Blog

Dave:
Hi, everyone. Welcome to On The Market. I’m your host, Dave Meyer, joined today by Kathy Fettke. Kathy, how are you?

Kathy:
I’m great. This is going to be a great interview. I can’t wait.

Dave:
I know. I love talking about these future technologies in the housing industry. It’s so much fun to imagine what might come of all of this.

Kathy:
A lot of people, fear technology thinking it will take away jobs and oftentimes it does, but oftentimes it brings on new jobs that people like even more. All I can say is the next 10 years are going to be really exciting, big technological advances, and I think this is going to be one of them.

Dave:
Absolutely. I think for our audience it’s especially important to pay attention to just some of the trends that Chris is talking about and how efficiency and productivity are huge barriers to progress in the housing market and to developers and to investors who are frustrated by the high cost of building new homes or just existing homes have gotten really expensive because there is a lack of supply. Chris presents a really interesting idea about how we might be able to add more housing supply at a cheaper cost, and there’s some other really interesting benefits to this method of construction that you’re probably going to be very interested in.

Kathy:
Absolutely.

Dave:
All right. Let’s jump into it. Let’s bring on Chris Anderson, but first we’re going to take a quick break. Chris Anderson, CEO of Vantem, thank you so much for joining us here On The Market. It’s a pleasure to have you.

Chris:
Well, Dave, thank you so much. Hi, Kathy. Good to see you too. I really appreciate you having me on.

Dave:
Could you just start by giving our audience a little bit of background on how you’re involved in the real estate industry?

Chris:
Sure. So Vantem, we have a proprietary technology that allows us to build affordable energy-efficient homes and the way that we do that is through volumetric modular construction. It means that we’re building homes in factories, doing it in a unique way and working with developers to deliver products that are more affordable and have a higher energy efficiency than traditional construction.

Dave:
I know Kathy and I are both chomping at the bit to ask questions about that, but we’d just love to know about you personally. Did you found Vantem, were you in real estate or how did you come to be the CEO of this company?

Chris:
Yeah, the long and winding road. This is my second entrepreneurial endeavor. I was the co-founder of another company, woo, about 30 years ago now, and we were in the business of manufacturing, construction products made from sustainably harvested hardwood. So we were making things like doors and windows, flooring with factories around the world and shipping them to places like Home Depot and Lowe’s and into Europe and so forth. The idea of what is now Vantem came out of that company because we’d travel around and we’d look and see these job sites where our windows and doors were being installed, and here we had this really modern factory making product within a thousandth of an inch tolerance. You derived to the construction site and the window opening would be three inches off. Everything was being done in a really old school way like it had been done 100 years ago and all this stuff that we saw in terms of productivity and tight tolerances that were so prevalent in other industries just were not present in construction.
So we figured there had to be a better way of doing it, put together a really talented team to try to figure out, “How can we rethink this system, the whole construction system and address the issues, productivity, later also, energy efficiency?” That’s how we came up with what is the core of the proprietary technology that Vantem now is deploying. After we had a good exit from our first company, I started what is today Vantem and came together with just a great private equity fund by the name of TIM Capital, who has been along with us since, and we’ve been deploying this technology into the space.

Dave:
Well, congratulations on your success of your first company. That’s incredible. I’m curious, when I hear modular homes, I know they’re more modern, but I think a lot of people associate it with Sears track homes and this old school and a certain type of product. Can you tell us a little bit about what your mission is and how you’re trying to evolve the idea of modular homes?

Chris:
Sure. Yeah. Unfortunately, a lot of people do think of modular as something that’s really boxy and simple and that’s absolutely not the case. When we started out along this road, one of the key things that we set out as a goal for ourselves was that whatever technology we developed would be one that when you were done, the home that we would deliver would look and feel like a traditional home that people are used to living in and used to seeing. So a Vantem home, even though it’s been made in a factory, when you see it finalized it would not be one that you would recognize as anything different than a traditional home. I think that’s just really an important difference, because just because you’re building something more efficiently doesn’t necessarily mean people are going to really want to live in the home and aesthetics are important. So we’re really proud that what we’re able to do meets all the different architectural demands that creative architects might have.

Kathy:
Chris, I’ve been covering stories on modular homes and new techniques for building more sustainably and more affordably, and yet, it just doesn’t seem to be getting traction. It’s not catching on. If anything, it’s got a bad rap. I’m in California where you’d think that we’d be all over this, sustainable, affordable, we need it. You probably heard the story in LA that we’re trying to build affordable housing and it was what, $837,000 per house for the homeless-

Chris:
My God.

Kathy:
So is modular getting more acceptable now?

Chris:
Well, let me step back a little bit. I think that the biggest problem, my critique would be that as people have tried to address how to do modular construction or be more efficient by automating construction, they didn’t step back and rethink the entire system. What I mean by that, it’s like people have said, “All right, let’s automate agriculture,” and they set out to design a mechanical four-legged horse instead of designing something completely different with a tractor with wheels and that’s just a much more efficient way of doing things. Most of the modular manufacturing or factory built manufacturing still is trying to build using wood framing or steel framing. These are complex systems, and so you bring them into a factory and yes, you have the efficiencies of building in a factory, but you have so many parts that you’ve got to put together that automating all that is extremely complex and extremely expensive.
The equipment to automate all that suddenly is a tremendous ticket, and that starts to filter its way into the cost structure. There’ve been examples of companies, I won’t name names, but that have not made it because they just absolutely over-automated these traditional systems instead of stepping back. So the way that we have approached it is to really rethink that system, and we don’t use frames. We don’t use wood framing. We don’t use steel framing. We don’t use bricks. We don’t use cement. We replace all of that with a very simple structural panel that replaces absolutely all of that. So suddenly, you have a product that is much simpler to build.
It has a lot less parts. We build these big panels. I imagine they’re four foot by 10 foot panels that are the walls, they’re the floor, they’re the roof of the modules that we make, and they’re the final surfaces. They don’t require more cladding because they’re fireproof and they’re moisture proof and weatherproof, so you don’t have all these extra layers, all this complex system to deal with. When you bring that into a factory automating that suddenly is also simple. The equipment that we have is so much less expensive and faster than what you would see in a traditional volumetric modular factory. I think that’s at the core of the difference between what Vantem is doing and what some of the other folks in the field that maybe are experiencing some problems have been doing.

Kathy:
What seems even more outdated than today’s construction is the whole process, the planning departments, the elected officials who know absolutely nothing about construction. How are you going to be able to get this through the system so that it’s accepted with the cities and with lenders? Let’s start with the planning departments.

Chris:
All right. Well, so we have been facing those exact challenges for years and other markets. We started our rollout in 2008 and because of what was going on in our home market of the U.S. in 2008, which we all remember, not a great time to be building in the U.S. We started our rollout overseas. So we started in south America and all the same issues that we have in the States are present there and to a certain extent, even more so. They’re even more complicated to get your approvals and whatnot. Now, the way that we have gotten across those hurdles is number one. The product that we designed from day one had code approvals in mind, so when we designed these panels and we designed the way that we were going to do this system, we were thinking, “How are we going to meet the fire code, the specific testing for the fire code? How are we going to meet the acoustical codes? How are we going to do all these things?” That’s baked into the way that the product was designed.
As we’ve rolled this out in other countries, we’ve been really successful in being able to get the code approvals and get the code officials to understand how all of these systems work. Now that we’re rolling out in the U.S., I expect it to be quite similar. Now, the other advantage when you do volumetric module and you’re doing about 80% of the whole job in a factory, rather than on-site, the inspections are happening in the factory. So if you do have a new product and a new system, one of the advantages is that you are working usually with one code official that comes into your factory and is looking at the product while it’s in process.
You’re not dealing with every little town’s code officials, which is really where you run into the problems, because those folks are usually less informed, particularly as you’re looking at new innovative systems. So volumetric modular gets inspected inside the factory, and when it relieves the factory, it leaves with this approval tag that already shows that it’s code approved, that it meets the codes. When it arrives to the job site, the only thing that the local code officials really are having to deal with is inspecting things like the foundations and the more normal part of the job site. It actually is not as complicated as it would be if we were site building all this product.

Kathy:
What about lenders, getting them on board? Have you seen any momentum there?

Chris:
We’re not seeing any pushback. I think the main reason is we’ve got more than three million square feet of product that’s been built in all kinds of places. We have homes that we’ve built in the driest desert in the world. We have structures we’ve built on the South Pole. We have structures that have survived the strongest hurricane on record, Hurricane Dorian in The Bahamas and structures that have survived 8.2 magnitude earthquakes in Northern Chile.

Kathy:
Wow. That’s amazing.

Dave:
Pretty good record.

Chris:
Well, and I think that’s what people want to see. That’s what banks want to see. Right?

Kathy:
Yeah.

Chris:
They want to see that resiliency. They want to understand that these are structures that’ll be around, and so we have structures that have been around many, many years and a lot of testing. We’re not getting any push back from lenders on that front because of that positive track record.

Kathy:
And fireproof, I think I read?

Chris:
Well, very. If we want to get back to the wonky side of this, we build using these structural panels, again, four foot by say 10 foot size panels and those panels are made by with three parts. They have a special skin on each side of the panel. It’s a special cementitious skin, and then the whole middle layer of these panels is insulation. So those two outer layers, the cementitious outer layers, they’re actually a type of ceramic and they’re in the family of ceramics that was used on the nose of the space shuttle. This is some very, very, to use a technical term, very refractory products, very fire-resistant products. We were able to hit extremely demanding fire codes because that outer layer that protects our panels has been designed to do so.

Dave:
I just learned several new words during that answer. I don’t think I’ve ever heard the word cementitious before. It’s a cool word. I like that. So Chris, that’s super impressive and you keep alluding to efficiency here and it does make sense. Could you share some numbers with us? How much more efficient is a modular home than a traditionally built, let’s say, single-family home.

