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David:
This is the BiggerPockets Podcast Show 580.

Daren:
Foreclosures are actually providing almost a refurbishing of housing inventory. And again, it’s a small piece it’s not going to solve the affordable housing issue that we have or the housing supply issues completely. But it’s one piece of the puzzle that is taking these properties and putting them back into the market.

David:
What’s going on everyone. It is David Greene, your host of the BiggerPockets Podcast here today with my amazing, awesome and fun co-host Dave Meyer. If you are here because you want to find financial freedom to real estate, you my friend are in the right place. BiggerPockets is a community of over two million members that are all on the same journey as you. They want to improve their lives, get back freedom to live life the way that they would like and build wealth through real estate. We help you by bringing on stories of other people that have done the same thing. People that are experts in the areas of real estate investing that would benefit you, people that made mistakes so that you can avoid them. And guests like today, where we have Daren Blomquist, a VP of marketing and economics for Auction.com, who is a foreclosure expert.
So Daren spends the majority of his day looking at data of how many foreclosures are hitting the market, and then trying to connect buyers of those foreclosures with the inventory that’s being released. So Dave and I get into some pretty deep information about how many properties are going to foreclosure, what happens once they get there? If you want to buy those, what you need to do as well as what we think is going to happen in the future. So this was a fascinating conversation. Make sure you stay all the way to the end because we give a take [inaudible 00:01:45] that you don’t hear very often that has to do with the psychology of human beings that are all sitting in the seats that we’re sitting in and how it tends to move back and forth very strongly, depending on what the masses are doing and how you can capitalize on that to build your wealth. Dave, so glad you’re here today. What were some of your favorite parts of today’s interview?

Dave:
Oh, thank you so much for being here. I’m glad to be back. And I think the favorite part was what you talked about. You just said, it’s so interesting because I’m person, I’m not an economist, but I do read a lot about economics and look at a lot of data. And while data is super helpful in decision making, there is this element of psychology that you really have to take into account and you have to factor in in doing your research, and you and Daren both talk about that really well at the end of the show. But I also just think this topic is something I’ve wanted to dive into for quite a while, because there is a lot of data about it. I’ve looked at it a lot myself and I wanted to get an expert’s opinion on whether foreclosures are going to cause either a crash or maybe they’re going to help the housing market because there’s going to be more inventory. And Daren was great and provides all that information. So everyone’s going to want to stick around for this.

David:
Great point.

Dave:
So the interview with Daren is great, but David, I also have a surprise segment for you coming up before that interview and it’s going to be really fun. We’re going to talk about some news, we’re going to talk about major headlines and I actually have a pretty big announcement so everyone’s going to want to pay attention to this first segment we’re about to do.

David:
All right. Today’s quick tip is follow us on YouTube at BiggerPockets. There’s a lot of content we’re making on YouTube that isn’t only being shown on the podcast. So Dave’s got a channel he puts a lot of information. I have a channel for BiggerPockets, I do more videos. There’s a lot of different people on there, so if you’re needing more real estate information and there isn’t a new podcast to listen to go check us out there. Here’s what’s even better, you can leave us a comment on YouTube and tell us what you think. So we’re doing shows like this today because we’ve committed to going deeper and giving more factual and specific information on literal topics in real estate.
So today would be the foreclosure game. We want to hear what you want to hear more from us about. So tell us what topics you’d like us to cover, we will put a show together for you, we love that. And then also don’t forget to leave us a comment on iTunes. We still check that, that still really matters as far as how popular the podcast becomes. And we want this information to get to as many people as possible. So please leave us a rating and review on iTunes, leave us comments on YouTube, tell us what you like to see more of and we will get to it. Dave, any last words before you hit me with these surprise questions that you’ve got?

Dave:
No, I’m excited to bring on my surprise segment. All right. So today, David, first of all, I love that you’re just letting me take over the show and have no idea what I’m about to propose to you. But what I’d like to start with is a new quiz game, I like to call it news or noise. And basically what I’m going to do is read some recent headlines from the world of real estate investing and get your opinion on whether this headline is in fact news or if it’s noise. And not that you’re not great on your own, but I’ve also brought in some extra firepower for this game. We have Mr. Henry Washington and Mr. Rob Abasolo joining us today. What’s up guys?

Rob:
How’s it going?

Henry:
What’s up buddy?

Dave:
Awesome. Thank you guys so much for joining us here. I feel like we’ve got the all star team and for our first headline Redfin released data this past week showing that a record 32.4% of their users looked to move to a different metro area in January. This is an all time high and represents a 25% increase in people who are looking to move over Q1 of 2020 right before the pandemic. So Henry let’s start with you, is this in fact news or is it noise?

Henry:
Oh man, this is news. The world is changing with the pandemic forcing the world to get comfortable with virtual working, with virtual learning. You don’t just have people with jobs that can relocate to areas that they maybe feel like are more affordable because the housing prices are increasing across the country. And so you’ve got people moving to areas where they feel like they can afford more because they know they can continue to work at their current job. You’ve also got students moving and I just think this freedom of where you work is going to continue. And I don’t see housing prices coming down anytime soon. So this is absolutely news, it’s going to continue to happen. It’s the new norm for right now.

Dave:
All right, David, I saw you nodding along there. What is your thoughts? Is this news or noise, and what are some of the implications of this?

David:
Well, this is absolutely news. It’s just not news to me because as a realtor, I’m watching this happen constantly. I would say that I think it’s probably overall healthy for our country to have a variation in what different states can offer. This is just my personal opinion, I don’t want to be speaking for anybody else, but there’s obviously going to be a difference of opinion in how things should be run politically. And when the federal government tries to make every state work the same, if they’re going against what the individual wants to see, they’re going to be very frustrated. If they become unpatriotic, then it becomes negative and bitter. But if you have a state that will have a set of rules or be governed politically according to what you like, and then other states that you don’t, you have freedom of choice.
You can go to the state that does things the way you like things to be done. Like Dave, you’re an Amsterdam. It’s notoriously known for not having laws when it comes to the entertainment industry, so to speak. So it draws people that are looking for that, and I’m not trying to imply that that’s why you’re there. It’s not a big rich party. I just think Amsterdam’s a really good example of that. If you’re super conservative, you don’t want to be around anything like that, you go to Singapore. If you’re looking for a little bit more of a party, you go to Amsterdam, it’s nice to have choices. So I think what we’re seeing is people are recognizing, like Henry said, I can move. I’m not tethered to my area because of my job.
Maybe my family could keep me tethered and as kids are moving out of the house and people are retiring, they’re saying, “Hey, I want to be in this type of political environment instead of that type, I want less sales taxes on me or state income taxes on me.” And other people are saying, “No, I like high state income taxes because they pay for programs that I like to support and that’s what I enjoy doing.” So I think what we’re seeing right now is this is how people would have been acting all along. But some of the restrictions that stopped it have been removed, like what Henry mentioned. And I think as an investor, it is so important to pay attention to what we’re talking about because I am specifically going to those areas as long distance investing that I believe more people or wealthier people are going to be moving to and I’m trying to buy properties in those areas before they get there.

Dave:
All right. We’ve got two for news. Rob, are you going to agree with everyone? And I’m curious as well, I’m going to throw an extra bonus question for you.

Rob:
Ooh. A curve ball.

Dave:
Yeah. I got to test you early. Is this going to be a long term trend or do you think this is just a blip after the pandemic?

Rob:
Okay. Let’s do this thing. News, it’s definitely news. Dave, I’ve moved three times in the last year. Literally-

Dave:
You’re contributing to half of this statistic, Rob.

Rob:
I am the statistic. I moved from Los Angeles to Tennessee to pursue building a tiny house village out there. I lived there for a year, then we decided, “Hey, we miss home. Let’s go back to LA.” We lived there for a month, and then we were like, “Hey, you know what? Let’s move to Texas.” And we’re currently in Texas at the moment. So I don’t know when we’re going to move again or if we’re going to move again. But to answer your question about if this is temporary or permanent, I think it’s permanent. I think it’s here to stay. You have to really consider the culture shift in the paradigm here. For a long time, all we knew was working in an office 9:00 to 5:00 and this is so common with so many different things out there. So let’s just take taxi cabs, for example.
Our whole life, we thought taxis were our only option and they were. And then Uber came around and people could then hire a taxi on demand, and now Uber is the new taxi. For a long time, we all thought long term rentals were the way to go. And then this whole thing called Airbnb came by and now that’s a whole new shift in the real estate market. But on top of that as a consumer, we thought hotels were our only option because for many, many years they were. Then Airbnb comes along and now people say, “I don’t want to stay in a little creaky, old nasty hotel. I want to go stay in a cool Airbnb where I can split really big house with my family for half the price.”
I think this is the exact same way with office and corporate culture where we thought we had to stay in the office 9:00 to 5:00 our whole life and be on the grind and work 40 years and then retire at 65. But I think what the pandemic has given light to is that things are important in a different way, we give importance to certain aspect to different things. So before money and security was something that we were all so married to, but I think the pandemic has helped a lot of people realize that, “Yeah, you know what? Maybe I don’t want to be working in the [inaudible 00:11:09]. Maybe I want to be closer to my family and if that means I make a little less, then hey, I’ll just move to a different city where I make a little less so I can be closer to that family.” So I think this is just the very beginning of a very huge culture shift in America. Thanks for coming to my Ted talk.

Dave:
I thought I was going to throw you off with that curve ball, but you nailed that one. So I’ll actually just come back to you with the second headline and we’ll do this one a little bit quicker, otherwise we’re going to get in trouble. But number two headline here is Zillow has emerged from its post iBuying shame, hiatus, whatever they call it, and is now claiming to be building a super app where home buyers can manage the entire home purchasing process in one place. Rob, is this news or noise?

Rob:
So can I get some clarification here. When you say noise, does this mean this is not truth you just made this headline up or?

Dave:
No, this isn’t two truths and a lie. No.

Rob:
Okay. Just making sure-

Dave:
Is this something that real estate investors should be paying attention to?

Rob:
Got it. I’m going to go noise on this. I think Zillow’s best interests and effective every capacity to try to come up with this really big thing that’s going to save them from this giant hole that they dug themselves into. Did they make an app? Maybe, but calling it the super app that’s going to help you do everything from start to finish, doesn’t necessarily mean it’s true or that it’s going to be really that super. So I’m going to go noise on this one.

Dave:
All right. David, what do you got?

David:
I think Rob nailed it. I think in general, every time somebody tries to convince you that things are easier than they are, they’re making money and you’re not. So this has been very common for a long time. Zillow will tell the people who are cruising on their website, “Hey, give us your information and we’ll get you in touch with an agent.” And then they go sell that information to five different agents and your phone blows up by these people that you never really wanted to talk to in the first place that paid money like $200 for that lead. And so they’re all going to just call you forever.
And I think Redfin had a model where they’re like, “Hey, we’ll credit you back to commission.” And what ends up happening is that agent basically makes no money and so their argument was well, every agent’s the same. So you might as well get your commission back and then you end up getting an agent that’s not as good or doesn’t understand your needs as much. And so it wasn’t true that all agents were the same. Side note, if you want to get a good agent, use BiggerPockets Agent Finder and find an agent that actually is on BiggerPockets and understands what we’re doing.
So this new idea that, hey, we can solve all the mystery and complexity of real estate investing with one app that you could just get in and get out and buy a house is just nonsense. It won’t work. Those of us that do invest in real estate know that it takes a massive commitment. That’s why we’re here on this podcast several times a week, putting out information because that’s how important it all is. So I would hope that it might be useful, it might be helpful in accomplishing some of the elements of a real estate transaction. I can’t say that it wouldn’t be, I haven’t seen the app yet. And so I would look at it from that perspective, but I wouldn’t assume that buying a house is ever going to be something that you just, it’s like buying groceries at the store. It’s never going to work that way.

