significant, if your property is worth five times as much? So if you had to sell it for half of what it should be worth, it’s still two and a half times more than what it is right now. It gets tricky when you start trying to work all of these things into the algorithm here. So with that information, Rob, does that change your perspective on this?

Rob:
Well, first of all, I know that the population decreasing is a real problem in other countries. I don’t know if that’s the case in the United States. I don’t know. So it is hard to really say. I think we have some time to figure that one out.

David:
Good point.

Rob:
I don’t know if that’s really a problem yet or I don’t know if it’ll really be a problem for, like you said, the next 10 to 15 years.

David:
And then there’s immigration, right? Are people going to keep coming to America from other countries, which would keep our population higher or is that going to change in 10 years and 20 years? Is America not a desirable place to come to? It is impossible to factor for all of those variables when you’re trying to make this question. So I love the question itself, because this is something that I think about all the time, coming from Josh. Overall, I think that there are enough tailwinds making real estate desirable to combat the headwinds of possible population growth or less people needing homes in the future.
I think a more realistic threat would be like 3D housing. What if they figure out a way to just build houses for $20,000 or something like that? And now we’ve got these homes that used to cost $500,000 to build or $200,000 to build, and you had to go through all this red tape and the city and the local municipalities made building incredibly hard and now people can just throw something up real quick, right? Assuming that this is something that’s actually safe. It’ll probably be a while before the technology goes there, but I’ve thought about that. That could just saturate the market with rental supply.

Rob:
That’s interesting. Man, you know what would be a really good show, is if we researched theories for real estate like 50 years from now, like what some of the thought leaders in this space think? What would be the case?

David:
Were worried about?

Rob:
Yeah, like ownership of real estate on Mars or things like this or whatever. If you own homes on a beach or whatever, and just talk about some of the bigger, [inaudible 00:33:53], I don’t know, questions that arise over, what does real estate look like in 50 to a hundred years?

David:
That would be very interesting because we get to hear why they thought green shag carpet was a good idea. Maybe that was meant to combat a threat at the time, or they’re like, one of the biggest threats to the real estate space is the open concept and we have to do everything we can to defeat that. So we’re just going to put walls everywhere inside of our houses. And to their dismay, they found out that we just tore all those homes down and blasted it on House Hunters talking about how these closed concepts are terrible?

Rob:
Yeah, well, I’ve always talked about, I would love to have Elon Musk on the show. I think that would be the perfect person for it. So hey Elon, I know you’re listening out there. Hit us up. Davidgreene24 on Instagram.

David:
Oh, I’m sure he is already following. I’m sure. Probably from one of his burner accounts.

Rob:
Probably.

David:
Yeah. All right. Our last question here comes from Alyssa Horn in Alaska. By the way, I forgot to say on our previous question, are you screaming at your computer or your car right now saying, “What are you guys talking about? You missed something.” Let us know in the comments if on this whole, will real estate become a problem in the future because of population growth? Let us know if you think we missed something and what should be brought into the conversation here.

Rob:
I love it. It’s very interesting.

David:
It’s a fun thought process.

Rob:
I’ll ask ChatGPT tonight and I’ll let you know. I’ll text you the answer.

David:
Rob knows how much I love that. All right, Alyssa says, “Hi, David. Thanks for taking the time to read this. My sister and I are looking at combined funds of the house hack a duplex in Anchorage, Alaska. However, we realize that the amount we could potentially charge for rent is greater than the amount we currently pay for rent in the place we currently live. Does it make more sense to continue renting and rent out the two sides of the property we buy? Mathematically, this seems like a no-brainer, but it also doesn’t seem normal. Are we missing something? First, for more context, we’re happy living in the place we rent, but want to work our way to financial freedom by building a real estate portfolio and obviously, people who rent don’t have a portfolio. Thanks so much for helping two Alaskan sisters find their way to vacations and warmer climates.”
All right. So here is how I understand Alyssa’s question. So she wants to buy real estate and buying real estate, if she moved into it, would increase her housing expense because her rent is low. But if she keeps paying the low rent, she never owns a property. Her alternative to this dilemma is to buy an investment property, rent out all of the units, which it looks like this is a duplex that they’re talking about. They’ll make more money that way. But now, they’re still renting out the property that they live in. They don’t live in the house they’re in. Now the downside to that is, they’re going to put 20 or 25% down if it’s an investment property versus 5% if it’s a house hack. So we factor all of these questions together. Welcome to Seeing Greene. This is what we get to do every single week. What advice do you have for Alyssa and her sister?