Chris:
Yeah. Let’s start with talking about a pet peeve of mine in construction, which is productivity growth, kind of another economists’ wonky terms. But so when you look at construction overall, of the major industries it is the one that has had the less productivity growth of all. It’s almost zero over the last 30 years. When you look at the average productivity growth of all the other industries like car industry, et cetera, they’ve experienced up to 30% productivity growth. What does that mean? That means that for every man hour spent making something other industries today are making 30% more of that something with the same number of people; whereas construction is not. It’s taking the same number of people to do the same thing as it has over the last 30 years.
So to your question of efficiencies, well, the main thing to focus on is productivity. How do you achieve productivity? Well, you achieve it by simplifying the system, what I preach constantly in hammer at. So you make it simpler, so you have less man hours to accomplish the same job. Then the other thing you typically would do is automate it to make that same workforce produce more units. That’s what you’re doing in a factory setting. You are employing the same number of people that you would be employing in construction. It’s not that you’re reducing the number of jobs. What you’re doing is you’re increasing the number of square feet of living space that that same number of people are able to produce.

Dave:
So what kind of output increases it, so you’re saying you have the same, let’s say, 100 people, are you going from building whatever, five houses a year to six or five to 10? What is the increase in productivity that modular provides?

Chris:
So yeah, so let me put it this way. A typical Vantem factory has about 150 people and we are able to produce a million square feet a year of apartments or houses. All right. So that’s, let’s say, 1000 houses or 1000 apartments of 1000 square feet a piece with about 150 people. You would need approximately 10 times that roughly, depending on what you’re doing, the number of people to accomplish the same task. You would have all the other headaches involved of moving those people from job site to job site and all the other costs that are involved in site construction. So the productivity gains by doing offsite construction well are really enormous.

Dave:
Wow. That’s incredible.

Kathy:
That is incredible. What about the material shortages that we’re facing in the construction industry? Do you have those same challenges?

Chris:
Well, so the main product that we build with is our own, it’s our own panel, which we produce. Fortunately, the materials that we use to produce that cementitious skin, that Dave liked the term for, those are readily available materials. That those are not materials that have these big fluctuations and costs or availabilities. So we, in the core manufacturing of our modules, have not experienced things like the huge spike in wood prices, for example, that I think that other people have. Now, that said, we’re all subject to other constraints like, we all use windows, we all use doors, those kind of things. We have had to plan out a little bit more than we have in the past, but on our core business, we haven’t had the same pressures.

Kathy:
Where are you starting in the U.S.? Where are you getting traction? Which cities are allowing this?

Chris:
Well, yeah. Our business model is to partner with strong developers in key markets, so what we do is come in and put a factory in a local market along with a developer who has a strong pipeline to build affordable housing. We originally expected to maybe close two deals this year to put factories in next year and we’ve already closed on four. I think that by the time we’re done this year, we might be somewhere in the neighborhood of six to eight, so the interest level from the developers has really exceeded our expectations. The first factories, the first deals “that we have,” the first partnerships we have are for the Dakotas and Minnesota, Arizona, Texas, particularly in the Austin and Houston areas, Alabama, Florida Panhandle, mid to Southern Florida. Those are already on the board and we’re working through how we’re going to stage all that. There’s a lot of work to be done there, and we’ve had a lot of interest also in other areas like California and in the Northeast, but we’ll be addressing those as the next steps.

Dave:
I imagine all the developers are interested because it provides significant cost savings to them. With all that increased efficiency you were talking about, can you share any numbers about the cost per square foot to develop, let’s say, an apartment or a single-family home and how that compares to a traditional home?

Chris:
Yeah. On average, our solution is about 20% lower than traditional costs. That varies a lot depending on the markets. So Kathy talking about California, in California, our difference is much higher just because the local costs are so much higher. Other areas like the Southeast of the United States where costs of construction aren’t quite as high, we’re close to that 15 to 20%. So overall average, it’s at least 20%, with a big, big, big difference though, because there’s an apples to oranges comparison here. The Vantem product, even though it’s 20% less in cost than traditional, it is much more energy-efficient and is a net zero ready product, meaning it is so energy-efficient that we can turn it into net zero by just adding solar panels to the structure. Again, net zero, meaning that with a fairly modest solar array, you will generate as much electricity as the home uses, so at the end of the day, you are using no net energy from the grid. So despite that huge benefit, we are about 20% less expensive than traditional construction. For developers, that’s a huge draw, but there are others.
Another important draw is that offsite construction greatly accelerates your time to complete a project. It’s around 50% of the time that it would take to do a regular project. So for developers that typically measure return on investment, when you reduce time, it increases your return on investment tremendously, and so it really increases that ROI for them a lot. Then the third part, which I think is as important and sometimes more so is that it reduces the risk profile for developers. Where do developers have the biggest risk? It’s the site construction, it’s the cost overrun. It’s the time overrun, right? That’s where they get hammered. By taking those risks offsite and putting them into a factory setting, they’re controlled. Now, you don’t have rain, you don’t have issues with labor having to show up on the job site or not. It’s all really controlled in the factory, and so for the developer, it’s not only a cost savings issue and a time savings issue, but it’s also a risk mitigation measure that makes it really attractive for them.

Kathy:
A 10 to 20% reduction is huge because many builders, their profit is maybe 10%. Are you seeing any national builders showing interest?

Chris:
Yes, we are in conversations, although our first partners are mostly very strong, very large, but regional players, but yeah, we’ve entered into some conversation with some of the national players here recently as well.

Dave:
Are most of what you’re building single-family homes or are you also building retail, multi-family across different asset classes?

Chris:
We have built it, in our initial rollout in South America, a lot of different things. We’ve built single-family homes, multi-family homes. We’ve actually built over 200 schools. We’ve built university, we’ve built commercial, we’ve built a lot of things, but one of the things one needs to do in business is focus to be maximally successful. In the U.S., our focus is very much affordable housing. We’re focused very much on housing, and within that it’s single-family homes, multi-family townhome configurations and multi-family apartment buildings up to three floors. That’s our real focus currently.

Dave:
Why’d you choose that focus?

Chris:
Another important goal, business goal, especially when you have a factory is repetition. Factories, love repetition, that’s why originally Henry Ford said, “You can have any color you want as long as it’s black.” He took it to the extreme, and so repetition is really important. In home building, single-family homes and especially in multi-family, you have that repetition. You have multiple units that you can produce that are the same, and that’s where you really achieve the largest effect in terms of decreasing costs and leading to a final product that is more affordable for everybody.

Kathy:
Plus there’s nobody out there doing it. It’s very, very difficult, if not impossible, to build affordable housing today. A lot of people don’t realize that developers are required to provide generally some affordable housing. In our projects, it’s usually 30% and that’s usually a loss to the developer. We had to build the affordable housing first and you’ve got to come up with a funding for that and you don’t make your profit to the very, very end. So I would just think that every developer would want to at least have that portion of their development at least break even. Wouldn’t that be amazing?

Chris:
Right. Right. Well, I think that what we’re seeing is that the goal our partners have, and I think it’s a realistic goal, is that it will definitely not be just break even. They’ll be making money on them.

Kathy:
Again, oh man, that’s a game changer for developers, because more and more city councils will vote for your project if you’re able to bring on that affordable housing.

Chris:
Right, but let’s not forget it’s not just the affordable side of it, but that energy efficiency, that’s the other thing that city councils are really excited about. So the effect of energy efficiency, it’s so multifaceted. We have the macro part in terms of the benefit that it has to carbon reduction and climate change, which is really a critical and important goal, I think, for everybody. But there’s also the aspect that if you have a net zero home, that’s doesn’t have a light bill, suddenly the family has more disposable income that can go towards paying for a mortgage, paying for a slightly bigger house perhaps, or just being able to buy the house period because maybe they didn’t have enough of an income otherwise to be able to purchase that house.
Then to the local communities, the other thing that it helps with in and that city councils and state governments like is that you’re not adding a draw to the energy grid, so they’re not having to add more power plants. They’re not having to add to the infrastructure, which is really, really expensive. When you’re looking at adding thousands of housing units to meet that housing need, that housing deficit that we have, the one thing that I think that Vantem allows is that we don’t put additional pressure on the local governments to have to raise more money to put infrastructure in, electrical infrastructure in particular. That’s just a massive benefit also for that community.

Kathy:
How are insurance companies responding to this? Because I would think if these homes are more resistant to earthquakes fires, wind storms, I would think insurance companies would be all over it. What’s been their support for this?

Chris:
That’s been really interesting. We’ve actually been approached by an insurance company to develop a specific product for disaster-prone areas in the Gulf area, or the Gulf area of the United States for Louisiana in particular. That’s been a real challenge for a lot of insurance companies. Many of them is, I think we all know they’ve tried to exit or have exited a lot of these markets where climate change is starting to change the risk profile so much that it’s just not economical for them to be involved anymore. In this case, we’re working on a program to offer a turnkey solution, which is Vantem apartment complexes that have an insurance already baked in pre-approved by the insurance company for areas where otherwise, currently building is uninsurable.

Kathy:
That’s amazing.

Dave:
That is incredible. Chris, I had a question. You were talking about net zero and as someone who lives in Europe and our energy costs just keep going up like crazy right now, would love a net zero home right now, another component of climate change and housing and construction’s contribution to that is the construction process itself, not just once the homeowner is in the home. How does your construction process compare to traditional building in terms of emissions during the construction process?

Chris:
Right. Yeah. That’s a great question. Vantem, we brought onboard a really important investor several months ago, a fund by the name of Breakthrough Energy and it’s Bill Gates’ fund for CO2 reduction, climate change issues. The reason that they invested in Vantem is that they clearly see the potential impact that we can have on carbon reduction, and that comes from two areas, like you said. One of them is the energy savings that Vantem allows over the lifetime of the home. But the other point that they really loved about what we’re doing is what they call the embodied carbon of a Vantem house is much, much lower than traditional construction. What does that mean?
Well, it means that the total amount of energy it takes to make all the materials that go into a Vantem house and to build that house is translated into how much carbon emission does that mean. Well, in our case, it’s about 80% less than the traditional construction methods being used globally, internationally, not only the United States, but everywhere else in the world. Now, in the U.S. where we use materials, we’re not building with as much concrete, for example, which and concrete is a very, very energy- intensive carbon emitter. Our carbon reduction is a bit less than 80%, but on average globally, we’re about 80% more efficient than how homes are being built elsewhere.