Dave:
Yeah. All right. I’ll reserve my opinion, but Henry what’s yours?

Henry:
I wish I had some maracas or a tambourine, something to make lots of noise. This is total noise. You think about Zillow-

Rob:
Okay man, I’ll be your maraca.

Henry:
That was awesome. No that’s noise, man. Look, Zillow’s a publicly traded company and they’ve had a rough year. They’re down 66%, their stock price is down 66% over the last year. And so they’ve got to try to do something to get that stock price up. They are trying to stay face in the eyes of their shareholders I’m sure. Now are they great at what they do? Yeah, they’re a big real estate information, even some would say technology company. And so sure they have the power to do great things. Is this that? No. To me, the sounds like they’re trying to rally the people behind them, get that stock price up a little bit, get some more momentum. And so nah, noise to me.

Dave:
All right. No Zillow boosters in the group today.

David:
Dave, can you give us a quick take on if you think this is news or, you may have a contrarian opinion I’m concerned.

Dave:
No. I think it’s the same thing that Henry was saying. I think that it’s a publicity stunt. What does a super app even mean? Wouldn’t they already have been trying to do this for years? It doesn’t sound like they’re actually doing anything differently, they’re just rebranding their app.

David:
That’s a very good point.

Rob:
Is Zillow not the super app? It’s like they’re going to make a whole nother thing that’s different?

Dave:
Yeah. Well, we’ll see what happens.

David:
Maybe we should all do that. Can we rebrand ourselves? I’m going to now be Super Dave, Super Rob, Hammer and Henry

Rob:
Super Henry, Hammer and Henry.

Dave:
Hopefully you’ll get as much press as Zillow did for this.

David:
Yes.

Dave:
But for our last headline, I have a very special one and it reads, the BiggerPockets Real Estate Podcast is very excited to announce that Rob Abasolo will be appearing on the podcast weekly as the new regular co-host of the podcast alongside David Greene. And in further excellent news, Henry Washington will be continuing to be an important part of the show appearing regularly as a guest host alongside David and Rob. Rob I’ll just start with you, is this news or noise?

Rob:
This is news. Oh my goodness, I can’t believe that we’re here. It feels like just yesterday I was making my very first appearance as a guest on the BiggerPockets Podcast. And six months later here I am getting to share the mic with one of my real estate heroes here, David Greene, and Henry you’re one of my heroes too, man. So I’m honored to be here-

Henry:
[inaudible 00:17:01] Henry there I did.

Rob:
I’m doing my best here guys. And I’m going to do my best here to share all the knowledge that I have to the world and hopefully make real estate just a little bit more approachable for everyone looking to get started in this journey.

Dave:
Awesome. Henry, what are your thoughts?

Henry:
Hey man, this is absolutely news and I want to congratulate Rob. That’s super awesome, this is so much fun. And I just can’t appreciate you guys enough for even providing this opportunity for us. I have been this BiggerPockets follower for a long time. And so right when I started investing, I put on my vision board a picture of the old podcast tile that had David’s face and Josh’s face and Brandon’s face. And then the BiggerPockets logo, because I had a goal to try to become a guest on the show and they gave me that opportunity. My second year in real estate, I had done 30 deals and they were like, “Well, come on the show and share your story.” And I was just so taken aback by that because I didn’t think what I was doing was that special.
And they saw something in me that I didn’t even see at the time and provided me this opportunity to share on the platform that inspired me so much. And that was only my second podcast interview that I had ever done. And so them believing in me and giving me that opportunity. And what’s funny was I just never took that off of my vision board, it’s still there today. And then all of a sudden you look back a couple of years later and I’m getting this opportunity to become this reoccurring host and share my journey and my insights and knowledge and information with people and hopefully inspire even more people to get in this game of real estate and to have a heart for people as they do it. So I couldn’t be more thrilled. This is absolutely news to me, and thank you so much for the opportunity.

Rob:
Your sound bite was way cooler than mine. Did you rehearse that in front of a mirror, what the heck?

Dave:
Rob, I’d give you another crack at it, but I think they’re going to tell me that this is already going too long. But it’s big news, I think it’s worthwhile. This is really exciting guys and both extremely well deserved from you, but let’s hear from the big honcho, the big cheese. David, what’s your thoughts on this?

David:
I am very excited to be having some backup firepower here. In all seriousness, hosting a podcast like this comes with a lot of weight. There’s a lot of people that listen to us and make decisions based on the information and the guidance and the influence that we have. And so I feel very good that Henry and Rob are two people who will be throwing in their two cents, because I don’t believe that they’re going to lead people astray. I think that they both run sound businesses, they’re both men of integrity. That’s very, very important when you’re picking who we’re going to be putting up there as giving advice. So I was very worried about this decision because it could have an amazing consequence or it could have a terrible consequence. Either way, it’s going to be big. And I think we got the right people, so I’m very excited. Welcome to the family boys.

Dave:
Welcome, this is awesome.

Rob:
Happy to be here. Thanks.

Henry:
Thank you.

Dave:
And before we go, before we end this segment, I do have a couple other pieces of news that are very exciting as well. First and foremost, I will continue to join the show monthly to co-host the Bigger News Show, so of course I think that’s exciting. And if you like the Bigger News Show, which I hope you are, because you’re listening to it right now and you like this news or noise segment, we have a lot more of this coming in the near future. We’re actually developing an entirely new podcast designed to help you understand today’s changing market dynamics and help you make informed investing decisions on your journey to financial freedom.
I actually am going to be the host, Henry is going to be super involved and we have a bunch of other experts who are going to be joining that show as well. So make sure to stay tuned for more announcements as to when this is launching, it’s going to be a lot of fun. So that was a lot of announcements, but I’m done now. So Henry and Rob, unfortunately I have to kick you out, although this was a lot of fun. Super excited for you guys. You guys have done an incredible job and really deserve this. And with that, David, I think you and I are on to interview Daren.

David:
Yes. I can’t wait to be doing this show with you. This is one of my favorite projects that we’re doing, the Bigger News Show. And Dave, here’s what I’d like to say to you because I only got to talk to Henry and Rob, Brandon and I may have had history, but you and I have chemistry.

Dave:
Ooh, I’m going to blush. Can you guys see this right now? I know, I got little chills right there. That’s quite a compliment, but David, I do love hosting this show. I think it’s so much fun and we’re getting such a good reaction to this and I don’t know, hanging out with all you guys is something I look forward to every single month. So I’m glad that we’re all going to be doing it together.

David:
Me too. This is awesome. Guys, welcome and I will see you soon.

Dave:
All right. Well that was a lot of fun. I’m very honored that I got to make that very big announcement and excited for you, but we also have a great show today. In addition to this announcement, we now have a great guest who’s going to come on and talk all about the state of foreclosure. So if you’re like me and you’ve heard a lot of news out there about foreclosures and what’s coming down the pike, you’re going to want to stay tuned to this one, because Daren’s going to drop some really good information for us. With that, let’s welcome Daren Blomquist who is the vice president of market economics at Auction.com. All right, Daren, thank you so much for being here. Before we jump into the meat of all the data and information I know you have in store for us, can you just tell people really quickly what it is that you do, what do you spend your time looking into, the type of research you’re up to at Auction.com?

Daren:
Yeah, absolutely. I’m vice president of market economics here at Auction.com. So what I spend my time doing each day, I spend lot of time just in the data, in our own data. We have a rich data set of folks coming and bidding on properties on our platform. So as you can imagine, that’s a pretty rich data set almost real time. And then also just looking into a lot of other data that we’ll talk about today, I think, and trying to figure out what that means for Auction.com as well as for our sellers, which are the banks and the servicers and the lenders who are selling these properties as well as our buyers, those are probably more aligned with your audience, folks who are looking to buy these foreclosure properties. And so what’s coming down the pike for our company, for our buyers and sellers is a lot of what I spend my time doing and it’s really fun.

Dave:
Great. Well, thank you so much for being here. I’m sure our audience is going to be super interested in learning all the things that you have to share with us. One of the things that I’m really excited to talk to you about is just foreclosure volume. And there’s just been this narrative in the real estate media recently, or if you watch YouTube a lot about a foreclosure crash and people have all this fear because there has been a moratorium on foreclosures. And once that has been lifted, is that going to cause a huge ripple through the whole housing market? And I want to get into all of that first, but before we do, could you just share with everyone a little bit about the history of foreclosures. Probably over the last 20 years, what happened in the great recession and relatively where are we today compared to everything that happened back then?

Daren:
Yes, absolutely. Especially right now and during the pandemic, that’s a lot of what you talked about first there, which is, is there going to be this huge wave of foreclosures is a lot of what I am looking at and trying to answer for because that makes a big difference for Auction.com. But the historical perspective, the way that we look at it is what we call foreclosure BTA, which is foreclosures brought to auction. And I think most people would understand that as just properties that are foreclosed on, properties that complete the foreclosure process. And there’s one of two outcomes, which is at that auction there’s either the property is sold to a third party investor who’s buying the property or it goes back to the bank as an REO or real estate owned by the lender. So that foreclosure BTA number is what I’m going to hang my hat on for using this for the historical perspective.
And we could do it as percentages, but this is actually going to be raw numbers. So at the height of the last foreclosure crisis, it was 2010, we saw about a million foreclosure BTA, foreclosures brought auction, in 2010. And that was the peak of the last crisis. We saw about five years there where it was well over 500,000 half a million a year from 2008 through 2012, 2013. Those were the worst of the foreclosure crisis that I think is still pretty, even though it was a decade ago or more, is still pretty fresh in folks’ memories. And there’s a lot of concern or anticipation that this could happen. And so to put that in perspective, what we saw in 2019, the last year before the pandemic, which is a whole different animal was we saw about 215,000 foreclosures brought to auction in that year. And so we’re at less than a quarter of that peak year in 2010.

Dave:
What would you consider normal? So on one hand we add a million around 2010 and then right before the pandemic, you said about 215,000. Is that what you would normally expect to see in a year?

Daren:
Yeah. It’s a little tough, because of course the whole market is expanding as we go. But prior to the last crisis we were seeing about 200,000 a year in 2004, 2005, 200,000 to 250,000. So I think 2019 we were getting back to about normal. Now we could talk about, and maybe we’ll do it later or now, but there was still a fairly healthy percentage of these 2019 foreclosures that were still tied to the last crisis. And so there’s an argument there that it probably could have gone down a little bit more, I’m waffling obviously on this answer here, but I think normal is around that 200,000 level when we look back over the last two decades.

Dave:
Okay. So 200 about normal and then walk us through what has happened in the last couple of years. We all know the housing market has been nuts, but can you give us a little bit of context about what has been going on in the foreclosure market in the last two plus years?

Daren:
Yes. What we saw after the pandemic hit was there’s a pretty immediate response politically and policy wise to prevent another wave of foreclosures. And so there was a foreclosure moratorium that was put in place pretty much at the end of March through the Cares Act, that had a lot of other impacts on the economy and the housing market as well. But we saw one big one was the foreclosure moratorium and then also a nationwide forbearance program. So one thing on the moratorium, it wasn’t a true moratorium, but there was still some foreclosures happening, but basically it did stop most foreclosures. The big exemption was properties that were vacant or abandoned. And so we saw foreclosure activity really almost dropped to nothing for a couple of months. And then slowly has started to come back as banks got more confident that they knew that properties were vacant and they could foreclose on them.
And then of course in the last few months, we’ve actually seen the expiration of that foreclosure moratorium, which we can get into a little bit more, but also the forbearance program, which allowed people to basically… It was actually a financially savvy move to go into forbearance some could argue, because you could basically get up to 18 months without making your mortgage payment and really no penalty, and just start making your payments at the end of that. And then the unpaid balance is put into a non-interest bearing, basically loan that goes to the end of your mortgage. But anyway, the forbearance program also those 18 months are expiring for many people. And so the majority of people have exited forbearance and there’s another few hundred thousand that will be exiting over the next six months. As those protections expire, we are seeing the tide of foreclosures start to lift.