Rob:
I think you have to… It’s rare. Okay, it’s not rare, but it is common where rent is cheaper than mortgages. And so I had to do this, when I lived in LA, my rent was $1,850 for a 600 square foot home. I then was so tired of paying that much money to a landlord that I was like, “I’m going to buy a house. I don’t care if that makes me a little bit more house poor, at least I own it. I’m building equity.”
So I bought a house and my mortgage was $4,400, which was more than double. Now with that house, there were some house hacking opportunities. I had a studio underneath. I ended up building that tiny house. We all know the story there, but I went into that understanding I was going to pay more for the homeownership. Fast forward to today, that house has doubled in value due to the beautiful thing called appreciation and I’m very happy that I was house poor.

David:
[inaudible 00:37:31]. Rent’s gone up as well.

Rob:
Rent has gone up. Yeah. So I’m happy that I was house poor for all those years.

David:
Yes.

Rob:
It paid off in the end. It hurts now more because you’re like, “Dang, I’m not saving as much. I’m spending more every month. It hurts more.” But you are also getting principal pay down. Inversely, the landlord is getting the principal pay down in the other scenarios. So…

David:
I love how you brought this up so far. In the book I’m working on right now, it’s about all the ways you make money in real estate instead of just the cashflow. Okay? So there’s this principle, when you look at something two dimensionally, certain things make sense. Why would I buy a house when renting is cheaper? I frequently get this when I go on other people’s podcasts that are not real estate experts, right? So I’m getting ready to go on Valuetainment. We’re going to be talking with Patrick Bet-David’s crew. They say this all the time, “Renting is cheaper than owning. Why would anyone buy a house?” It makes sense when you’re looking at a snapshot, not a whole movie.
When you look at everything that real estate does to make money, it starts to change things. So her rent is less right now, but she doesn’t control the rent. The landlord does. Maybe she has a really nice landlord. What happens if they sell the house, they pass away, someone else takes it over? They realize that they could be charging more. That changes very quickly. And during that period of time, housing might’ve become more expensive. Also, in most markets, rent goes up every single year.
So though renting may be cheaper than owning right now, if you do five years of rent increases, it’s often not cheaper than owning because when you buy a house, your mortgage gets locked in place. Now, consider house hacking. Not only are you not having your rent increased on you every year, but you are charging more to your tenants every year and now becomes twice as valuable, that rent increases are working in your favor to build your wealth. And you extend this over five years, 10 years, 15 years, it starts to become way cheaper to own than rent, especially when you’re house [inaudible 00:39:18].
Now, we haven’t thrown in principal reduction. We haven’t thrown in potential tax advantages. We haven’t thrown in what you just said, Rob, which was appreciation. All of these other things end up being even more impactful than just the rent, and it becomes a no-brainer that you should own. The thing I want to highlight here is that it rarely looks wise when you’re just looking at right now. When you’re looking at 10 years down the road, 15 years down the road, I don’t know that I’ve ever seen a scenario where renting is actually cheaper, unless it’s like you’re living with your mom and she’s going to let you live for free or something like that. Does that change your take on this question?

Rob:
Yeah, definitely. I would say ultimately, almost everyone looks like a genius, like a real estate genius if they hold onto property for 30 years.

David:
Yeah.

Rob:
Like I said, it might hurt now, but if you hold onto it for 30 years, people are going to be like, “Oh, my gosh. You bought a house in Los Angeles when it was $600,000. That’s so cheap. I cannot believe that.” And people will be mad at you, that you got into real estate 30 years earlier. You know what I mean?

David:
But when you bought it at 600,000, did it feel cheap?

Rob:
No. God no. I was scared to tell everybody.

David:
And everyone was telling you that you were stupid, right?