Dave:
Wow. That’s incredible. Chris, I think I would love to spend here more time here learning about your process, but we do have to start wrapping up and our audience is primarily real estate investors. Everyone from people who are aspiring to get their first deal to people like Kathy, who are professionals and doing development, if anyone in our audience wants to get involved with modular homes, is that possible right now, or is it only for people, developers and large scale builders at this point?

Chris:
I think there are certainly opportunities in modular homes in general, available to everybody. I think the demands on modular home builders are high right now. There’s a demand outstrips supply pretty much, so it might be a little bit difficult honestly, to go out there and buy a modular home right now off the shelf, if you will, from other manufacturers. From a Vantem standpoint, our first factories will be coming online at the end of next year. As I mentioned before South Dakota, Arizona, Texas, and Alabama, Florida, keep your eyes peeled. We’ll be letting everybody know as those come on board and we’ll be generating quite a bit of capacity. Some of that capacity is, in fact, reserved for about 30% of the capacity of each one of these factories is reserved for third parties, including individuals that might be interested in buying Vantem modular homes.

Dave:
Great. Thank you, Chris. Is there anything you think our audience of real estate investors should know about modular homes and how it might be changing the future of the housing market or the way Americans find housing, find and build housing, I guess I should say?

Chris:
Yeah. Listen, as an investor, I really urge people to think about the energy efficiency and the impact that has on their returns, and there are many angles to that. The appreciation of your asset is greater the more energy efficient it is. Also, with time, what we’re going to start seeing as investors in real estate is that there’s really a great appetite by banks for lending to projects that have a very high energy efficiency. We’re already seeing it perhaps on a developer scale, maybe not so much individual yet, but we’re seeing it at a developer scale where banks are lending at rates that are lower than market for projects that are more energy-efficient than others. I foresee, because we are talking to banks that are trying to figure out how to offer mortgages to individuals that are lower than market rate because of the energy efficiency. So as an investor, I really would urge everybody to focus on that as a really interesting opportunity in the future as we’re looking to build our portfolio.

Dave:
Great. Well, Chris, thank you so much for joining us. If people want to learn more about you or connect with Vantem, where can they do that?

Chris:
Best place to look would be on our website, vantem.com. That’s V as in Victor, A, N as in Nancy, T as in Tom, E, M as in Mike, vantem.com. Dave, thank you so much for your interest and Kathy, really a pleasure talking to you both, okay?

Kathy:
Likewise, I can’t wait to see where this all is, say, 10 years from now. I think it’s going to be a different world.

Chris:
Thanks again. Appreciate that.

Dave:
All right, Kathy, what did you think about our conversation with Chris?

Kathy:
I have mixed feelings because I just know how much change is needed in the construction industry and in the whole process of bringing on affordable housing. We need support in this country. We need the governments to get on board, and so I’m mixed because I want it to happen. I hope this is the company that can do it, because many have failed, like you said.

Dave:
Yeah. The technology sounds really interesting, but you’re more concerned the bureaucracy, red tape, not as concerned about the technology or are you concerned about both?

Kathy:
I’m not been concerned about the technology. To me, it’s always made sense that if you can build a house in a factory, how much easier is it than, like our Utah project? We can’t build during half of the year. If that could be just done in a factory and you can control it and it’s the same thing every time, you’ve dealt with construction workers, sometimes they don’t show up or with COVID, the site would be shut down for two weeks if one person tested positive. So the efficiencies have always made sense to me, and I couldn’t understand why it wasn’t catching on. Just even locally, I’m in one of the most liberal places on earth, and you would think they would be adopting this idea, and I’ve tried to build modular housing. In California, it’s really hard. Even after the fires when thousands of houses are gone, you’d think they’d all come back modular, but it’s just not been the case.

Dave:
That’s why you were so interested in the fireproofing.

Kathy:
Yes, I am. Well, again, California’s always burning. It’s just either people have to stop living here or we need fireproof housing, because insurance companies aren’t going to keep insuring and they’re starting not to. We’re only half insured on our house. We’d only-

Dave:
Really?

Kathy:
Yeah, they won’t do it. Wow. How many times are they going to rebuild? Most of California or a lot of California’s in a fire zone. So then you’ve got lots of Texas, and like you said, Louisiana and Florida in a flood zone, flood zone or in a hurricane zone? So these solutions are coming. I get really excited about the technologies that are coming and I just think, “Wow, what’s this world going to be 10 years from now?” I know some people want us to be more negative, but it’s like all I can see is that technology is going to change things. It’s going to be a different world and it’s exciting. Look at just 10 years ago, we didn’t have Uber.

Dave:
Right. Right.

Kathy:
It was brand new. We didn’t have Airbnb and now we just take it for granted like it, “Of course, of course, you’re going to just let a stranger in your car or in your home.” This weren’t thoughts we had 10 years ago.

Dave:
Yeah. It’s just inevitable, it has to happen. We had Chris on today, when we had the 3D printing company, Alquist, on recently, it’s these ideas that make so much sense logically. But unfortunately, you know that the technology and intent is only half the battle with development and bureaucracy, logistics. Some of the boring stuff really can get in the way of some of these exciting things, but I have to believe it’s just a matter of time and hopefully it’ll be sooner rather than later.

Kathy:
Yes, absolutely. Yep. Housing just happens to be one of the last dinosaurs. We’re still doing it the way we’ve done it forever, so I think that that brings investors in when they say, “Oh, here’s some opportunity.” It does sound like he’s really well-funded, I hope that’s the case. That’s what it’s going to take.

Dave:
Maybe one of the silver linings to the really difficult affordability challenges we’re seeing across the U.S. is hopefully, governmental and policy support for building more affordable homes like this, because like you’ve said everyone wants the price of housing to go down, but you’re a developer and you’re trying to build affordable homes right now and you can’t even do it, so something has to change. Whether it’s the technology or a policy, it’s not like you’re out there trying to price gouge people, you’re literally trying to build affordable homes and the policy and economy doesn’t support it right now.

Kathy:
No, it doesn’t. Is it the developer’s responsibility? That’s always been the question. On our Park City, the only way we could even get the project through was by offering affordable housing, which I was thrilled to do. The way we explained it is, “Wouldn’t you like to have teachers and firefighters and police officers be here and not an hour away?” So that’s how we got the project through, but those homes, they cost us twice as much to build than what we sold them for because they wouldn’t let us go over 375,000. It costs 750 to build them, so that hurts. That’s hard to do, but if there was an option for us to be able to build it cheaper, wouldn’t that be amazing, and fireproof and earthquake-proof? All these things is wonderful. I hope it works.

Dave:
All right. Cool. Well, we’ll keep an eye on it. Hopefully, we’ll see some progress over the next couple of years and if we do, we will definitely update you on a future episode of the podcast. Kathy, thank you so much for joining me. I’m looking forward to seeing you in a couple of weeks at BP Con.

Kathy:
Can’t wait, it’s going to be so fun. You have to get a larger space. You got to look at a larger space, because it’s sold out and people are now trading these tickets.

Dave:
I know. We sold out and I think the team here at BiggerPockets who’s responsible for it is getting a lot of desperate emails, but we can’t. They have fire codes and a certain amount of tickets we can sell, so I guess next year we’re going to have to go even bigger.

Kathy:
It’s going to have to be Las Vegas Convention Center.

Dave:
Yeah. Yeah. 100,000 people there.

Kathy:
Yeah, 100,000.

Dave:
All right. Well, Kathy, it’s always a pleasure. You always ask such great questions. It’s a lot of fun having you here and we’ll see you again real soon.

Kathy:
Thank you so much.

Dave:
All right. Thanks, everyone, for listening. We’ll see you on the next episode of On The Market. On The Market is created by me, Dave Meyer and Kaitlin Bennett; produced by Kaitlin Bennett; editing by Joel Esparza and Onyx Media; copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions. Only all listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast show 665.

Jeff:
I think a successful investor is someone who is willingly ready to pivot whenever that needs to happen. So I think anybody who has a strict mindset and is rigid on “This is what I’m going to do” and is unwilling to actually look at the data in front of them or look at what the deal is in front of them and pivot what they were hoping for is destined for failure. And I think that somebody who is flexible and treats each deal and each property like a snowflake is more likely to succeed.

David:
What’s going on, everyone? This is David Greene. You host of the BiggerPockets Real Estate Podcast here coming at you today from Scottsdale, Arizona, where I am checking out rental property and making fire content along with my partner, Rob Abasolo. Rob, how are you today?

Rob:
Ola, ola. It’s Friday. I’m feeling great. I’m excited to hit the weekend. Maybe catch a flick at the cinema by myself and have a little bit of me time. How about you, sir?

David:
Maybe check out Bed Bath & Beyond if you have enough time possibly.

Rob:
That’s my therapy these days, is going to the container store and I’m like, “Ah, I wish I could organize like this.”

David:
Speaking of Bed Bath & Beyond, we get into it with today’s guest, Jeff Iloulian, talking about how to furnish your short-term rentals. Obviously, short-term rentals are all the rage. I’ve jumped into that and bought several of them for myself. Robbie here is a specialist in the short term rental game. And this is one of the hotter asset classes in our space. So you often hear about analyzing the deal, finding the deal, managing the deal, but you don’t always hear about furnishing the deal. So in today’s episode, we give you some really good advice about where to go to find the best furnishings that you can and tip. And hint, it’s not at Bed Bath & Beyond. Rob, what were some of your favorite parts of the show?

Rob:
This one is multifaceted. First, it starts off as a rental arbitrage, lease arbitrage master class and I was like, “Wow, we are hitting the groove here.” And then all of a sudden we transition into furnishing and all the things you need to know, the ins and outs, horror stories, methods to the madness and everything in between. Jeff really does break this one down. It’s a really, really cool story. He was a full-time lawyer that basically six month into his short-term rental journey decided, ‘Hey, I don’t want to do that anymore. I want to be a successful short-term rental entrepreneur.” And then even from there, crushing it time and time again. So I’m really excited to get into this one.