Dave:
That’s a great point. I just want to make clear for everyone who’s listening to this what the forbearance program was and what it exactly does, because you made a really good point there. Basically at the end of March in 2020, there is a program that allowed people to basically stop paying their mortgage. And this doesn’t mean that their debt was forgiven, it means that they basically put it on pause. And the payments that they skip for most parts, it’s not the same for everyone, for most parts, just get added to the end of their mortgage. You have a couple more months or years of payment, 18 probably.
And I think this is a really important point because we saw this huge amount of people going to forbearance. And I think that is a root cause of a lot of the fear that people have, that there is going to be a foreclosure crisis. But if I’m getting you right, Daren, it sounds like what you’re saying is some people were just opting to go into forbearance even if they weren’t in a poor or difficult financial situation, they were just doing it because they didn’t want to pay their mortgage. They said we’ll just stack some cash for 18 months. Is that right?

Daren:
Yeah, absolutely. I think you see that happening with the proactive and early on in the pandemic, people didn’t know it was going to happen. And so, hey, I take this payment off the table that I don’t have to make just in case something bad happens. But what we saw is that from the vast majority of those people, the worst case scenario did not happen. They didn’t lose their job or they got their job back fairly quickly. And so that resulted in the vast majority of those forbearance… According to Black Knight, 8.3 million homeowners entered forbearance over their entire life have entered forbearance of the program. And of that 8.3 million, we only have 578,000 that have exited forbearance and are not in any type of loss mitigation, which would also protect them from foreclosure. And so that 8.3 million, if that were to be the number that were to hit the market, that would be a lot scarier, but we’re talking more along the lines of less than a million folks who are still in what I would consider that high risk category, that 578,000.

Dave:
That’s great. And I want to jump into that number, but would love David, to hear what are your thoughts? Are you seeing any foreclosure activity in your market? Do you think the forbearance program largely was successful?

David:
I think it was successful from the sense that it was popular, people really liked it. It gave people the sense of, “Hey, you’re going to be okay.” It’s hard for me to comment on how useful or necessary it actually was, because I don’t know how many people did lose their jobs. I’m seeing zero foreclosure activity in the market that we’re working in. And frankly from my position, it’s very difficult to see how we could have foreclosures when asset prices have risen at the degree that they have. So in order to have a foreclosure, from my perspective, you need two things. You need the inability to pay your mortgage and the inability to sell your house.
And what we saw in the last crash was that was happening is people didn’t want to pay their mortgage or they couldn’t pay their mortgage and value of the assets was dropping. So they were stuck with it and they just let it go. But nobody would do that now, you would just make a bunch of money by selling the house, even if you just bought it a year previous. So I wanted to ask you, Daren, there is a huge contingent of people that are banging the drums saying there’s a wave of foreclosures coming, don’t buy real estate, don’t jump in early, the white walkers are approaching the wall and they’re all coming and we have to be ready. What are your thoughts on what you would need to see before you could put more credibility towards that position?

Daren:
To your point just a second ago, we’d have to see home price correction or crash. And that it’s a two-pronged thing, you’re always going to have foreclosures because you always have folks who get into a difficult life circumstance, but typically you have to have a double trigger to get folks to actually get to foreclosure. And so you have that life circumstance, but then you also have little or no equity in the home, as you mentioned. Now, I do want to jump into that because there’s actually some research out there that pushes back on that a little bit. It’s like equity is not the panacea for foreclosures, we actually see people going into foreclosure with equity.
And I think that maybe speaks to people, we all know humans are not completely rational beings, so they don’t always behave rationally despite economics suggesting that they should. But anyway, that may be a separate topic, but I think by and large, for most foreclosures, you do need that combination of unfortunate shock life event and then also lack of equity to see that wave. And it’s funny, I hear a lot about it but I’ve actually never encountered anybody that I can remember who’s arguing that we are going to see a wave anything along the lines of what we saw last time. And maybe I just need to get out more and talk to more people, but we’re definitely not seeing that in the data.
However, we’re also not seeing the zero foreclosures that you talked about in your market. We’re seeing right now in the fourth quarter, basically every quarter, every month, since the second quarter of 2020, where we saw our numbers drop dramatically, we’re seeing now record numbers of, I shouldn’t say record numbers, but pandemic highs in terms of foreclosure level. So in the fourth quarter of 2021, we saw foreclosures up 97% from a year ago from a very low number, but they’re still at 38% of what they were prior to the pandemic. So I just want to nuance that a little bit we’re not seeing the wave, but we’re not seeing nothing either.

David:
When I say we’re not seeing them, what I mean is they’re not making their way to the market where a person would see that house in the MLS as REO or a foreclosure. I’m sure people are going through foreclosure. It’s funny you said that because my very first venture in a real estate was working with my first mentor Tim Road. And we would find people that had been issued notice of defaults, and we would go try to buy their house from them before it foreclosed. And because they did have equity and they didn’t know what to do, they were just frozen or sometimes they didn’t have enough time to get it ready, put it on the MLS, get it a 30 day escrow to close. They would’ve lost the house before then because they waited too long. So we would target those people and buy their house so that their credit wouldn’t take a hit and we’d get a deal that way.
So I’m sure that it’s still happening, like you said, in cases. It has to happen at a large systemic level before actually that inventory makes its way to where the public, who just looking on Zillow or Realtor.com would see, “Hey look, there’s foreclosure right there.” The people that are very savvy that are in the game, that are maybe looking at Auction.com, that are going to the Courthouse Steps, they’re going to be the ones grabbing those type of deals. Side note, pick out BiggerPockets book, Bidding to Buy, if you want to get into the auction game. They wrote a book about that very topic. But I think Daren, what I would like to see or to know from you as someone who tracks this data all the time, at what point would you be concerned that there’s going to be for… What do you think historically would need to happen maybe in our overall economy before we would be getting into that danger zone where a wave of foreclosures is likely to be coming?

Daren:
Yeah. I think right now the biggest threat I see, the biggest risk I see is inflation, which I know gets a lot of press and a lot of talk time. But I do see that as a risk, even if we look back over the last decade, which has been a very long housing boom, the points of weakness in that housing boom were when we saw mortgage rates rise, it’s extremely mortgage rates sensitive housing market. And so to the extent that inflation would push up mortgage rates, which they already have, or at least the threat of the Fed raising their interest rates has done that. We would see weakness in home price appreciation. And we saw that there’s two examples of that if we look back at about 2013, 2014 mortgage rates went above 4% for an extended period of time, as well as 2018, 2019, we saw that same thing.
And actually I look at the public record data shows we actually had a very, very slight at least flattening and even 1% decrease in home prices at least nationwide in 2019 and the NAR numbers don’t show that. But that was another point where we saw an extended period in 2018 and 2019 where mortgage rates went above 4% and went above even 4.5%. And that did definitely cool demand and cooled home price appreciation, at least at the very least slowed it down. And so I see that as a big threat that not only would trigger that slowdown in home prices, but also psychological factors are very important. And then everybody thinking, oh, the market is slowing down. And that becoming almost a self-fulfilling prophecy as well is the biggest risk I see right now.

Dave:
So it sounds like, basically summarizing the first part of this conversation, we are seeing an uptick in foreclosures after the forbearance period ended, but you’re not seeing a lot that suggests we’re anywhere near 2007 levels. And frankly, as David pointed out, it’s not really hitting the market in any way where it’s really impacting inventory. We’re seeing inventory numbers in January and February right now that are near all time lows. So I think hopefully that addresses some fear that people or our listeners have about foreclosures, but there’s also this other part of foreclosures that are really relevant to real estate investors, and David hit on this, and that’s the role of investing in foreclosures. And Daren, I’d love to get your thoughts, but before you do David, I’m curious, can you just give everyone a little bit of a primer about how you invest in foreclosures, why people do it and what role it plays for real estate investors?

David:
Yeah. Well, basically the reason you want to be investing in a foreclosure is because you’re getting a distressed asset so you’re probably getting it at a better price. That’s a short answer. Most foreclosures are not in the best condition that they would ever be in because the person who’s losing them probably wasn’t taking care of them very well. And the person who’s selling it we should also probably define there’s the foreclosure process, which is the act of taking a property, the title back from the owner and giving it to the person who lent on it. And then there is a property that has been foreclosed, which is owned by the lender who gave the loan on it. We typically would call that REO or real estate owned, because most of the time the lender would be some kind of bank. So there was a time when a bank owns a lot of real estate and they’re not very good at owning it, they’re not property managers, they don’t know what to do with it.
They’re usually going to sell it at a discounted price because they want to get out from under that. They want to turn the REO on their books as an asset that the bank owns into money that they’ve received back, that they had lent out and put it on their books in that fashion. When there’s not a lot of them and there’s still a lot of demand for housing, a foreclosed property goes back to a bank, a bank hires a real estate agent like me, I go put it on the MLS and I sell it just like any other house. And so that is misleading when you think that foreclosure automatically means great deal, that’s not the case. It’s when it’s distressed asset that you’re more likely to get a great deal or the seller is in a time where they need to get rid of the house. So something in the foreclosure process, the owner still has title to the property, the bank has not taken it, that could mean distress.
There’s absolutely an opportunity there where they would let it go for less than it’s worth, because they’re going to lose it anyway. But once it goes back to, I’m saying bank because in most cases the bank is the lender on the property that will take the title, it only becomes a distressed asset if that bank wants to get rid of it very badly and is willing to let it go at a lower price. And that’s only going to happen when it’s sat on the market for longer than the average days on market. So in 2010, 2011, we were seeing houses would just sit there forever and they were owned by banks. So you were getting them at better prices than the regular seller, they were also in worse shape. But today man, it’s like pouring a glass of water on sand at the beach. That inventory just gets sucked up so quick that the fact that it’s REO or in the foreclosure process or a house that isn’t there, it’s all the same to the end buyer.

Dave:
Yeah. That’s a good point. And just to be clear, there are some challenges with foreclosures too. Usually it’s site unseen and you have to pay all cash, is that right?

Daren:
Yeah. I can jump in on that one and I think that’s a good distinction, a good overview by David about the difference between foreclosed versus in foreclosure. And those foreclosed properties that are on the MLS are going to be more like a typical sale. And those would be you wouldn’t have some of those challenges, but if you’re buying and you’re going to get that distress discount, there are some challenges that basically come along with that. And if you’re buying at the foreclosure auction, typically in most states, you have to pay on the spot cash so people are bringing cashiers checks to the auction. We do have a remote bid now on our app where you can actually put funds in an escrow account and pull out of that to pay at the auction in many counties, which we’re trying to bring foreclosure auctions into the 21st century a little bit.
That’s one challenge. And then related to that, the reason that you’re paying cash is because you’re buying these properties. The property is transferring from that distressed homeowner to you, and so up until the point of the auction, they own the property. It’s going to be very hard to go in and do an interior inspection of the property, get a full appraisal of the property that would even qualify it for financing. And even if you could, the condition of the property often is such that it’s not fanciable. And so that’s why we love our buyers is because they’re not just Joe or Sally buyer down the street, they’re the ones that are ready, willing, and able to take on these challenging properties and renovate them and return them back into the retail market six to 12 months later, a lot of times. So I would say it’s three pronged to the cash piece related to the financing piece, which is related to the condition of the property and the renovation required.

Dave:
Yeah, that makes sense. And I think as we talk about on the show all the time, if you’re going to look for a deal, you got to do a little bit of extra legwork. It’s pretty hard to just find an excellent deal. And so just like with driving for dollars or doing bar with a rehab, you’re going to have to do some work to find a deal. And this is just one example. Daren, I’m curious given everything that we’ve talked about, the condition of foreclosures today and the housing market and the state that it is, what do you see the role of the foreclosure market playing in the broader housing market, the broader housing picture in 2022?