Rob:
Yeah. I was scared to tell my parents. I was scared to tell my coworkers because my coworkers knew kind of how much I made. They were my peers and they were like, “You can’t afford that.” And they just didn’t know that I was like, “Well, I’m thinking about it. How can I afford it?”

David:
Yeah. You say, “Well, I’m going to rent out part of my house.” Oh, I don’t want to do that. That sounds like [inaudible 00:40:38]. I like my space.

Rob:
No, I don’t want that. I don’t want to know my tenant. Yeah, it’s all that whole thing.

David:
You like your space. You also like being poor forever. If you can’t afford to put money into a property, you got to put your comfortability and your convenience away, right? It’s going to cost you something. So might as well cost comfort instead, if you don’t have the money at the time. I remember you and I were heading to a real estate meetup when we were hanging out in LA to record at the Spotify Studios.
And we drove by a property that you pointed out in LA and you were like, “That house right there was… Hit the market, had been renovated.” My wife and I looked at it and it was $1.1 million. And we said, “That is insane that those people think they will ever get that much money for that property, right?” Fast forward with four or five years, is that about how long it’s been? Okay, and what do you think it’s worth now?

Rob:
Oh, like 1.8, 1.9, maybe two, somewhere in there.

David:
It was insane, but you were overpaying and then you go five years in the future and all of a sudden, if you could buy it for 1.1 right now, you’d be walking into $700,000 of equity and tons of cashflow.

Rob:
Yeah. And it was a little bit more like, “It’s so expensive. I wish I could afford that someday.” And then now, it’s like, in retrospect, it was a good deal. Everything is a good deal in the past, right?

David:
That’s a great point and that’s all we’re trying to say, is try to exist outside of just this moment. Think about your whole life and where you’re going to be in five or 10 years and factor it, that into your decision-making process. And if you got to sacrifice comfort or you got to have a little bit more housing than you wanted in order to own, but you’re in a good area where rents are going to be increasing and you’ve now taken control of your financial future and your housing expense, where you know the worst case scenario is, this is my mortgage and it can only get better from that?
I would rather see people do that than not have control and be at the mercy of a landlord or somebody else. Taking this long-term approach makes the most sense, which is why we are talking more and more about financial responsibility, playing defense, and making money in other ways outside of real estate, which is playing offense in business. Because when you have those two things going for you, you can use the delayed gratification approach with real estate and build a portfolio we’re talking about.

Rob:
Oh, one thing she said that people who rent, obviously don’t have a portfolio. False. I’m sure we’ve said this already, but honestly, the people that I’m proudest most in life of, are people who sacrifice short-term gain and continue renting and use the money they have to get into a rental property. And they sacrifice owning a house so that they can rent longer and build equity. I’m always like, “Hey, that’s actually pretty cool of you, that you did that.” So don’t feel bad if that’s where you end up netting out, Alyssa.

David:
All right. We hope you enjoyed today’s show. We sure enjoyed having it with you all. If you did, please do me a favor. Leave us a review on wherever you listen to your favorite podcast and let us know what you like about the podcast so other people can find it, and leave us a comment on YouTube, telling us what you thought of today’s show.
Hopefully we read your comment on a future episode and you will be supporting the show. Also, if you like to be featured here, we would love to have you. Head over to biggerpockets.com/david, where you can leave your question for us to answer on a future episode. Rob, for people that were absolutely blown away by your insight, intelligence, sense of humor, and dashing good looks, where can they get more Rob?

Rob:
You can find me on YouTube at Robuilt, R-O-B-U-I-L-T and Instagram @robuilt, if you want, short form real estate funnies. If you want long form real estate wackiness, go to YouTube. Up to you or do both.

David:
There you go. I’m there as well. You can find me @davidgreene24 on social media, David Greene Real Estate on YouTube or davidgreene24.com on the internet to find my webpage. Thanks again, everyone for joining us today. It’s been our pleasure to be teaching you and instructing you and encouraging you in your real estate journey. I really hope that we were able to help some of you brain souls who took action to ask us questions and I look forward to answering more of your questions this year. This is David Greene for handsome Rob Abasolo. Signing off.

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