David:
Yeah. We also talk about how Jeff had to transition from being a lawyer, which is not a skillset that is conducive to being an entrepreneur, into being an entrepreneur that moves at scale. We talk about hiring, about leveraging, about growing and about overcoming the obstacles between your ears sometimes to stop us from making content. So overall, I would say this is a very solid show. Make sure you listen all the way to the end because we play a game called Method or Madness where Jeff gets into the method that he has used to furnish rental properties before and if it drove him mad or if it worked.
All right. Today’s quick tip is three words, contractor, grade, furniture. In the show, we talk a lot about buying the right property, as Rob here would say, buy nice, not thrice. You want to get something that will stand the beating that your guests are going to put on it and save yourself a lot of time and money in the future. If you watch this episode alone, that should give you quite a bit of value. I know I had my eyes open to this fact. It’s probably going to save me a lot of money on the properties I’ve bought. Rob, anything you want to save before we bring in Jeff?

Rob:
I totally agree. Buy nice, not thrice. Let me just give you a little reason why. Because you’re going to buy cheap furniture and then guess what? It’s going to break and then you’re going to buy it again. It’s going to break again. Not only do you have to get rid of the furniture, you have to hire someone to take it out and reassemble the new one. And then by the end of it, you buy the nice one and you just ended up spending three times as much than if you want to just splurge the first time. So listen to the episode, take notes, grab your pen and paper and get ready because this is a good one. It’s going to be very, very eyeopening for everyone that’s looking to really get into this industry full force.

David:
All right, let’s bring in Jeff.
Jeff Iloulian, welcome to the BiggerPockets Real Estate Podcast. How are you today?

Jeff:
Doing great. How about you?

David:
I’m doing good too. I’m in Scottsdale actually. I’m here looking at potential rental properties, going to be checking out houses when we get done with this and then tomorrow as well. I really like the area. There was a crazy storm here last night. We were doing a YouTube live and it was like everything was fine. Within five minutes, there was a monsoon, just tons of rain, tons of lightning. We’re kind of staying up in the mountains right now so we are right in the middle of it. It was an awesome experience. I’m not quite sure how I’m going to connect that to what we’re going to talk about today. I was hoping that as I kept talking, there would be a segue that would appear that is-

Rob:
Ooh, I got it.

David:
Okay, Rob.

Rob:
I got the segue. Don’t worry. Okay. So I think that monsoon was the guest that we just actually had at our Scottsdale property. And let me tell you, man, this is by far, I mean, this is the most, oh man, high maintenance guest I’ve ever had in my entire Airbnb career. And here’s the segue. Get ready for it. Jeff, tell us about your short term experience because I know you’ve managed quite a few short-term rentals and you’ve probably dealt with a few high maintenance guests in your time.

Jeff:
Yeah, I think that’s a very, very fair thing to say. So I’ve managed over 250 vacation rental units in a variety of different ways, from super, super luxury homes, all the way to apartment buildings and everything in between, cabins, beach properties. The level of maintenance is always high. It doesn’t matter the type of property, it can always get pretty high. So I’ve probably had tens and tens of thousands, if not hundreds of thousands of guests with a lot of crazy vacation rental stories.

Rob:
Wow. Okay. That’s some bragging rights, man, to even be in the tens of thousands. I mean, I’m thousands. I was just on the phone with Airbnb talking about this guest. It was a whole thing. Many layers deep into the customer service room and I said, “Listen, I’ve hosted thousands of people, okay? So I don’t say this lightly, but I think this is the one.” And they laughed and they’re like, “We understand. We can’t help you though.” And I was like, “No.” So tell us about when you got into Airbnb, man.

Jeff:
Yeah. So I got into Airbnb back around… Or vacation rentals, the STR industry, 2014 I kind of started. I was and am a lawyer, but I was practicing law at the time and really read an article for the first time about somebody doing arbitrage. I thought it was really interesting. Had never thought about before and always loved the idea of being in the hospitality industry, of being in travel, and kind of started back then with my first property.

Rob:
I mean, I consider that sort of the wild west of Airbnb, the 1.0. And then I think the next probably four or five years were sort of the 2.0 where things are getting more established. And now we’re, sort of, I don’t want to say the final stage, but it’s a very different animal, I mean. Would you say that there has been pretty big paradigm shifts within the short term rental industry since that time?

Jeff:
Yeah, absolutely. I mean, I think even thinking about 2014 as 1.0 is too much. I mean 2014 was already 3.0, 4.0. I mean, the last 20 years of the vacation rental industry has changed a lot. I go to conferences and things and meet people who were in vacation rental markets where it’s customary to not make the beds, right? You just leave the sheets and hang them on the door. Guests, 20 years ago, they used to have to pay if they wanted sheets. So that even in the early 2000s to 2014 was a huge shift. I think we’re definitely in a third phase from that point, but right now is still very much the wild west.

Rob:
That’s totally fair. That’s very, very, very fair. I kind of more liken it to the, I guess like the dotcom era for Airbnb and short term rental Vrbo, VRBO, all that stuff. Okay, so you got into real estate, you saw this article, this interesting concept of letting strangers sleep in your home for a rate basically, right? So what from there sort of kicked you off to actually get into it and what was that first unit like?

Jeff:
So the first first unit that I had, I actually got that unit, I was speaking with a friend who had some experience in the short term rental industry. He’d been doing it for a little bit longer than me based out of New York. We had this property that came up and we actually started that property under a management deal where a third party company was managing it from New York for about three, four months. It was a really interesting deal for a bunch of different reasons, but I learned a lot from those first three months about how management worked, seeing somebody else manage my own property. But that deal was really, really unique because actually it was a lease arbitrage deal that I had a property management company running.

Rob:
Okay. So can you explain that for people at home just so that we understand what is lease arbitrage?

Jeff:
Yeah. So lease arbitrage is essentially you go in, you lease a property for X amount, banking on the fact that if you put furniture in it and rent it on a shorter basis, then a year or multi years that you’re going to get overall higher return. Nightly rates adding up monthly, you’re going to get a higher month return than you would get after expenses with just your lease. So it’s the arbitrage, the difference between your fixed lease amount that you’re paying and what you’re getting through the short term rental industry. At least that’s what lease arbitrage is in this industry.

Rob:
Yeah, sure. So basically, let’s say that it costs you $100 a day in rent to rent a property and then let’s say you got another $20 in utilities a day. You have to rent your property for more than $120 a day to make a profit basically, right?

Jeff:
That’s right, yeah. Plus, factoring in the fact that you’re going to have to furnish the place, maybe pay a management fee to somebody else. All those costs add up. And the idea is at the end of the month, you’re going to net out more money than you’re paying in rent and expenses.

Rob:
So as someone that actually started in rental arbitrage myself, this was me back in 2018, 2017, somewhere in there. That’s when I was just a wee raw built at that point. But I was getting my… I don’t know. I was understanding what this could be and I thought it was just a crazy opportunity to make a lot of cash flow. What was this like in 2014? Because in 2018, it wasn’t even a new concept at that point. 2014, this must have been like, “Man, I feel like I’ve won the lottery.” So tell us about the sentiment there when you were first getting started.

Jeff:
You know what’s really funny, Rob, is that the sentiment in 2014 from everybody else who’d been doing it for four years is four years ago, five years ago, this was a completely novel concept that nobody would’ve ever thought. It’s the same as what you’re saying now. I felt the same. I was like, “This is already played out. This is already done.” But now looking back at it, it was very different than it is now. It was, for lack of a better way to say it, it was very hard to miss. There was a lot of money out there. You could put any kind of units up with any type of quality level, et cetera. They were going to rent and you were going to meet your least arbitrage number. It was very, very difficult to miss. The demand significantly outpace the supply in the market.

Rob:
Okay. So can you tell us what were you actually doing then? What was your full-time career at this time? Were you already in real estate?

Jeff:
I’ve always kind of dabbled in real estate on the side, a little bit of commercial real estate, a little bit of residential real estate, but I was a lawyer full-time. So that’s what I was doing. I did some real estate law. I was doing transaction work. I was doing business litigation. So I was working at a big law firm. My day to day at the point when I started getting into the vacation rental industry was woke up super early, went into the office, worked a full day as a lawyer, and then I was trying to figure out how to do vacation rentals at night. And at the beginning, I had a property management company handling my messages, but during that transition where I decided to make the jump full-time and quit, I was doing a lot of the messaging from my phone in the office responding to guests, doing pricing, all that stuff on coffee breaks, on things like that. So I was working full-time as a lawyer when I started doing this.

Rob:
I always wonder how people do this. I was in advertising so I always felt like my life was really flexible, my career was very flexible. It’s always crazy that a lawyer could be managing an Airbnb on the side. And David, I don’t know. What was it like for you, man? Because I know you were out in the field, you were working in the [inaudible 00:13:09] at that time managing your portfolio. Were you ever just shooting text messages out to your property managers? Or was it pretty passive for you early on?

David:
No, it was not passive at all. So I, very similar to Jeff, had to develop a system where I could communicate with people on the brakes that I had. So part of it was training the property managers, the agents I was working with, to communicate with me in the way I need it. So text messaging was much easier than phone calls and I would prep them ahead of time. So let’s say that they had a house they wanted me to look at, they don’t just send me a link and say, “Do you want to buy it?” It would be, “Here’s the house. Here’s the rent. Here’s the ARV. Here’s where I think we can get it for.” And I’ve looped the property manager in on that text and the property manager would literally send a thumbs up icon or a thumbs down icon regarding do I like the area or do they like the area.
So I could really quickly look at it and then I could take those numbers. And either at a point, I got to be able to do it in my head, but at first I would just run in a calculator and I could make a decision on yes or no and then I could just text back with a purchase price like 110K or 200K or whatever that they would write the offer. And then they would tell me, “I’ve sent the email” and I could DocuSign it. So as a cop, it could literally be, I go on a call, I get done. I get back in the car. I look at my phone. Everything is there I need. I send the text, I put it back in my pocket. I move on to the next thing. All of us have time throughout our day. It does not matter how busy you are, where we check our phone to text our friends or we check an email or we look at something on TikTok. I don’t use TikTok, but I know a lot of people do. Most visited website.