Daren:
Yeah, I think it plays a role. It’s a small, it is a little bit like pouring water on the beach, but it is adding some inventory back into the market and it’s taking these properties that tend to be much older, when we look at the average age of these properties, in poor condition and the folks who are buying them on our site are then rehabbing those properties. And typically in most cases, not all the cases, sometimes they’re holding them as rentals, but what we found in the majority of cases, our buyers are actually selling them back to an owner occupant and these properties tend to be on the lower end of the market. And so in my view, this foreclosures are actually providing almost a refurbishing of housing inventory.
And again, it’s a small piece. It’s not going to solve the affordable housing issues that we have or the housing supply issues completely, but it’s one piece of the puzzle that is taking these properties and putting them back into the market. And so we see 71% of our buyers who then renovate and sell back to an owner occupant and even in low income since this tracks, it’s 68% sell to an owner occupant and in minority tracks, 70% sell to an owner occupant. So we see that as actually a good thing in the long term. Of course, it’s never great to talk about someone losing their home, but when you see what’s happening to those properties over six to 12 months.
And we would argue that our buyers do a lot better job than the banks. And one thing I wanted to mention to what David said earlier is one huge shift with the pandemic we saw is that at the foreclosure auction, I talked about there’s two things that can happen, it can go REO, or it can go to an investor. Prior to the pandemic, only about 40% of properties were selling to an investor at the foreclosure auction and the rest were going REO. It’s completely flipped during the pandemic, which is why you’re seeing that fewer of those REOs, what we call our sales rate is now 60 plus percent going to investors at the foreclosure auction and the remainder going REO.

David:
And that makes sense because there’s more demand for these properties.

Daren:
So there’s a lot of demand, yeah.

David:
That’s exactly right. People are going to want to buy them at the auction more, whereas before they probably only just took the cream of the cup and everything else went to REO.

Daren:
That’s right.

David:
So here’s a question for you, Daren, if somebody that’s listening here wants to get into the auction game, they want to buy these properties before the title transfers back to the lender, what are some things that they need to be aware of as they prepare for this so they’re walking in with their eyes wide open? Just as far as how they need to be prepared, how the process will differ from traditionally buying?

Daren:
I think the number thing is you do have to have some dry powder, some cash to go into this with. And so it’s not one of those things where you… Now that said, there’s some very low price properties and there’s new people getting into this. We have some great buyer stories you probably don’t have time to get into, but people I’ve talked to who have actually started doing this during the pandemic and had never been an investor before. So it’s possible, but you do have to have some foundation in terms of capital going in typically.
And you can sometimes work with hard money lenders or private lenders to help with that. So I would think that would be the number one thing. I would say, anybody who’s considering this, I would advise to go to a live. These foreclosure auctions are in-person events. Now we have the mobile app that allows you to participate remotely, which is really cool, but I would encourage someone going to just attend the in-person auction, usually at the Courthouse Steps. And just to go there observe a few times and see what other investors are doing, what other buyers are doing and get a feel for it before jumping in.

David:
Do you have any examples, Daren, of what a deal at Auction.com done right would look like?

Daren:
I pulled some data here just over the last few years of properties that have been purchased at foreclosure auction, which is where you do tend to get the better deal. Sorry just a quick side note, we do also the REO auctions where it’s almost immediately after the foreclosure auction if it doesn’t sell, then some of the banks and also HUD does this what’s called second chance auction. And so those are still good discounts because they’re not going back on the MLS, they’re REOs but they’re auctions almost immediately after the foreclosure auction. But when I looked at our data with the foreclosure auctions and I just did as a benchmark compare the properties’ sale price to the 2022 AVM automated valuation investor terms that would be the after repair value.
And what I’m showing is those properties were selling to our buyers at auction for about 54% of the 2022 after repair value. And this is over the last five years, and then they’re selling for 88% of the after repair value. And so to put it in dollar figures the average price is $136,000 purchase on our site. The average resale by the fix and flipper is about $224,000. And that’s over the last five years. So hopefully that helps. I can’t give a specific example, but we’re seeing basically in percentage points, the value gain go from 54% to 88%. And in terms of dollar figures going up by close to $100,000 between when they buy it on their site, renovate it and then resell it.

Dave:
But that’s great, Daren, thank you. I think that’s really excellent data and for everyone listening out there and you’re considering entering a foreclosure, this could be a really good option. Or if you’re just looking for deals right now, foreclosure could be a really good option because deals are not the easiest they have ever been to obtain right now. Daren, before we jump off, is there anything else you think we should know or our listeners should know about foreclosures, what’s happening in the market or the opportunity there before we let you go?

Daren:
To circle back to what we talked about early on is you are going to see some pretty big percentage increases and they might be in the headlines. And so at first blush that might look like confirmation that there’s this foreclosure wave coming. But for instance, I just looked at the Black Knight data and January there was a 700% increase in foreclosure starts. So when you look at that, you’re going to think, oh, maybe there’s another foreclosure wave and just be very cautious with that because we are seeing foreclosures come back, but they’re coming back from almost nothing. And so it does spell more opportunity, but at this point, at least we’re not seeing it be this overwhelming wave that’s going to pull down the rest of the market with it at all. It’s more of just finally there’s some of this inventory that’s becoming available that investors can access, but just be wary of those headlines coming out over the next few months and weeks.

Dave:
I was going to say, well, that’s a perfect tie in with our first segment where we were talking about news or noise and, Daren, just for reference, we were talking about whether certain real estate stories were important or not. So I think that was a great way to summarize this conversation that foreclosures are coming up. But if you hear that, keep in mind that this is a recovery from almost all time lows or basically artificially low. And that does not mean that there’s going to be a huge wave of foreclosure. And after everything we’ve learned today, keep in mind that there is a lot of stuff that would have to happen to see a big foreclosure crisis in the US, at least in the next six months to a year who knows what’s going to happen after that?

David:
Yeah. I think that’s a perfect precursor to the point that I was thinking of Dave. Daren, you said something incredibly insightful I don’t want to get passed up, you mentioned that it was something along the lines of the psychology of the buyer plays a very big role when you see a foreclosure crisis. So we had that in 2010 and this is something I just… Because I sell a lot of real estate, I own a lot of real estate, you realize how few human beings make decisions based off empirical data and how much emotions go into it. And one of the huge things that affects people is the herd mentality. When you don’t know really well what you’re doing, you just follow what everyone else does and it feels better. So we had a run up in prices from say 2000 to 2006 or so based off of really bad lending, everybody was buying houses. None of them had any idea what they were doing.
They did not know if a property would cash flow, they didn’t know how to manage a property. It was literally just buy it, wait and you could sell it later, because it’s going up. So that was herd mentality on the offensive side. And then a lot of those loans started to reset. And so people couldn’t make the payment anymore and they would sell the house if they could, but enough of them resell at the same time that too many houses hit the market for sale and people didn’t buy them right away. And then they started to foreclosed, which meant more inventory was hitting the market. And you saw this little shift just went right over the edge where it went from there’s not enough homes and everybody’s buying them to, I don’t want to buy a house what if the prices are going to keep going down?
And so what happened is it’s not like 10% of the market backed off and said, “Hey, I want to wait and see if prices stabilize.” It was 98% of the market backed off and said, “I’m not touching a house because I think prices are going to come down.” And then prices started coming down So even more people said, “I don’t want to buy a property prices are going down.” And then people that worked in those industries, the lending industry, the real estate industry or people that worked in luxury markets, they sell boats or they sell time shares or that type of thing. No one’s taking out money on their house to go buy that RV or that new car or that boat. So now they’re losing their jobs and now they’re starting to lose their houses to foreclosure. And it just went so fast as everybody did the same thing. They all said, we’re not going to buy and prices kept coming down and it never slowed down. They just plummeted because nobody wants to step in and catch the falling knife, so to speak.
And it wasn’t until it hit the bottom and investors basically changed it. They said, “I could buy that house and it could cash flow and it doesn’t matter if it keeps dropping in price, I don’t care. It’s going to cash flow, I’m going to buy it.” And then investors started to buy, houses started to come off the market a little bit and then the masses said, “Oh, it’s time to buy.” And everybody came in again and boom prices shot up just as fast as they had come down. So while we talk about the individual owning real estate and we want them to understand the skill of operating a property, the metrics involved in its value, how to make sure that you’re making money, individually those things matter. The way that property values go up or down is largely psychological. It’s what the masses are all looking at. And most of them are not listening to this podcast, unfortunately that’s the case they should be. And so they’re just following what the herd says.
And you made a great point. The foreclosures are coming, but they’re not going to overwhelm the market because the psychology of the buyer right now is there’s a lot of inflation, I want to invest in real estate, it’s a limited supply. I need to get it before there isn’t any of it. Our population continues to grow, so there’s still a big demand for housing and we’re not building enough of it. And so the things that make somebody think I want to buy real estate psychologically are still very, very strong. And on the other side, if that changes, it changes quickly. It’s not something that, oh, we’re starting to see a slow down in prices and they tick back down over a five year period. So people like you listening to podcasts like this is very important, because you want to be one of the first people to know if it looks like it’s starting to hit that tipping point going over the edge.

Daren:
Yeah, totally agree. Good stuff there. And we do have a scenario, our most likely scenario, our forecast is seeing over the next five years, about 200,000 to 250,000 foreclosures per year. But we do have a scenario if that psychology turns. If home prices drop, we see that falling knife scenario we are seeing in that model, the volume go up to over 400,000 foreclosures a year, which actually still is not the recession level or last recession level, but the path could vary, it’s certainly not set in stone. If we knew that for sure, we probably wouldn’t be talking about it here.

Dave:
All right. Great. Daren, thank you so much for joining us and sharing all this information with us. It’s super helpful for us and for our users. Really appreciate you being here.

Daren:
Thanks so much for having me. It was great.

Dave:
So Daren now, before we go, where can people connect with you or learn more about Auction.com if they’re interested?

Daren:
Yeah, absolutely. Auction.com, you can just go there and there’s no subscription fee or anything like that. Just to look at properties and to actually bid on properties. Of course, you have to have the cash to if you’re the winning bidder. So check it out Auction.com. And then a lot of the research I’m doing if you go to auction.com/inthenews, you’ll see that. We have heat maps about where we see foreclosures emerging and things like that, that could be very useful to the audience. As well as some great buyer stories of people who’ve been in the business for decades as well as people who’ve just gotten into investing over the last couple of years and are specifically buying at foreclosure auction or bank owned REO auction. And so I think those are some great resources, that’s auction.com/inthenews to see all of that.

Dave:
All right, good stuff. Thank you, Daren.

Daren:
Thank you.

Dave:
All right. David, well, there you have it. There dropped a lot of information. What are your thoughts on all this?

David:
It was a lot of data, which I think frankly we needed because there’s so much controversy about this issue. I think this was the perfect guest to give us some clarity on it. It sounds like though many of us that are investors are hoping for a wave of foreclosures. It’s not very likely to happen and that the market fundamentals for real estate still seems strong even as the price of it continues to rise.

Dave:
Yeah. I’m glad to see this and hear it from someone who’s as engrossed in this data as Daren is, because I put out a lot of YouTube videos and I’m on YouTube a decent amount. And you see these people who are screaming about a foreclosure crash and a forbearance crash and all this stuff. And frankly, I’ve always thought it was overblown and I’m glad to hear that that’s the case. Now there’re of course additional challenges to today’s housing market, but there is one last thing you have to worry about is a foreclosure crisis. So if we’re going to round this whole show out, I would say that thoughts of a foreclosure crisis is noise and not news.

David:
All right. Well, thank you very much audience for listening to us, and Dave, thank you for doing a stellar job with the interview that we just took down of Daren Blomquist. You are getting better and better at this the more you do it. Everybody, go check out Dave on YouTube, he’s got some really good stuff. You can also follow him online on social media at thedatadeli-

Dave:
Thedatadeli.