Rob:
Not yet.

David:
So if you tell yourself, “I can’t do this, I’m too busy,” that will become true. If you ask yourself, “How can I do this when I’m busy?”, you will absolutely find a way. I personally believe that led to me being better at analyzing deals, that led me to be a better communicator. It led to all the concepts that are in long distance real estate investing. So I love hearing that Jeff had that same attitude. This sounds cheesy to say it, but so much of the time we talk ourselves out of what we’re possible of because of the stories we tell ourselves. You see this with real estate agents. They go to the office, they sit there all day. They don’t contact any buyers or sellers. They don’t put anything out to draw leads. They don’t do any work to make them money. They sit there, they develop business cards, they make marketing fliers and they look at emails and then they go home and say, “I worked for eight hours today.” No, you sat in an office for eight hours. You didn’t actually do work.
But when you have that W2 mindset where you get paid just because you’re at a place, you start to think that’s work. And that W2 mindset does not work in this 1099 world where we are entrepreneurs, where we get paid for results. I truly believe, Jeff, and I want to hear your opinion on this, so many people don’t work in any form of entrepreneurial environment because they can’t break out of that thinking of like an assembly line worker like, “I’m here. It’s supposed to just happen. I’m looking at houses on Zillow. Why have I not got a deal on her contract yet?” But if one of us sat there and watched them do it, what we’d say, “Yeah, you showed up at the gym and you didn’t touch a machine the whole time.”

Jeff:
Yeah. I mean, I can’t tell you how much that resonates with me. I mean, the concept of being productive with your time and what you can do when you’re really thinking about your time. As a lawyer specifically, I was tracking every minute. I was billing by the minute. So I was very conscious of what I was doing with my time. So if I was sitting there for eight hours and I wasn’t tracking what I was doing and billing it to somebody, then I wasn’t going to get paid. I wasn’t going to get my credit for it. So I was very aware, hyper aware of time. But you figure out where you can fit it in, where you can find time. And honestly, you make the time. A lot of the work I did in the first six months before I decided to jump was done from 6:00 PM to 10:00 PM. That’s a lot of hours. You can do a lot of work late at night.
I think just like you’re saying, David, the toughest part is that first you’re sitting there, you’re paralyzed, you’re a deer in the headlights, taking that first leap of faith is really, really challenging. As good as I was at managing my time and being productive, that was a really big learning curve for me. It wasn’t a natural fit right out of the gate. I was really risk averse. Lawyers are trained to be really risk averse and think the worst is going to happen and everything. Lawyers in general make terrible business people for that reason alone. You’re terrible at sales, you’re really bad at deal analysis because you think everything is going to fail. So I totally get that. That first little nudge over the edge to jump off the cliff as it were, like, that’s a big thing.

David:
I see this with different vocations like engineers. So sometimes my real estate team will be working with an engineer and we’ll find eight houses we’re going to show them as a potential house hack. We’ll go look at the houses and they don’t like any of them. Bad area, bad house, something. It’s an obvious no. And they’re going to want to follow up when we get done and analyze every house and plug all the numbers in the spreadsheet and see what the ROI would be and talk about how they would do every house and I’m like, “Bro, you don’t want any of them. Why are we still talking about this? Let’s put the energy into finding the next house.” And it’s sort of a self-awareness thing that you have to recognize “I am programmed to think this way.”
As an engineer, you just have to solve problems. You have to dive in and get the information. And it’s easy to forget, “Why am I even getting this? What purpose does it serve?” And when you get into the world of real estate investing or entrepreneurial and endeavors in general, you’re always asking yourself, “Does this matter? Is this important? How important is this? Is this going to actually move the ball forward?”
I just wanted to take little segue to cover this because so many of our listeners I’m sure are trapped in the matrix. They don’t realize they’re just going through these motions without knowing they’re going through motions. And two years come passed and you haven’t made any progress, it could become very discouraging. So if you don’t mind sharing, what was your red pill moment in the matrix where your eyes were open and you realize, “Yeah, as a lawyer, I am totally prone to seeing what could go wrong and I can’t see anything other that.”? And now obviously you’re in a place where you’ve sort of embraced risk and you’re creative and you’re scrappy. That could not have been a natural process for you to go from where you were to where you are now.

Jeff:
It wasn’t. And you know what? To be fair, I had a really great business partner when I jumped out of being a lawyer. I didn’t start it on my own. I had somebody who was an entrepreneur, who had some experience, really kind of coaching me through those first couple months. It was really, really hard. I was used to being right about… You’re trained as a lawyer to value your opinion. Your opinion is right. You got to go with your gut. And then you enter into a totally different universe where you don’t even know which way is up and you’re on a sales call and then you have somebody tell you afterwards that that was the worst sales call I’ve ever heard in their life. That’s a tough thing.
So I had somebody kind of coaching me through those first couple months. I think my first sales call was probably that red pill moment where I was like, “Oh, I don’t know. I don’t know anything.” Everything that I just heard as a critique of my first sales call was one of the worst. I look at it now and I laugh in a great way, but it was a good learning experience.

Rob:
So that was your first deal when you were first starting out. But how many deals did you eventually get to just so that I have an understanding of how far you went with this?

Jeff:
So yeah, I started with that first deal and then I did about the next 40 deals as lease arbitrage. And then after that, it kind of became a mix. About 50/50 I was doing property management for other people. And then I was doing lease arbitrage. When we were at our biggest, we were 150 properties. But over the seven, eight years, a lot of those came and went. So I set up and ran over 250. But sometimes especially with lease arbitrage deals, they’ll last for two, three years, especially the way that I was doing it. Some of them didn’t last forever, but that was kind of the point.

Rob:
Wow. Okay. So we got to backtrack here. There’s a lot to this story that I want to know. So you went from one and you said, “We did about 40.” So what was that? What was that scaling? Because in my understanding of lease arbitrages, it’s pretty tough to go out and find landlords that are like, “Sure, you could lease my place. Why not? Sure I could get the same rent from a long term renter, but your pitch sounds great.” So how are you able to actually get into units? Because that seems like the hard part for this niche within short term rentals.

Jeff:
Yeah. I think that that’s right. I have that conversation with a lot of people about what’s the best way to have the conversation, how to approach a landlord. For me, I found a niche within a niche for those first 40 properties and kind of ongoing, which was, I had this wild idea. I knew a bunch of real estate developers and they were really focused on flipping homes, but they were flipping homes in nicer areas. So they would buy a home that was decent, but the market in that area had shifted and the market was really hot. And so for them to knock down a decent home and build a much, much larger home was going to be worth it in two, three year flips.
The problem was that when they would buy these homes, they would have to wait for entitlements and wait for permits to come through. And that process, especially out here in Los Angeles, could be anywhere from a year to 18 months to two years, depending on what you’re trying to do and how crazy it is. And so the concept that I came up with was to, just talking to some of my real estate friends, was hearing that they had bought a home from a homeowner. That homeowner had moved out because they were moving on and they were trying to figure out what to do with these homes. They wanted to lease them out, but they didn’t want to put long term tenants that they were going to have to maybe kick out in 10 months and they didn’t want to go through the hassle of figuring out what to do with it.
And so I reached out to landlords who needed this service specifically. They needed somebody to come in and take an underutilized asset and figure out how to maximize it or how to make it work for them. So I was leasing properties that were waiting for entitlements, homes that were waiting for entitlements for flexible periods of time, anywhere from 10 months to two years, saying, “You let me know month to month when you’re ready to get the property back.” And I was able to lease those properties at significantly less than market rent.

Rob:
Wow. So basically someone was going to go. And just so I understand it, and let me just say, as someone who has built a tiny house ADU, an accessory dwelling unit in my backyard, I can 100% vouch for how difficult it is just to get a simple permit or what I thought would be simple. I was very green. I didn’t know what I was doing. But it took a long time just to get a 300 square foot structure. Yeah, so permit. I have a lot of sympathy for the people that actually want to do a tear down and a remodel. So effectively, someone sells their house and they’re either just going to lose money on the mortgage payment. They don’t want to have to evict anybody. So you come in and you’re like, “Hey, I’ll tell you what. I’ll lease it here. And when you’re ready to kick me out, I’ll go.” You were able to just pick up clients that way? Or did you have a lot of nos along the way too?

Jeff:
Mostly it was yeses. Honestly, the value prop we were bringing to the table was really strong. A lot of the people’s alternatives were zero. They were just not going to rent the homes out. Or by understanding their pain points, we were coming in with conversations like, “Well, you’re a flipper, but you don’t do management.” Right? They don’t have management. A lot of these companies weren’t property managers. So we would tell them, “Hey, look, we’re going to lease the home. We’re going to lease it for less than market rent. We’re going to give it back to you whenever. And if anything happens to the house, we’ll fix it. We’ll never call you for any basic stuff. If it’s a minor AC repair or a broken faucet or a plumbing issue, as long as it’s not a major thing, we’ll just take care of it ourselves and we won’t even call you.” And so that was like music to a real estate developer’s ears that was doing a flip. That’s the last thing they want to deal with. This is all upside for them so a lot of these deals were really easy to close.

Rob:
Okay. So was this all specifically in any kind of, I don’t know, segment within Airbnb like luxury? Because I know obviously if you’re building a house it takes a little bit of money to do that. So I imagine, were all these houses in more higher end areas or was it kind of across the board, just every single type of, I don’t know, price point?

Jeff:
It was across the board. I mean, I eventually got to homes where I was renting them out for 3,000, $4,000 a night. And I had homes that I was renting for 70, $80 a night. This lease arbitrage model worked for both because what would happen is it would be an okay home in a decent neighborhood that was going to be turned into a super nice home. So it might have been a little bit old. It might have needed a little bit of touch up work. And I would do light work myself. Painting, maybe putting down some laminate in an area that needed a little bit of love, but nothing heavy.
And then on the other hand, we would get folks that would call us, “Hey, we just bought these four homes and we’re waiting to get entitlements to build an apartment building in this part of town. Do you want these four homes? Because they’re just going to sit. We’re not going to lease them to anybody until we get a… The entitlement process to get an apartment complex green light is years. So those were always great deals for us too. But a lot of those, or even some of the apartment buildings, were much, much smaller, much, much more value units.

Rob:
Wow. Okay. So tell me a little bit about your team here because I know there’s only one Jeff, right? So there’s no way that you can go and furnish and paint and lay laminate on all 40 units, I’d imagine. I mean, at this point, once you get to that number, you’ve probably left your job I think you mentioned six months or so, is that right?

Jeff:
Yeah, probably like five, six months after I started renting out the first property with that management company. Yeah, I remember having 10 properties when I left my job.

Rob:
Okay. And so at what point did you start building out your team or what did that team look like? Tell us the phases of it. Because I know from one to 10 is going to be probably a different animal from 10 to 40.

Jeff:
Yeah, absolutely. So I think you have to also remember in the context of this story PMS software, property management software in the vacation rental industry was not where it is today. A lot of the solutions that exist like HostGPO, my company now, didn’t exist back then. So things that make it easier to run vacation rentals. So the types of help that you need were very different. So the first person that I… It was me and my partner. The first hire that we did, remember 2014 was a check-in person. We did all of our check-ins in-person for the first two years of this business.

Rob:
Wow.

Jeff:
And it was because we were hyper vigilant about what was going on. Back then there was a lot more fraud. We were in a really kind of metropolitan area. And so there were a lot of party issues, neighbor issues, things like that and we wanted to make sure that we could get it off the ground. And we wanted to make sure that we were creating great experiences for guests. The remote check-in thing was just getting started so the expectation was a little bit different when people showed up. Being able to have somebody walk you through the house and answer questions for you, that was really what generated a lot of positive reviews. Now we stopped doing that for a lot of reasons. Also, I think it became unnecessary and we learned how to do that in other ways.
So the first person was a check-in person. The second person was a maintenance person. After that, we had an operations person that did started doing a lot of the messaging. We hired a pricing person that was doing the full-time pricing. Oh, I should say before we hired the pricing person, we hired something that we thought was really important was a head of quality and assurance. So this person ran our cleaning teams. So the cleaning teams were all outside cleaners, but we had somebody present at the beginnings and ends of the cleanings to run inspections to make sure that the properties were in tip-top shape. So a head of cleaning. And then after that, your basic accounting, another operations person, two full-time handymen that were kind of doing everything. We did a lot of maintenance work and we kept the units in great shape. We would repaint units, I don’t know, twice a year, pretty much any issues, any maintenance issues, just to make sure that they were always had this fresh unwrapped brand new kind of feel when you walked in.

Rob:
Okay. So you kind of figured out the team, right? You’re kind of slowly assembling here. I’m sure you have a lot of problems from that zero to 40, right? I have to imagine going from 40 to 150, that’s got to be a whole different animal with its own set of problems, right?

Jeff:
Absolutely. I mean, I think that you start to get to the point… One of the big problems that came from 40 to 150 was we started diversifying our business model. So now all of a sudden we were doing property management on some properties, lease arbitrage on other properties and keeping track of expensing, accounting, doing statements for owners, figuring out who’s paying for what, figuring out how to track and what types of maintenance we wanted to do on different properties, when we needed to get approval, the diversification of the business into the luxury space. How we handled luxury units was so, so different than how we handled basic units. So really creating operating procedures that went across a broad cross of different types of business models and different types of properties was probably the biggest logistical hurdle from 40 to 150. Just figuring out how to treat each of these properties and creating processes for each one, it was really complicated.

Rob:
Do you feel like at any point you went from being a real estate company or like a rental arbitrage, lease arbitrage company to an operations company. Or are they kind of one in the same in this business?

Jeff:
I think that they’re different. There’s a lot of people doing lease arbitrage out there or just investing in the short term rental industry passively where you’re not really involved at all. There’s a lot of people that take managing and working with their property managers really, really seriously and are really hands on. And then there’s people that are owner operators that do 50, 100 units on their own. I really think that the degree that you can work with other property managers or do it on your own, it’s just a total sliding scale and it just depends on what you’re looking for. I think you can shape it however you want.

Rob:
Yeah, it makes sense. It seems like part of the growing pains of growing a company. I mean, I know you have a great team. I remember we were having dinner not too long ago and you’re like, “Oh, I’ve got a person for this. I got a person for this.” I was like, “Wow, this guy knows how to build a team. I have something to learn here.” And that’s obviously one of the big proponents of operations. That’s one thing that I’m figuring out right now. Can you talk about a little bit for the listeners at home that are maybe struggling with scaling or the operation side, how can people getting started or really looking to scale their company, how can they take on the biggest challenge in their operations?

Jeff:
The first thing you got to do is see what’s out there. You have to talk to people. Honestly, the Facebook groups, the coaching that’s out there, there are a lot of solutions out there and I think the first place that you have to look. Don’t try to reinvent the wheel first. You can reinvent the wheel. I’ve had to do it and I’ve built solutions in areas that I didn’t think made sense. That’s a lot of what I do now. But I think the first thing that you want to do is start talking to people, start talking to people in the community. That’s something that’s available now in the short term rental industry that wasn’t. I mean, in 2014, there weren’t a lot of people to talk to. Period. There weren’t a lot of other people in this industry to talk to as easily. There were a lot of people in the industry. It was very disparate. There wasn’t a big sense of community.
Now there’s a huge community out there. So whatever your biggest operation issue is, first try to find a problem from somebody else that you, a mentor, somebody you respect, somebody that you can… A group or a forum that you can put that out there. Look for a solution that exists first.

Rob:
Yeah. Great advice. David, you’re also kind of the king here. I feel like you have so many teams and so many points of contact for so many aspects of your businesses. I’m curious on your side, when do you look to make that higher? Because I know that you’re very good at staying lean too. So does every single hire hurt or is it come from a point of excitement to actually create a role that can sort of alleviate the load for the team?

David:
I think personally that hires are scarier than they are exciting because we have done well in the role that we are hiring for. Because if we didn’t, we would need to hire someone to do it. Just by very nature of being in a position that you can’t keep up, you did a good job. I think a lot of the reason that people do a good job is they’re motivated for themselves. So all of us, when it’s our own property, we take care of it really well, we’re building our wealth. It’s our reputation.
Now think about you drive your own car different than you drive a rental car. Every employee is in some sense driving a rental car. Now, that doesn’t mean they’re all going to trash the car. When I drive rental cars, I’m very respectful of them. I treat it like it was my own. But I’m not naive enough to think everyone does that. So it’s very difficult when you get to that point trying to scale, because most human beings aren’t going to put the effort into it that you did.
I was just saying something about this the other day with someone that we hired. They had a decision to make and instead of putting a little bit of effort into thinking what’s the best choice, they just did the quickest thing they could. They were kind of being defended by someone on the team and I said, “No, look, let me ask you something. If this person was trying to figure out what restaurant they wanted to go to eat at tonight, at minimum they would’ve yelped and seen what the reviews are. It’s okay to expect them to do that in our company too.” They could have put that same effort into this decision. They just didn’t want to. This isn’t the right person to be in that position, because we’re not going to watch them every day and we’re not going to know what decisions they’re making.
So there is an element of hiring that just makes your job more complicated. There’s no way around that, it’s a different skill set. But you got to deal with it. There is no way around the hiring debacle. If you want to scale, if you want to grow, you have to be able to do this. And it doesn’t benefit you to sit around and talk about like, “Oh, I don’t want to grow because of all these reasons.” If you want to grow, this is what you’re dealing with.
Jeff, I want to transition us into a little game here, but I want to give you a chance to respond to that whole thought about scaling in employees before we do.

Jeff:
Yeah. I mean, I think you’re spot on. You’re hiring for something that you just did. It’s hard to let go. It’s hard especially when you care as much as you do to expect other people to have that same level of care. I think the more you can align, it’s something that I’ve done in all of my businesses, is try to align your interest with your employee’s interests. Now, a lot of the times it’s easy to do in a sales position, right? Your alignment is the commission. Everybody’s aligned by a commission. What I used to do and what I’ve seen a lot of people do is align your cleaning company by determining extra bonuses based on how many five star cleaning reviews you get or align your total compensation with your whole company. There’s a lot of people out there that do equity for startups and things like that. But one thing that you can do is actually give out quarterly bonuses, which I’ve done in my company, I do it in my company now, based on total growth.
So one, align your employees as much as you can with yourself and your business. And then the second point that was a more nuance thing in what you said, David, that really resonated with me was that you treat your own properties the best, right? And that’s for me, starting a property management company after 40 properties was not something I wanted to do, but I had already built out a property management company with a team for myself that was operating my units the way I wanted my units to be operated. And so I wasn’t building out a property management team to handle other people’s properties. They were just coming in and I was like, “Well, I have this team already. This is a good deal. I should try to do this.” Those properties fit into my system in the same way. And so all of those procedures and processes were in place as though I was taking care of my own property. I think that that was a really nice transition to get into property management. It wasn’t something I was looking to do, it just happened because of what I had built already.

David:
Now, Jeff, I have recently purchased a literal butt load of short term rentals. I don’t know what a literal butt load is, but I thought that that would make Rob laugh. I think I’ve got like-

Rob:
It did.

David:
… probably 15 short term rentals, maybe 17 by now, either just closed or coming down the pipe. For the first time ever, I’m having to work through the fact that it’s not purchasing a normal house where I go have a handyman go, work out a punch list of an inspection report and I turn it over to the property manager and they get it listed. There’s a lot of stuff you got to buy to get these things ready. I am going to selfishly ask you to teach me and the rest of us what are some methods that you have used to get a short term rental ready to be put on the market. We’re going to call this game Method to the Madness and we’re going to focus on purchasing for short term rental. So you can share a method that you used, who this method could work for, and if it has resulted in madness to you. Rob, why don’t you take question number one?