David:
There it is. You can follow me at DavidGreene24 on all social media. Dave’s name is way cooler than mine. [inaudible 01:00:19] the datadeli is awesome because Dave loves sandwiches. So thank you very much. This is going to be the end of our show. So go check out another BiggerPockets Podcast or follow us on YouTube and see what you think there. This is David Greene, for Dave, thedatadeli Meyer signing off.

David:
This is the BiggerPockets podcast show, 579.

Rob: Most of the properties that I’ve purchased have been sub $500,000. But now as my time has grown more rare, I suppose, I’m really not looking to acquire real estate that’s less than a million dollars in the short-term rental game. And then we start looking at the deal that you and me are looking at. That’s a $3.4 million luxury home.

What’s going on, everyone? It is David Greene, your host of the BiggerPockets Real Estate Podcast, the podcast where we teach you how to find financial freedom through real estate. So if you’re looking to have a better life, to have more freedom, to have more control, to build your own destiny instead of someone else’s, you my friend have found the right place to be.

David:
If you don’t know who we are, BiggerPockets is a company with over 2 million members whose sole purpose is to help you find financial freedom through real estate. We do that by bringing on experts, guests, people who have done this before to share what they did right, what they did wrong and how you can do it too, giving away the knowledge that used to cost a lot of money to get access to, and you can now get for free.

David:
In today’s episode, it is a Seeing Greene show, as you can see, there’s a green light behind me. This is where I will be going and taking all of your questions and answering them myself.

Rob:
We now interrupt this episode of Seeing Greene to show you how to make more green in the FTR industry. Hey, what’s up man? I’ve got some questions.

David:
Rob, I am such a narcissist. I totally didn’t even realize you were here.

Rob:
I was sitting here the whole time. That’s okay. Man, I have a question. I have a question for you. Can we continue the conversation on short-term rentals that we started on Thursday?

David:
I think it would only be right. We did promise everybody that we were going to continue that conversation and share the rest of the information today. I’m glad that you’ve been sitting here for three days straight, waiting for me to log back in and do this. What a trooper.

Rob:
I haven’t even used the restroom, man. Come on.

David:
Well, why don’t we take a quick break to let you use the restroom and we will be right back?

Rob:
This episode is brought to you by Nutri-Grain bars, the official bar of the BiggerPockets podcast.

David:
All right, on today’s show, Rob and I are going to finish up part two of what we started on the last episode. We are going to be talking about how to choose your property type if you want to buy a short-term rental. How to figure out the timeline that you want to achieve success by. Is this a long-term investment? Is it something more short term? How quickly do you need cashflow versus how much can you delay gratification to make more money later? And then what work is going to be involved in the beginning? And if you’re going to partner, how to divvy up that work.

David:
Now, Rob and I are actually doing this ourselves. We are buying properties together. This information that we’re giving you comes right out of the systems that we have created for how we stay on track ourselves. After this show, I want you to keep an eye out for a future show where we will talk about how to analyze and underwrite properties right up to the point where you’re going to make an offer. And then after that, we’re going to do a show where we explain how we manage these properties. This is a short-term rental masterclass, and you are being taught by a master classman with my co-host, Mr. Abasolo.

Rob:
Hi. Hi. Hi. Fellow master classman here. Man, I’m excited to dive into this. I think everyone knows I get all giddy whenever we start talking about Airbnbs and short-term rentals and for good reason. I think it’s a really great place for a lot of new investors to start. And today we’re going to be covering a lot of things.

Rob:
We’re going to be covering property types. Are we doing standard single families, multi-family, modified single family, luxury? The timelines associated with it. How do you want to divvy up work? Who are you going to empower? Are you working with a partner? Should you do some of the work? Should you make all your partner do the work? How do we avoid resentment in partnerships? So pretty stacked itinerary I’d say.

David:
Very nice. I imagine that you also might be a little extra giddy, because you went to the bathroom for the first time in three or four days now. So, well done.

Rob:
Well, yes, that’s… I thought we were going to edit this out, but yes, I did use the restroom and I’m back. I’m back, baby. I lost myself there for [crosstalk 00:03:38].

David:
Jedi-like bladder control, incredibly impressive. And that is how I know that I picked the right partner.

David:
Before we get into today’s show, let’s hear a quick word from today’s show sponsors. All right. Thanks to our show sponsors as always. Rob, anything you want to say before we get into it?

Rob:
There is nothing that I’d like to say other than I appreciate you, man. I don’t know if anyone tells you that enough, but today I’m letting know, my friend, I appreciate you.

David:
Thank you, Rob, that warmed my heart.

Rob:
You appreciate me?

David:
Not that I’m going to admit on a podcast for everybody to hear, but you could be worse.

Rob:
We’ll fix that in post.

David:
You’re really-

Rob:
I could be worse. I’ll take it.

David:
You’re very okay. I’ll give you that.

Rob:
Hey, that’s no way to speak to your future social media manager.

David:
That’s a very good point. Rob has done a lot to help me as far as with the camera quality and with social media in general. So if you’re following me on social media, it will look better soon. Thank you for your patience. It’s been under construction for five years, and we’re finally getting around to actually finishing the rehab on my Instagram. Very good point there. Thanks for pointing that out.

David:
Today’s quick tip, if you’re interested in what we’re talking about, if you want to dive even deeper into a specific asset class, BiggerPockets has resources for you. Check out biggerpockets.com/events, where you can find a host of different boot camps, one of which is hosted by Tony Robinson on this specific topic, short-term rentals. So if this has tickled your fancy, if it’s caught your interest, if you have itching ears, go to biggerpockets.com/events and sign up for the short-term rental bootcamp or a different bootcamp that might suit your needs.

Rob:
I’d like to add a bonus quick tip here. If you’re looking to get in shape, just follow Tony Robinson’s workout routine. He’s jacked.

David:
All right. Without any further ado, let’s get into today’s show. All right. Number four. The fourth step we talk about is the property type. You’ve got a couple different options. Why don’t you run through those?

Rob:
Option one here is going to be your standard single family residence. This is most of my bread and butter here. This is a house, basically, just a house that you can go out and buy on Redfin. This to me is perhaps my favorite to go into because you can buy a house, and I don’t typically buy a single family residence within a neighborhood where I have close neighbors. I’m not against it. I own probably one or two that are like that.

Rob:
But I’m usually trying to find something that’s on half an acre or on an acre, something that’s a little bit more secluded. You have that luxury a little bit more in those national park type of areas, because usually houses aren’t stacked next to each other, like in the Smoky Mountains, dor example.

Rob:
This to me is probably one of the less risky ones specifically because you don’t have neighbors that can call the cops on you or get mad at you. You don’t have really too many people that you can make angry. You don’t have next door neighbors in a condo, for example, that they can be loud.

David:
That’s just a huge, huge point. If you’re going to do a short-term rental and the neighbors are super close, you are asking for problems.

Rob:
Happy neighbors, happy life.

David:
Yes. When you and I are looking at properties one of the first things we’re looking at is how close are all the other houses to it? This one’s on five acres and there’s 10 acres on each side of it. There’s nobody else around, that becomes much more desirable than if it’s a track house and they’re all right next to each other.

Rob:
And so then we get into things like multi-families, which is a duplex. I’m okay with that. I actually love the duplex strategy quite a bit. I was buying a house in Destin that wasn’t technically a duplex, but it was a main single family residence home. Then there was a pool, and then there was a carriage house in the backyard.

Rob:
And it wasn’t that I wanted to rent it out to two separate parties. I actually wanted to rent it out to just one really big group of people, like two families, that will pay me a premium to have their own set of bathrooms, their own kitchens, their own spaces. Because if you’re traveling with other people’s kids, if your kids are like my kids, they’re probably ultra wild. I don’t want my kids to be in the same house as other kids at night, when everyone’s trying to go to sleep and we’re trying to cook for each other and it’s like a whole thing.

Rob:
I love the idea of a multi-family where are two separate kitchens and you can rent it out to two families at a much higher premium than if you were renting out two houses separately.

David:
And then next up is we have the modified single family. This is one of my favorite asset classes. What’s your thoughts on that?

Rob:
So this would be if you’re converting a space into any kind of bonus space or anything like that, right?

David:
Yes. Taking a house and basically modifying it by either adding an ADU, converting a garage, splitting it into two different components. It functions as a duplex or a triplex, even though it’s just one property.

Rob:
Oh yeah, man, this is what gave me my jumpstart. I really attribute the wealth that I have today and everything that I’ve been able to build up to my house hack. Like I said, I had this in Los Angeles, it had a 279 square foot studio under it. I rented that on Airbnb. That was making $2,000 to $3,000 a month. And then I built a tiny house in my backyard. I was also Airbnbing that too.

Rob:
And now I don’t live at that house anymore. So now I rent to three different tenants. I rent to the people in the studio. I rent my tiny house on Airbnb and now I rent my main house on Airbnb. And it’s all three different types of stays. It’s long-term stays, short-term stays and mid-term stays. And so I’ll have basically a triplex.

Rob:
And on that property, it’s a $4,000 mortgage. Total, I think it brings it anywhere from eight, on a high month, $9,000. The cashflow is quite a bit for me. And it’s because I’ve modified a lot about that property and converted it to the ultimate house hack/triplex-esque type of place.

David:
And that is what you got to do in today’s market. If you want to be in the best areas with the best properties, you can’t just take it right out of the box. I think that’s where a lot of the listeners that are frustrating saying, “I can’t find good deals.” They’re looking for something that’s already there. In their mind, analyzing it in the calculator, looking at the cash on cash return to writing an offer is the job of an investor. And when that doesn’t work, they say, “Well, real estate as it work.”

David:
But you and I are putting a much, much more creative and detailed look into every single property. We’re sitting here and we’re saying, “This is what it would look as is, this is what it could be.” We’re seeing the vision like a coach that’s drafting raw talent. What can we turn this property into? And then we’re saying, if it was there, how would it be performing? What could we expect out of this player if we got them at their maximum ability?

David:
And then the question is, well, is that worth the time and effort it would take to get it there? Or could we find something else for less time, less effort that would perform at the same point? Just like Brandon and I used to say, you don’t find deals right now. You make deals and you have to embrace that that is what we’re doing.

David:
Not only are we looking to make a deal, but we’re understanding we are competing against all the other people that are trying to do the same thing. It’s not set it and forget it real estate when you get into the short-term game, it’s high risk and high reward. So your unit, your property has to be better than the other options and that’s how you mitigate risks.

David:
So that’s part of why we want to do this show is I’m trying to get people to understand the level of detail that you and I put into what we’re looking to do. And it’s not just run it on a calculator and then move on.

Rob:
And getting into the risky stuff, like luxury, that’s where you and me are starting to transition to. And all previous to now, most of the properties that I’ve purchased have been sub $500,000. But now as my time has grown more rare, I suppose, I’m really not looking to acquire real estate that’s less than a million dollars in the short-term rental game. And then we start looking at the deal that you and me are looking at. That’s a $3.4 million luxury home.

David:
So that’s a great point, that brings us into the last asset class, at least how I see it, luxury real estate. So let’s define what that even means. Because it could mean different things to different people.

David:
In my mind, the way I look at real estate and as I’ve described it in the Sold series I’m writing for BiggerPockets, you’ve got three tiers. You’ve got starter homes, which is where a first-time home buyer, what they’re trying to get into. You’ve got step up homes, which are typically, I got a starter home, I sold it and I used the equity to buy this step up home. These are going to be your B, A class neighborhoods, better schools, bigger house, amenities like pools, a little bit bigger lot, better location.

David:
And then you’ve got luxury homes, and this is going to be, this is more than anyone needs in a house. This is what you do when you have enough money that you don’t have to worry about money basically.

Rob:
It’s a little extra.