Rob:
Number one, what was an easy access marketplace, but not scalable avenue you used at first?

Jeff:
An easy access marketplace, probably literally Facebook Marketplace. I don’t know if that just because it’s a marketplace, but it’s easy to access. There’s a lot of good stuff on there. I definitely use that at the beginning, that and Craigslist, to kind of furnish my first couple properties with most of the basic items.

Rob:
Okay. So who should use this and how/

Jeff:
Oh, who should use this. So if you are setting up your first vacation rental property and you are dipping your toe, you’re not fully committed to this, you just want to try it out, I don’t know if I recommend that for everybody, but sometimes that makes sense. You got an extra bedroom in your house, you are trying to rent out a small guest house. It’s your first couple properties. You can use marketplace. You’re not on a timeline. You can wait. You can wait. You can you find the exact items that you want and you have the time to drive around, pick up those items. You own a truck, that helps.

Rob:
Yeah.

Jeff:
So those are the types of people that I would recommend Facebook marketplace work. You have a truck maybe or access to a truck or somebody with a truck and you’re kind of setting up one, two rooms for the first time and you just want to see what it’s like.

Rob:
Okay. So if you’ve done this several times, can you talk about a moment in which this became madness for you?

Jeff:
Yes. So I remember trying to do this on the third property maybe. I couldn’t find any text message to anybody that I knew. It was just random numbers as far as I could scroll because I had so many feelers out for a bed and a bench and a mat and whatever I could think. And I had no idea who was texting me for what or what address any of these things were at. And I was like, “I’m spending hours trying to find three couches right now. This doesn’t make any sense.”

Rob:
If I had a dollar, Jeff, for every time in my beginning of my Airbnb career where my heart jumped when I was driving and saw an old raggedy piece of furniture, I was like, “Oh, that could go in my Airbnb,” I’d have enough money to buy a house because literally every time I saw a dresser, I was like, “I can paint that” or if it was a free couch. I mean, the very first couch I had in my Airbnb was literally a pullout couch that was on Craigslist free. Wow, that one, it was not… Yeah, I wouldn’t show photos of that couch. It was a little dingy, but we made it through.

Jeff:
I’ll tell you. I had some dingy in my first couple units. In addition to the Craigslist and other things, I literally would be driving on the road and see somebody moving out of an apartment or home. I am guilty of picking up a couple items off the street and being like, “Hmm, I could probably clean that and paint it and throw it in a unit.” So that is obviously not scalable because you can’t spend all day driving around. But yes, I’ve also taken things off the side of the road and tried to fix them up.

Rob:
All right. For everyone at home watching on YouTube, we’re going to throw over some B-roll right here so you can see what my very first Airbnb looked like. They don’t look like this anymore, but just so you know. It’s a glow up story for everyone that ever gets into this business. David, how about you take number two?

David:
Question number two, what are some big box items that ended up being big flops?

Jeff:
Big box items that ended up being big flops. I would say I used to buy Ikea sheets and pillows and stuff. They were not great. I don’t know how to say that any better. That was my main thing I used to pick up from there. They were really thin. They were kind of scratchy. The guests didn’t really like them. I would get complaints about how the sheets weren’t good. I remember trying to upgrade and buying the more expensive sheets that they had at the time. And then learning that those were actually way more expensive than what was out there in other places. So big box, big flop.

David:
Okay. Who should use this method?

Jeff:
Who should use the kind of Ikea method? I would say nobody. I think-

Rob:
Oh, I love it. I love it.

Jeff:
Look, I don’t hate on Ikea. They really help in a lot of ways. I think there are certain things that are there that are great, but a lot of their furniture items too, it’s like you just learn that having an Ikea couch or coffee table, it’s just not going to last most of the time, especially because you’re in there and you’re like, “Well, I’m here to save money” and then you realize that you’re actually losing money in the long run because you’re wasting a lot of time and you have to replace the items and all that kind of stuff down the road. But I think that Ikea furniture, unfortunately the majority of it doesn’t have a place in vacation rental units and I don’t think anybody should put it in their units.

David:
I believe Rob’s famous line is by nice, not thrice because you don’t want to buy it three times.

Rob:
That’s right. David, you watch my YouTube videos? Wow, that is so sweet.

David:
There-

Rob:
Jeff, I do want to say you have impacted my sleep, all right? Since we’ve talked, you have really changed the… I woke up like this and it’s all because of you because you’re the one that told me about Brooklinen sheets. I never really heard of them. And so let me tell you, we buy them now. And this is not advertising. I don’t get anything, nothing. But they are the greatest sheets to ever touch my skin ever. I have come from the dark side of Ikea. I was an Ikea fan and now I cannot do it. It’s ruined sleeping everywhere for me. I can only sleep in my bed now. So thank you for that. I guess it’s a double thank you.

Jeff:
You’re welcome. They’re fantastic. I feel the same way about them.

David:
Did we touch on the Ikea cart story? You hit that, Jeff?

Rob:
Oh yeah, yeah, tell us about that.

Jeff:
Oh yeah. That’s kind of a scaling pain story also. I remembered getting to the point, I took that Ikea sheets and et cetera story to kind of the next level. I was setting up 16 units at a time. It was one big setup and I’ll never forget because each of those units was two, three bedrooms. So you’re talking a lot of furniture and a lot of mattresses and a lot of everything else linens, et cetera, that I needed all at once. Up to that point, I was probably around 40, 50 properties. I had been running to Ikea with my team to pick up items.
Past the marketplace world into the Ikea world, I’ll never forget this one day where I was with my team, there were 16 of us. We were in Ikea, we had 48 shopping carts worth of items to check out. It was crazy. The line went all the way around through the store, towards the entrance [inaudible 00:46:05] where you pick everything up. Just the checkout alone took three hours of just scanning. And then the payment came up and I remember asking, “Hey, this is a decent amount of stuff. Can I get a discount?” And I’ll never forget, the woman just laughed and she was like, “No way. No shot. This isn’t even close to what you would need to get a discount on this stuff.” And I was like, “That’s crazy.”
But that whole day was the worst. I mean, from my employees wanting to literally never talk to me again because we picked up all this stuff, we put it in this U-Haul, one U-Haul one and our van that we had. And the U-Haul, my employee that was driving, it ended up getting into a fender bender. And then there was all these insurance issues that happened afterwards. And then we got to the place. And it was like 8:00 something at night, all of a sudden I’m like, the sigh of relief, “Ugh, this whole crazy day is gone. I’ve picked up all this Ikea stuff. Here I am.” And then realizing that it was all in the U-Haul. We had to get it all out and return the U-Haul. And then we had to build it. And so it was like, just the amount of packaging and opening and the time building it and the time unloading it, it was one of the craziest 48 hours of this one trip to Ikea. And I swore to myself after that and true to myself, never, never did it again.

Rob:
Oh man, I have done that so many times. You know that scene in Wolf of Wall Street where Jordan Belfort’s selling the stocks, he’s like, “Come on. You could do it.” And he sells them and everyone’s crowded around him and everyone claps after he is done? I remember I went to Ikea one time with one of my first business partners. I was like, “All right, you take this cart, you go here.” And I was like a robot just grabbing fake plants and sheets and doing this. Literally the speed at which I was doing this, because I’ve mastered this process so many times, he’s like, “Man, I just felt like I watched Jordan Belfort sell stocks.” And I was like, “I know, man. I’m sorry.” So we also had five. And I think that was the moment for him when he realized that short term rentals were not going to be easy. He was like, “Oh man, I thought we just furnished this.” I was like, “No, no, no. The furnishing is actually the fun part. It’s the buying that’s not fun. And then the dealing with the boxes.”

Jeff:
You’re 100% right. I remember being with my team and we were in there and we’re talking to each other like, “Hey, did you grab the EKTORP? Oh, where’s the MALM?” I literally felt like we were speaking Swedish to each other because everybody knew every piece of furniture that we would use by name. And it was like this aha moment of, “This probably is not right.”

Rob:
The MALM, the very difficult to assemble dresser.

Jeff:
Why is it so hard?

Rob:
That’s the one piece of furniture I’m like, “If you’re going to buy something used on Craigslist, it’s a MALM dresser because you’ll never get those five hours back.” Moving on here to question number three, does online shopping have its drawbacks? What’s the method here?

Jeff:
Online shopping, it can be good if done the right way. The problems with online shopping are, one, a lot of people don’t know what they’re doing. So I think that there’s a lot of little tips and tricks that an effective online shopper will know how to do. Whereas somebody who’s kind of just entering the space and is in this kind of analysis paralysis of, “Hey, there’s 900 different mattresses out there. Hey, there’s so many different kinds of sheets” might not be able to understand. And then you end up not really buying from brands. You end up buying off brand stuff that you don’t really know what you’re getting. A lot of folks that I talked to and myself will go through things like… I went through a big Wayfair phase where I was buying a lot of stuff from Wayfair and it was literally playing roulette. It was Wayfair roulette where I would order something, I wouldn’t be sure what was actually going to show up. It could be really good quality. It could be really bad quality.
I remember ordering a couple nightstands one time that showed up and they were literally maybe eight inches doll. They were for a doll house. They looked big on the picture because they were zoomed in and I was like, “What a great price for nightstands.” And then they ended up showing up. I think we actually put them next to the bed that we were buying them for for the couple guests because it were damaged. We were replacing them. We put them there for a couple guests because we thought that they might find it funny too.
But yeah, I mean there are some perils. Not knowing the quality of what you’re getting, playing roulette, not understanding shipping timelines and how those work and how to buy things that are in stock, not understanding what contract-grade furniture is and commercial-grade quality furniture, there’s a lot of things that fall under online shopping. Whereas if you were buying through something like even HostGPO, my company, it’s online shopping, but it’s very, very different and it’s geared towards making that experience easier for people rather than like… The other thing is when you’re checking out of an Amazon or an Ikea or whatever, thousands of clicks, thousands of clicks. “Oh, I need a cheese grater.” You’re buying one cheese grater at a time. That is also a pair of online shopping that we try to solve. But you know, you can do it wrong. You can spend a lot of time online shopping.