David:
A lot extra. A little, that’s exactly right. Now, luxury is not dependent on price point. Because if you call it a million dollar listing, in where I live in the Bay Area, that is not that impressive. It is actually incredibly unimpressive in a lot of different areas.

David:
But if you do the same thing in Kansas, you might have a mansion. So you can’t define luxury by price. You define luxury by its price in comparison to the other homes in the market. I look at luxury like its own asset class, because the people who are going to be renting that property from us are not the same people that are just a traveling nurse who needs a place to lay their head.

David:
This is someone who wants an extravagant experience, who’s going to maybe have a lot of people go with them and they want to have an amazing memory that they’re going to be… It’s not practical is basically what we’re getting at here. That’s what luxury is.

David:
Now some people own luxury properties to live in, so they can have a non-practical experience themselves. Other people like us buy luxury properties to rent it out to luxury people who want to have a non-practical experience, but our purposes are so practical. We’re trying to make money with this thing.

David:
So as you’re looking at different property types, if you’re going to get into the luxury market, you have to understand what you’re looking for and the quality of service you have to provide. Frankly, you can’t run out of batteries in a luxury house. You have to have a property manager on standby that if something goes wrong, the heater in the pool is not working, a bug gets into the house, yes, that does happen. They will call if a big bug ends up in a property. There is someone that, boom, lickety-split is on that and they are taking care of it and that person knows that their experience will be good.

David:
You’re probably going to have to stock the fridge with Cokes and other things that people are going to want. Maybe have a chef go by and cook for those people. It’s a higher detailed experience, but that’s why you’re going to make more money.

David:
So when you’re trying to choose your property type, we have the standard single family. That’s probably the least amount of work. You’ve got the multifamily. That’s going to be a little bit more work, but probably a little bit more profit. Because like you said, Rob, you have extra income streams.

David:
You’ve got the modified single family, which is the way you combine steps one and two into a property that hopefully gets you the best of both worlds, but it will be the most work. Then you’ve got luxury, which is a completely different animal, high risk, high reward, high attention. Anything you want to add on those?

Rob:
No, just a little. I said no, but a little bit. On the luxury side of things, what I’m really excited about, and this has been something that we’ve talked about a lot, because in some senses, we are moving a little bit away from the cashflow side of things. Because one thing that we’re uncovering here is, the more you invest, funny enough in this market, the return is actually going down just a little bit more. But we’re okay with that because if we’re buying the $3.4 million house, while we’re not necessarily cashflowing as much as we want, over 30 years, when someone pays for this house, it’s going to be worth double, maybe triple.

David:
That’s a great point. Now let’s say real estate continues to climb like it’s been climbing. This is something else you and I talk about, we should share. 10% per year is a pretty big number. I wouldn’t assume it’s always going to be that case, but in most of the markets we’re looking in, that’s what we’ve been seeing, sometimes even more. I’m just going to use 10%, because it’s around number. I don’t have to get my calculator out to do the math of 7.2% of whatever it might actually be.

David:
Let’s say that you buy a house for $300,000 and it appreciates by 10%. You’re going to make $30,000, which is nothing to turn your nose at. But this 3.4 million house that goes up by $340,000, the work is going to be roughly the same. The investment on our half will be bigger, but proportionally it’s going to be the same.

David:
Even if the ROI is slightly smaller than that 300,000, so let’s say we can get a 14% return, that other one could get a 20% return. It’s dwarfed in comparison to the increase of 10%. And the increase of the 3.4 property is probably going to be higher than the $300,000 one, because there are less of the $3.4 million properties. There aren’t as many of them to compete with. Builders are not going to be building houses like that. They’re going to make more of the $300,000 home.

David:
And then you throw in how much of the principal is being paid down with every single payment. You look at the whole picture, that starts to be a much more clearly advantageous financial decision, versus the $300,000 one, which it’s still a good deal. I’m not saying people shouldn’t get into it, but that tends to be, the value of that is that you’re going to learn the fundamentals of real estate at a lower risk for yourself. It’s like learning to swim in the shallow end of the pool.

Rob:
And even just going back to what we talked about earlier, let’s just say worse comes to worse, we buy a $3.4 million house, and then we just break even for two years, but it went up $600,000. Well, let’s sell it and make half a million bucks after all of our fees are paid off. It’s not really that sad. It’s not that sad of a scenario to break even right there.

David:
That’s right. And then another thing we’ve talked about just as far as mitigating risk, because I know if I heard you say that my first thought would be, well, you’re assuming it’s going to go up. When they go down by 10%, you’re going to take an even bigger hit. When they go down by whatever, you don’t know you’re going to be able to sell. And that’s absolutely right.

David:
But here’s another reason that Rob and I are looking in the luxury market for ourselves. If we’re getting $2,000 a night for this thing and the market becomes less demanding and we can’t get $2,000, if we drop our price to $1,000 a month, we are a much better option than the other options people were looking at for 800 to $1,000.

David:
So if we’re talking about a 6,000 square foot amazing estate that has its own basketball court, its own pool, its own movie room, its own game room, it’s got a place you can ride dirt bikes, it’s incredible. And you could go pay $1,000 a month to just rent a nice big house that has nothing, you might say, you know what, for maybe 1,100, instead of 1,000, we get that. Let’s just get one extra person in our group and let’s go do it.

David:
So in a sense, our risk is actually less, because we can drop our price more, still hit our nut and be a better option than our competition that can’t do the same thing. So we have thought about both ends of this. The upside is higher and the downside is also better in this situation.

Rob:
There are a lot of reasons to do this and I would ultimately shy away from this for a new investor. I’ve been doing this four or five years. David’s got a lot of experience in real estate too. And it’s like we could do this. We’re built for this. We got the experience.

Rob:
If you’re starting out, I’m probably not going to recommend anyone buy a $3.4 million house starting out.

David:
Great point.

Rob:
But work your way up to it. Scale accordingly. The reason I’ve always hit home runs on all of my portfolio is because I just was really strategic and tactical. And so I really took it day by day and I didn’t scale up too quickly. And because of that, I now have all the reserves and the cash that I need to get into an investment like this and survive if there is a dip.

David:
And have a partner that can benefit you there too. So this is what I want to wrap this one up with, all the fears that someone has as they listen to this, the what ifs, but what if this, but what if that, those are all very good. Instead of letting those stop you from moving forward, get them out of your head and write them down on paper or on a Google document, put them down somewhere.

David:
Then with your partner or yourself or however you’re going to do it, systematically work through every single what if and say what the plan is, if that happens. So if somebody was to get on here and challenge Rob and I, and say, what are you going to do if this happens or what are you going to do if that happens, there is a contingency for every single one of those that we feel confident that we can handle.

David:
Now, even if we don’t make money, we’re not going to lose the property. We’re not going to go bankrupt. That’s what we’re getting at here. It’s okay every once in a while to take an L. You’re going to have that happen in real estate, even buying the $300,000 properties, you can take Ls.

David:
The important thing is that it doesn’t take you out of the game, just like a poker player. You can lose hands. You don’t want to lose your entire pot that you’ve got on your side.

Rob:
You don’t want to re-buy in.

David:
That’s exactly right. And that’s the problem is when people start playing reckless, like I’m going to go big on my first deal. If you don’t know how to ride that bike, you should not be taking off the training wheels. You definitely shouldn’t be getting on a motorcycle that’s 2000 CCs. That’s what we’re talking about here.

David:
But if you’ve been riding them for five years and you feel very comfortable and you know how to handle it, it’s not the same risk as someone who’s new. So thank you for pointing that out. That’s very responsible of you, Robert.

Rob:
Hey, that’s Rob to you, pal.

David:
You got it. Number five. Our fifth step is the timeline. So this is also important. Before you invest in short-term rentals, you need to be thinking about what is your specific timeline for the property, the partnership, everything else? Why don’t you start with what you think we went into, Rob, when we were deciding on our partnership?

Rob:
I think we wanted to start with just one and get it right. And it would be very easy for you and I to be like let’s go buy 15 of these things, because we can. But we’re really focused on setting and solidifying a strategy. We said, okay, let’s start with one. Let’s start with a $3.4 million property. We’re starting here in the big leagues obviously, but let’s start with one and let’s perfect the systems needed to run a luxury property that’s on five acres.

Rob:
Who do we have to hire? Do we have to hire several landscapers because it’s five acres? Do we have to hire a team of cleaners? I think that for us has been the really nice thing is that we’ve been taking it slow. I think once we perfect that one, then we can really assess how quickly we want to scale up.

Rob:
I don’t know. I would imagine my goal, I don’t know about yours, you can tell everyone here for the world to see, but I would like to be acquiring a luxury property every two months.

David:
I believe that that goal came from our conversation. So I subconsciously planted that into your mind. But, yes-

Rob:
You Inceptioned me. I hate when you do that.

David:
That’s exactly right. That’s a great movie. If anyone has not seen Inception, it’s the like Matrix, but less confusing. So I would highly recommend people check that out. So yes, that’s exactly right.

David:
Now, when it comes to our goals for the properties, one of the things that we talked about as far as our timeline was long-term wealth. You and I looked and said, all right, we could either get a whole bunch of cashflowing, high ROI properties like those cabins that we mentioned, that would become our full-time job if we scale this thing up. Or we could be a little bit more careful about what we buy, a little more focused to play the long-term game. They’re going to cashflow most likely a little bit less. We’re going to have to keep more in reserves, but over a significant period of time, they’re going to perform way better.

David:
So you and I chose a path that I would describe as long-term wealth. Other people who might not be in our position, they might not have the resources we do, the experience we do. They might still be working jobs, and not even have the time we do. They might need to go for short-term cashflow.

David:
So that’s an important thing that you’re deciding either with your partner or with yourself, which of these properties are you going to be pursuing? Because if you’re trying to get maximum cashflow and maximum long-term wealth out of one property, it’s probably not going to work.

Rob:
It doesn’t happen from one property. It happens from a very strategic journey over years. You build many, many properties. Ultimately, to me, I’m working towards having a solid portfolio. I have 14 now. I would to actually take on less, but take on more strategic. And in the next year, I’d like to be at 20. When I was on the BiggerPockets podcast six months ago, I wanted 40, but no, I’m trying to really diversify correctly.

Rob:
And the way I’m doing that is now I’m moving into luxury real estate. I just want to have a really well balanced portfolio to just cover me. I think diversification, for me, I finally have figured out. It’s not necessarily about chasing cash. It is sometimes about chasing stability and that’s me. I’m an adult now. I’ve figured it out. Thank you, David.

David:
I’m an adult now. That’s funny. I need a little stability in my life. I got rid of the pocket protector and the 401(k) and I need to replace it somehow. You made a really good point I want to highlight, that had to do with, you’re not going to find it all in one property. That’s exactly right.

David:
So the emotions that somebody has as they’re trying to figure out real estate investing, typically is I want appreciation and I want cashflow, I want freedom. I want my time back. I love real estate. They have all of these feelings that they are then trying to figure out, how do I express them? And the mistake comes when they try to express it through the same house.

David:
I don’t look at a house and say, “I need this to provide it for me.” Just like one relationship can’t provide everything you need in your life. You need a life full of different relationships that meet different needs.

David:
Your portfolio should be that way. Your portfolio should provide cashflow, not a house. Your portfolio should provide appreciate, not a house. And you take a lot of risk off of yourself when you understand, all right, I’ve built up to 10 to 15 of these type of properties that I use the BRRRR method to get, now cashflow. I have most of my capital back. With that, I’m going to buy five properties in markets that I think are going to appreciate very solidly with the capital that I pulled out of these deals.

David:
Once I’ve got those two things working really well, solid cashflow, and I’ve got quite a bit of equity, now I can buy one or two of these maybe luxury short-term rentals like David and Rob are talking about. And if they don’t go well, that’s okay, because the rest of my portfolio can support it. This is in that same video I talked about on YouTube. I call it pyramid theory.

David:
And so that will take a lot of pressure off of you. If you say, you know what, I really just need a buddy in my life. Well, that might not be your spouse’s job to be your buddy for everything. You need to go make some friends. And then if you got some friends and you’re like, man, I’m just feeling romantic right now. That’s probably not your friend’s job to meet that need either. Maybe you’re going to need a spouse in your life.

David:
And then you have different people that you work out with, people that I do jujitsu with, people that I talk business with, people that I talk spiritual things with. When you have a more balanced life, you don’t put pressure on any one thing.

David:
And for so many people listening, I really feel like what is holding them back from taking or making progress in real estate is they’re trying to find it all in one deal. And you and I after doing this for a couple years have realized it’s not healthy. It doesn’t work that way, but you can get it all out of one portfolio of deals.

Rob:
Everyone’s chasing the home run that they forget about the singles or the doubles. Get the bases loaded, then go for the home run, because then it’s a grand slam.

David:
And you know the other thing I learned, because I used to play baseball and I was not nearly as good as basketball, but in baseball, if I tried to hit the home run, I rarely ever did. Home runs came when the pitcher made a mistake. They just left the ball out there that they shouldn’t have. Basketball would be the same thing. If I tried to get a steal and I reached, I would either foul them or I’d be off balance and they’d go past me.

David:
If I waited for them to make a mistake with the ball, the steal would come to me. It was just like this thing I learned, steals happen for you. You don’t really make them very often. You can create pressure that’s more likely to have them make a mistake, but still it’s a mistake that allowed the steal.

David:
Good deals come like that. You create pressure by putting yourself in the right environment. You make the right relationships. You have the conversations. You can’t make that seller that’s not motivated, be motivated. You’ll just foul them and you’ll ruin the whole thing.

David:
But being in that position, you will come across the person who’s like, they made a mistake in life. They’re financially strapped. They don’t want the property. They didn’t take care of it. They need to get rid of it, and boom, that’s your home run or that’s your steal. That’s your win.

David:
And so just adjust your mindset when it comes to that. Home runs happen. You can’t really make a home run happen. You can’t make a pitcher throw a bad pitch. You just take advantage of it when it comes your way. But you should focus, like you said, Rob, on these singles, on these doubles, because if you hit a home run with no one on base, it’s still only worth one run. If you’ve got three people on base when that home run comes, because you have a portfolio of other properties, and then rates drop and you can refinance four properties and get better rates or pull your money out, that functions as a home run if that makes sense. Do you have anything you want to add on that?

Rob:
I think it’s a consistency game, man. That’s the greatest home run, that’s the only way that you can control home runs is just being consistent. I get a lot of people that are like, “Man, how do I go viral?” And I’m like, listen, I’m pretty good at YouTube. But the only way that I ever go viral is I post a video every single week. I’m on my game every single week. And that’s the only way that you can control anything is with consistency, I think.

David:
I love that. Now we’ve got a sixth step, a bonus step that we did not tell you about, but we love you.

Rob:
Bonus. Let’s do it.

David:
At BiggerPockets, we just want to overflow you with value and do everything we can to help you make some money. So here is the bonus step. In stage one of choosing your location, your market and your strategy, which we’ve actually taken that and split this up into two podcasts. So you’ll hear us talk about stage one as these three things, but it’s being split over two different shows.

David:
The other thing that we recommend you do is you decide how you will divvy up the work. That’s something that either you and your partner need to decide on, or you yourself need to decide, how are you going to handle these components? Rob, if you want, we could just alternate back and forth between the steps that we’ve come up with that needs to be divvied up when someone’s going to buy a short-term rental.

Rob:
Definitely. So if you’re going into a partnership here, this is really important, because property management is going to be something that’s going to come up. Someone needs to manage the property. Obviously, you can go-

David:
Can you give us some examples of what that means in practical terms?

Rob:
So if you’re managing an Airbnb, that would consist of things like messaging guests back and forth, scheduling any maintenance. If something is broken, you need to get it replaced. You need to communicate and schedule all of your cleanings. You need to make sure that your cleaners are communicating with you, that things are broken. And then they need to communicate with the maintenance person, contractors that need to come in and fix any big repairs.

Rob:
I had a roof leak one time. Maintenance person, finding them, I’m sorry, not maintenance, lawn maintenance, finding them, finding someone reliable that will come every single week. Last one, pool service, if you want that. Oh, pest control. So these are all moving parts that you have to figure that out. You have to coordinate with it.

Rob:
My pest control person still contacts me every two weeks. She calls me, “Hey, I’m going to come by on Monday. Is that okay?” And then I have to look at my schedule and say, “I’m booked that day. Come the next day.” So, that’s a lot of work and it’s also a little bit of work, once you actually get your systems down, your automation, but still, you still have to do it. Someone still has to figure out how to automate all of that. Someone has to do it.

Rob:
Now. I’m a big fan myself personally of self-managing. I teach people how to self-manage. That’s my jam. I prefer to self-manage, because I don’t think in the Airbnb space, it is… Again, this will get into time and value of time, but I don’t think it’s worth it to hire a property manager necessarily, because property managers in the short-term rental game can charge between 15% and 30% of your gross revenue. That’s a lot.

Rob:
What’s standard for long-term rentals, is it eight to 15?

David:
6% to 10%. So if it’s a higher, what I pay in California, because the rents are higher, I pay 6%. When I get in some of the cheaper markets, it’s more in the 8% to 10%.

Rob:
10 is what I’ve heard back and forth. So it could be up to three times more than a long-term rental property management company.

David:
Or five times more if you look at 6% to the 30%.

Rob:
That’s exactly right. So that’s a really big difference. I think especially if you’re entering a partnership, if there’s someone that’s willing to put in the work and do a little bit of the sweat equity side of things, that is going to make everybody a lot more money.

Rob:
Because I’ve gone into partnerships where, when I work with investors, for example, we will charge them anywhere from 7% to 10% to manage the property. That’s a really good deal because we’re like, “Hey, we’re still going to charge a little bit, because our time goes into this, but we’re saving you…”

David:
But it’s a third of what they would pay from someone else.

Rob:
That’s exactly right. So that’s the benefits of it.

David:
I would also add, in addition to it being cheaper, if you manage it yourself and if you do a good job, it’s also better. So the problem isn’t that proper managers want money, it’s that they might not be good at what they do because they don’t care. A lot of property managers are trying to do the minimum they can, especially if you negotiate a better rate for yourself. You’re just disincentivizing them to care.

David:
And with short-term rentals, the quality of management is exponentially more important than it is in a long-term rental. Your long-term tenant says, “Hey, the toilet handle is jingling. Can you get someone to fix it?” If it takes a couple weeks to get someone out, they’ll deal with it. That’s their house. That’s where they live.

David:
Your short-term rental, if they don’t have enough sheets in the house or if they smell because the cleaner didn’t do their job right or something, that’s a bad review on Airbnb that decreases future bookings for a very long period of time. It’s a huge, huge, huge deal. The quality of work for short-term rentals has to be significantly better than with long-term rentals. And if you’re doing it yourself, you have more control over how things go down.

David:
Now, Rob and I agreed that we would take a chunk of the revenue and pay it to him and his team, since they will be handling the management of the property. But even if you’re not doing a partner, you need to decide, am I doing this myself or am I going to hire somebody to do it?

Rob:
And again, there are pros to hiring someone to do it. I understand that. And as I grow and develop and all that kind of stuff, develop my philosophies, I think my brain is done developing now. But my philosophies, then I would say, I’m starting to now come around to the idea of it.

Rob:
But what I’ve done is, I have an assist that helps me across all of my businesses and property management is just one way that she helps me. I could still be involved with it, because I don’t ever want to feel like I’ve grown too big to just send a guest a message. I’m not in the weeds of my business, but I’m in there. I’m bird’s eye viewing it. I step in when I’m needed.

David:
Well, I’ll give everybody a little behind the scenes look. I’m actually looking at making a property management company that will manage short-term rentals. It won’t be full service, so it’ll be cheaper, but it’s a company that’s going to handle the bookings, the revenue, getting you going. And so they’ll be responsible for making sure that there’s people staying there. And then the person who owns it can be responsible for making sure that everything gets done.

David:
I see that there’s a really big need here. Rob doesn’t have time to manage them all. He’s incredible at the stuff he does, but for a lot of you listening, send me a message and I’ll get you connected if that’s something that you think you might want some help with.

David:
The next thing we have here is bookkeeping. So bookkeeping also becomes a little bit more detailed when it comes to a short-term rental because there’s just more income and expenses that are coming out. With my long-term rentals, I get a rent check every month. Sometimes it’s two, because they don’t pay the full amount right away. And then every once in a while, there might be an expense on there that’s not much. I get a statement from a property manager. My bookkeeper takes it, puts it into my information for taxes and that’s all there is to it.

David:
But with a short-term rental, I’ve got several different sources of income at different nightly rates for different periods of time. I’ve got several different types of income. I’ve got cleaning expenses. I’ve got registration expenses. I’ve got the actual booking of it.

David:
I’m sure Rob could probably come up with some more, and then sorry, that was [crosstalk 00:34:36].

Rob:
Batteries. Lots of batteries.

David:
That’s in the expenses side. And then on the expenses, I said expenses, I meant income. You’ve got all the materials that you’re getting, all of the products that you’re buying, all of the different people, the handymen, the cleaners, the things the cleaners had to buy, the things the guests needed that we had to go drop off last minute, the property management themselves. There’s a lot more expenses associated. So bookkeeping becomes a much bigger issue and you’re going to have to decide how that’s going to be addressed.

David:
Rob, what’s your preferred way of tackling that in your properties?

Rob:
I have a bookkeeper, and my bookkeeper basically creates a profile for every single one of my properties. I thought about doing it myself, but then it was one of those things that I had to really be honest with myself and say, am I going to be punctual about this? And the answer was no. So I hired a bookkeeper. They can be affordable. They can be expensive. It’s up to you.

Rob:
But for me, because of how fast my portfolio grew, I started getting very serious about tracking and everything like that. I sync up all my different bank accounts and all of my different credit card accounts and everything like that. Now I’m starting to have to really get into the nitty-gritty of getting a separate credit card for every single property, so that we can match it up to the different profiles.

Rob:
But luckily my bookkeeper is much smarter than me at the mathematical stuff. So far, it’s been the best decision I’ve ever made.

David:
I think you saying mathematical might have been the most funny part of this entire show.

Rob:
Mathematical.

David:
I haven’t heard that since third grade. Good job. All right. Why don’t you move us on to the third segment in the bonus step?

Rob:
This next one’s going to be setting up the furnishings, the decor, any kind of rehab work. If you’re going to partner up with somebody in this world, then you should really lay out responsibilities here, because a lot of people really underestimate the furnishing part of it. We’ll get into this in another episode. We got a whole episode where we’re going to actually dive deep into the nuts and bolts of analyzing and furnishing and everything like that.

Rob:
But what I do want to say about this is, a lot of people, they underestimate furnishing. They’re like, “Oh yeah, whatever, you’re going to move a couch? Well, how hard can that be?” And then you get there and you’re like, all right, we have three days. And then you’re late to the airport because someone was cutting up a box and you couldn’t find a place to dispose it. And oh man, I’m getting all the flashbacks and everything like that. I’ve had some crazy times.

Rob:
But most of my Airbnbs, I’ve actually set up with my partners. I think there’s a little bit of comradery there. So I would recommend that if you have a partner in the deal, even if one is like, “No, you can do it,” if y’all agree on that, I would definitely recommend just everybody. It’s a full effort. It’s not a one person job. Setting up an Airbnb can be a two, three, four, five person job.

Rob:
There are some diminishing returns there for sure. I’ve had eight people in my Airbnb before where it’s like, what are we doing? Everyone’s doing a little bit, but not a lot. And it ends up being worse than if there were just three people there.

Rob:
But same thing with rehabs. Some partners are very handy and they want to hop in there and they’ll say, “I’ll just paint the wall. It’s so much better than hiring a handyman for $1,000,” or whatever. So regardless of what that is, just make sure that there’s some level of compensation or some level of agreement for how everybody’s going to maintain the status quo.

Rob:
My partner just went out and completely set up a new unit for us in West Virginia. He was happy to do it. He has to do it out of the two of us, because of my schedule for this month. And I was like, “Well, let’s just pay you, man.” And we’re going to pay him $2,000, $3,000 to go and do that for a week. And he was like, “Dude, that’s awesome. Thank you.” And I was like, you deserve it, because without you, I couldn’t do this.

Rob:
I think throwing a bone to your partner in this category specifically will go a long way, because resentment can start as early as furnishing in Airbnb.

David:
I said on Facebook a while ago, I think I said bitterness, but it’s very similar to resentment is the lactic acid of relationships. When you’re working out, lactic acid builds and at the point it gets to be too much, at least this is my understanding. I know there’s fitness people that are about to DM me and say, “That was totally only 99% true. You missed this part.”

Rob:
The YouTube comments are going insane.

David:
Yes. There you go. The basic understanding is that lactic acid builds and then the muscle can’t perform. And then it has to be flushed out before it can perform again. And during that period of time, it regrows. But if you let bitterness and resentment leak into your relationships, the relationship stops performing. And here’s the thing is lactic acid doesn’t really do anything to actually help you perform better. It just slows you down. So resentment doesn’t have any positive impact on a relationship. It doesn’t protect you from anything. It’s totally bad. So you’re very wise to mention, you don’t want that to build.

David:
The part I want to highlight here is that this is not passive income. Short-term rentals are not passive income. They are high income. They are real estate investing, but real estate investing and passive income are not synonymous. There are ways of doing it that are passive. There are ways of doing it that are not passive and there’s a whole lot in between.

David:
So this setup portion is, what I tell people is imagine you just bought a business. You bought a Taco Bell or a 7-Eleven or some franchise. You have looked at it from the outside, but you don’t really know much about what you got. You’re going to have to show up and look at all your employees, who’s got a good attitude, who’s got a bad attitude, who needs to be fired, who needs to be promoted? What’s your inventory look like, how the book’s been kept. It’s a lot of work when you first buy it to try to get it running the way you want.

David:
That’s what you’re doing on these short-term rentals is you’re showing up and you’re trying to get the business set up the way you want it to be, the furniture, the decor, everything you want that’s different than what the previous owners had, and that’s work. So be prepared. That’s why we’re going over this in the bonus step. If you’re going to be doing that work, be prepared knowing you’re going to go into it and what is going to be done. And in a future episode, we’re going to dive deeper into all of the steps that are involved.

David:
All right. And that brings us to our last point, are you going to work with investors? Now, Rob and I are bringing this up because we are raising money to help buy these properties. Like you said, we’re going to buy one together, maybe a couple together. Then we’re going to start raising money from other people, so people can invest with us in these properties. They’ll be paid out, just like if it was money in the bank.

David:
Now, some people are going to just use their own capital and you can get that from refinancing houses, from putting HELOCs on existing properties. Typically, if you’re going to try an expensive Airbnb, you probably already have quite a bit of capital saved up. So odds are, you’ve done a little bit of real estate investing yourself if you’re jumping into that.

David:
But if you’re not and you’re looking to raise money, it’s very important that you understand that cashflow will cover the debt service of both the loan that you’re taking out and the investors that you’re going to be paying out. That’s one of the reasons that bookkeeping and analysis is very important, because you’re not just investing your own money. You actually have to take care of someone else’s money, even more importantly than if you did it yourself.

David:
So if you want to invest with Rob or I, please reach out to us. You can go to investwithdavidgreene.com and you can learn a little bit more about it. But if you’re also looking to do this yourself and you want to invest with other people, that’s one more reason why you better have a lot of money in reserves. I personally don’t like the model that says, “Hey, invest in real estate, you get some of the equity, but if it doesn’t work out, you invest it at your own risk.”

David:
Some people do that. In fact, a lot of people do that. The majority of people I think do it. I just don’t like it. I don’t like it because I can’t sleep at night. I don’t like it because so many people trust, “Hey, if I’m saying you should do this,” that that’s why they’re investing in the deal with me, and they’re not doing it because they’re looking at the deal. They’re doing it because they’re looking at David.

David:
When we first talked about this, Rob, I’m curious, did you have concerns, fears, were you excited? I don’t think we ever talked about what emotions you went through when we talked about doing this with investors.

Rob:
Wow, man, we’re going to air it for everyone to see here. No, no. I’m excited, man. I’ve worked with investors quite a bit. I work one-on-one with investors and I think what investors really appreciate when they work with me is that they see the pain. They see the future pain. They see, I really take an investor’s dollar very seriously. I always say in my mind, an investor’s dollar is worth four of my own. And so if I lose an investor’s dollar, which has never happened, but if I do, it hurts me like I lost four of my own. That’s how I really need to approach it.

Rob:
Because I always make it very clear how serious I am with all of my analysis. I shoot down stuff. I’ll have investors that pitch ideas to me that are just not good or they’re okay, and I’m like, “Listen, I understand why you think that, but let me be real with you.” I try to just be very real with investors of what has worked for me, what doesn’t. If there’s something that I haven’t really tried before and they’re pitching that to me, I’m like, “No, I’m sorry. It probably will work, but I’ve never done it.”

Rob:
I think a little bit of honesty with your investors and your commitment to making sure that their dollar goes a long way is super important. I think I’ve had a couple investors that have been not annoyed, but a little like, “Hey, I thought you were going to move faster on this.” And it’s like because I haven’t found you the deal yet, man. I found a bunch of deals that comped out here, but for it to be Rob stamped or whatever, it’s got to be here.

Rob:
It’s like a fault and a good thing that it’s like I’m over critical of every deal that I go into, something that you and me talk about quite a bit. And it’s like I’m happy… I used to be a lot more of a risky person. And now when other people’s money is on the line, I’ve actually become really conservative with how I approach deals.

David:
It’s the way you drive when you’re in the car yourself versus when your kids are in the back seat.

Rob:
Exactly. That’s so perfect. Yep.

David:
So one of the ways that we are structured, and I am saying this because I highly recommend anyone else who’s looking to raise investor money, please consider what I’m about to say. I am keeping enough money in reserves that even if some horrible thing happened, a tornado ripped the house off the ground, aliens abducted it, and they just sucked our property off of the Earth.

Rob:
Hate when that happens.

David:
Just in case, we have enough money set aside that investors will still be paid on the investment that they made. I just wouldn’t be able to move forward if that wasn’t the case. This is not one of those, “Hey, it’s on you if it works out or if it’s not.” And so if you’re investing with someone who’s never done it before, or they don’t have any money themselves, I would just be way more cautious. If they haven’t learned how to manage their own finances, I wouldn’t trust them with managing your finances, even if they’re very charismatic or hardworking or you’re impressed by their knowledge base. There’s a little more that goes into, there’s some discipline that goes to managing money, in addition to just the skill or the knowledge of investing in real estate.

Rob:
I think there’s always a little bit of due diligence that’s needed. I think it’s important to reveal that due diligence, so that they’re like, “Oh, okay, they’re pretty serious with my dollar.” I try to make that as clear as possible, as soon as possible.

David:
All right. Well, I hope you have all enjoyed the first and second part of our series for choosing your location, market and strategy when it comes to short-term rentals. Now there will be future episodes in this series that we will be diving into, so keep an eye out for those.

David:
Please leave some comments below and let us know both on the YouTube page and on biggerpodcasts.com/podcast what you think. Did you like the deep dive into a specific strategy? Would you like it if we would actually maybe analyze a deal live on the podcast for you to see how Rob and I break down both the pros and the cons of a property and weigh out if this would work?

David:
We actually have a matrix that we use that incorporates five different elements that we think are important in real estate investing. And when we’re looking at a deal, we evaluate it through that matrix. So we’ll go and say, “Well, how does it affect this one? How is it affected by this one? How does it weigh out?”

David:
I just want to know, what would you guys like to see more of and what did you like about this show? So please leave it in the comments. If these are popular, if you like having us go deep on one specific strategy like this, tell us. We will do everything that we can to do more. Anything you want to add, Rob?

Rob:
If anyone wants to hear it from you directly, if they want to just find you online for those short-term rental knowledge bombs, my friend, where can they find you?

David:
They can find me on all social media @DavidGreene24. And then I have a YouTube channel as well. But what I basically do is when we’re doing in the podcast, I’ll take a concept that I was like, that was really, really good, and I’ll dive deeper into a video on that. I was describing how you diversify risk in a portfolio. I’m going to make a video on that, cashflow versus appreciation, I’m going to make a video on that. So oftentimes what I hear people say is, “This was a great point. Can you talk about it more?” Well, I get buried in DMs. I can’t answer every single person individually. I try to make a video there.

David:
And I know you’re no slouch on YouTube yourself. Rob is a bit of my… I’m the Padawan learner and he’s the experienced Jedi when it comes to YouTube. He does a lot.

Rob:
We got to do a collab, man.

David:
Yes. that’s a good point. If you notice my camera, it looks like this because your camera looked… I’m not as handsome as you, I’m still working on that.

Rob:
I disagree.

David:
You’ve done a lot to help me in that area. So where can people find you if they want to learn more about what’s going on in the brilliant Jedi mind?

Rob:
Well, as always, you can find me on YouTube at Robuilt. A lot of people say Robuilt, that’s fine if you want to. But Robuilt, like Rob built it. R-O-B-U-I-L-T. You find me on the Gram as the young kids call it, @Robuilt as well. TikTok at Robuilto, because someone snagged that Robuilt from me.

David:
I love that you say that every time. I still think Robuilto is hilarious.

Rob:
It’s important because I think this is a sign that’s like, oh, okay, I’ve made it because I’ve got a lot of scammers that will make fake accounts of me. By the way, just anyone watching this right now, I will never ask you for crypto or Forex or any of that other stuff. I will never ask you to DM me on WhatsApp either. But I always have to clarify because there are a lot of Robuilts.

David:
That goes for both of us. I have a scammer, I get them all the time. It’s usually some derivative of DavidGreene24. So the current one is-

Rob:
It’s DavidGreene25.

David:
Yes. DavidGreene024, DavidGreene_24, David Green with no E at the end, 24.

Rob:
Or David dah, dah, dah, Greene 24.

David:
It’s always like that. So look very closely at the screen name. Scott Trench ha the same thing going on. There’s a Scott with three Ts. And so what happens is people will make these fake profiles. They’ll message you, because you trust us, then they will ask you for money or they’ll ask you to buy crypto with them, or invest in some course they have. They’re ripping you off. So there’s nothing we can really do about it. I would love it if I could get that check mark from Instagram finally, so you would know if it was me or if it was Rob, but that’s very difficult. Instagram is-

Rob:
2022, man, we’re going to get those blue check marks.

David:
It would save a lot of people money. But in the meantime, please pay attention to that. We don’t want you to get ripped off and then follow Robuilto. [foreign language 00:49:00].

Rob:
[foreign language 00:49:02].

David:
[foreign language 00:49:10]. I don’t know how to say I would appreciate it, but I would like that. [foreign language 00:49:24].

Rob:
[foreign language 00:49:24].

David:
[foreign language 00:49:24].

Rob:
Robuilto.

David:
Robuilto. On YouTube. All right. Enough of these shenanigans. Thank you everybody for your time. We really appreciate you listening. Let us know in the comments what you think, reach out to each of us and tell us what you would like more of. We will let you get out of here, but keep an eye out for future shows in this series of how to get your first short-term rental with Robert mathematic Abasolo. No. With Robert mathematical Abasolo. This is David Greene for BiggerPockets, signing off.