David:
Okay. I think you actually you covered everything there, the method and the madness. I love that phrase Wayfair roulette. That was hilarious. I also had my Ikea moment in addition to you guys. I was living with another cop and I was working in law enforcement and I bought the Ikea thing and they had these tiny little tools that you’re supposed to use. It took me about three and a half hours to put it together. And in the middle of it, I realized I could have worked four hours of overtime and made 75 bucks an hour at double time or whatever it was. I could have bought the nicest dresser ever and saved money. I’m never doing this again. So you guys are bringing up all [inaudible 00:52:04].

Jeff:
Value of time.

David:
Ikea is like PTSD in Swedish or something. That’s probably four letters.

Rob:
Dikea.

Jeff:
That’s really good.

David:
All right. Next question here. Let’s talk throw out rugs. When has this gone well and when has this made you mad?

Jeff:
Yeah. So I talk about this. I’ve had this conversation a lot of times. When is it time to throw a rug out? How do you deal with rugs in your vacation rental units? On the one hand, rugs are great and they… Actually, my background and my family’s background is actually in rugs so I’m always thinking about rugs for rooms. But what a lot of people don’t understand is, if a guest makes a rug dirty and it’s an high traffic area, they spill something on it, whatever it is, you can probably pay $200, or at least that’s how much it is out here, to have somebody come with a special vacuum and shampoo the rug and clean it. But that rug is never going to look as good as a brand new $200 rug. And so the thought here is, when do you really need to replace items in a vacation rental unit? How often? How often do you need to be throwing out your rugs? How often do you need to be replacing linens?
And so what ends up happening is even if you buy a washable rug, you will go through enough washes where it’ll start to fray and you really have to be okay with understanding that like at a hotel or at any other nicer accommodation where people are paying and expecting that level of service and quality when they show up, you need to make sure that you’re replacing the items that are starting to get worn out in a regular and frequent enough basis, rugs especially because it’s usually the first thing people see when they walk into a room or when they walk into an entryway. And if that doesn’t give off this clean pull together new vibe, that’s going to reflect negatively and set the tone for the rest of the stay.

David:
I haven’t thought about this enough. As you’re talking, I’m starting to get chills in my stomach. I’ve looked at the house, I’ve looked at the deal. I’ve looked at the numbers. I haven’t thought about furniture and how much I’m going to go through. Rob’s laughing. It’s like he’s like, “Oh, I remember back when I was innocent and naive and I didn’t think about what guests were doing.’ Because I’m like, I got a lot of rugs in these houses. Some of them are these faux bare skin really thin rugs. I’m like, “That’s going to be completely ripped into pieces and trash and they were all expensive when we picked them out. So I wish we had interviewed you before I had picked out the furniture.” Because this is some good stuff. I mean, obviously guests aren’t going to treat it super well.
Before we move on to the next question, what’s just a quick universal piece of advice that when you’re picking out furniture or picking decor, picking out whatever you want to call this for a rental property, that a rule people can just live by that if you get this right, overall you’ll be okay?

Jeff:
I mean, I really like Rob’s buy it once.

David:
Thrice. Yeah.

Jeff:
Buy nice.

Rob:
Buy nice, not thrice.

Jeff:
Not thrice. That’s a really strong one. I think the other kind of game changer rule is buy contract-grade furniture. Really, really focus on contract-grade furniture or just the idea of commercial-grade everything. You want commercial-grade in your house. Your home, it’s not… This is the concept that I think people just failed to grasp a lot of the time. And I did for my first 100 units, right? You really need to think nice doesn’t just mean expensive. Nice means right for what you’re doing. You’re creating a commercial space. People are coming and going. The way that somebody’s going to use that couch, they’re going to drive it like a rental couch and they’re going to sit in it, they’re going to open it. They’re going to close it.
If you buy a pullout couch from your normal place, how many times you expect somebody like a friend or somebody who’s coming to stay in your own home to stay in that couch? Maybe you open that thing two, three times a year. That’s what it’s built for. That applies across the board. Those vacation rental pullout couches get opened and closed every day, at least couple times a week, right? The cleaners open and close it a couple times. The guests will open and close it, they might open and close it multiple times during a day, right? So buy nice really means buy linens that are going to go through enough washes. Buy contract-grade furniture that’s going to be able to not break and withstand people standing up and sitting down. There’re specific types of furniture… This is a big thing that we talk about with HostGPO too, is just educating people on what those kinds of furniture are that you should be putting in your homes. So the one takeaway is treat your space like it’s a commercial space and buy that property.

David:
Is there a quick answer to where you can shop to find commercial-grade stuff? Or is it not that easy?

Jeff:
Yeah, I mean, so HostGPO, our buying group is really based on focusing on only identifying companies that have, at least for high use items, contract-grade furniture. If you’re buying on a site like West Elm through a HostGPO or not, you can sort by contract-grade. It’s a filter. Most people just don’t know what it is. So again, online shopping can be good if you know how to do it. And filtering by contract-grade especially when you have that luxury and that ability is a great way to do that. So again, you can do that. Sometimes it’s not generally available. So linens is a good example of that. Especially if you’re running dozens or 50 or 100 listings, linens can get a little bit challenging because commercial-grade linens aren’t available to the general public a lot of the time. So something like that you would have to join a buying group to be able to access.

Rob:
Yeah, I think I also got some contractor-grade things from Wayfair in the past that’s typically when I go to Wayfair, it has to be contractor-grade just because like you said, Wayfair roulette, right? You’re not really sure what you’re going to get. I’ve had some pretty good luck on there. I’ve purchased several vanities and things that are actual, I don’t know, critical components to houses and stuff. So they’ve held up pretty well for me.

Jeff:
To be fair, contract-grade, it’s a great term, but it doesn’t mean the same thing everywhere.

Rob:
Right.

Jeff:
It’s kind of like saying artisanal, that artisanal pizza or ice cream or whatever might not be the same in two different areas or two different places depending on where you are. So yes, certain people with actual contract-grade designations that do the testing on those products, those products are game changers.

Rob:
Well, I, for one, am a big fan of artisanal couches. My favorite in the game. We can end here. We got one more question here.

Jeff:
Sure.

Rob:
Should you bulk at buying in bulk?

Jeff:
Absolutely not. Buying in bulk doesn’t necessarily mean buying hundreds of everything. It means buying enough that you can qualify for some sort of discount pricing. And there’s tons of benefits. One, you can access additional discounts that you’re not going to be able to get otherwise. And two, you’ll be able to keep an inventory in your home that will prevent you from doing the worst thing you can do in vacation rentals, or really in your life, which is panic buying.
So that really goes to you’re out at a store because you had a guest checking in and you’re missing a pillow case. So you go to the closest store to buy two pillow cases. All of a sudden you’re paying double for those pillow cases or those sheets or those towels. They’re not going to match what you had the first time. You’re going to have to exchange them out if you want to create a unified experience. And you’re going to pay through the nose for them and that’s the worst thing you can do. Whereas if you had them in inventory, you had them in storage, you just pull a new one out. Keeping a closet full of replacement items and buying in bulk them that way is a real, real trick to operating a successful profitable business.

Rob:
Well, that is the Cube Master as I like to call him, Mark Cuban, and he talks about that and he’s likes, he always buys the big version of stuff, right? Because he’s like, “I’m going to need to buy toothpaste eventually so I just buy 1,000 of them.” No, I’m just kidding. He didn’t say that exactly. But maybe, I don’t know.

Jeff:
He said a lot of stuff like that. His whole thing is like, “Why would you buy one toothpaste when you can buy a pack of five for the cost of one and a half?” You’re going to use the toothpaste. You’re going to use the sheets in your listing so you might as well… You’re pretty much overpaying four times on your toothpaste if you really think about it that way. You don’t have to buy a hundred toothpaste because you might not… Hopefully you get through all of them, but you might not. It’s just you don’t want to buy one.

David:
Do you just keep those in the owner’s closet and then you just keep restocking from that same place?

Jeff:
Yeah. Usually, we’ll have at least a handful of items in the owner closet. And then once we got to 50 plus units, we started having warehouses where we would actually hold. And a lot of our kind of members at HostGPO, everybody has their own different way of doing it. And warehousing is a really nice option when you can get there.

Rob:
Yeah, we’ll say man, I got bulk sheets from a, I don’t remember where, but Host Standard Textile. It was kind of expensive because I didn’t need 20 pairs of sheets or whatever, but it is super relaxing. Ordering sheets and reordering sheets, David, you’re going to learn this 15 times over here in your portfolio. It’s very inconvenient when you’re cleaner’s like, “Will you order sheets?’ And you’re like, “Oh man, okay. Are they staying now? Do I need to order them now?” So just having a lot ready to go actually is really quite a relief to not have to worry about sheets for the next year or two.

Jeff:
Yeah. I mean Standard textile is a great example of that. There’s so many benefits that you just don’t know if you don’t know. Like you’re cleaner telling you, “Hey, we need to replace the sheet” and you’re like, “What size is it?” Nobody can figure it out. But if you look on the inside, there’s like a color coordinated thread. There’s a color coded thread that says green and that means twin. So they go and they grab a green inside. Those are commercial sheets. Those are hospitality sheets. Rob, you’ve had a positive experience buying through HostGPO, that kind of stuff. I mean, that’s what we made it for. We made it to streamline your ordering process.

Rob:
Yeah. At scale, we kind have to do it.

Jeff:
Yeah.

David:
This has been fantastic. Thank you very much, Jeff, for sharing such helpful details here, I’m going to move us on to the last segment of our show. It is the world famous.

Announcer:
Famous Four.

David:
In this segment of the show, we ask every guest the same four questions every time. And I will start with the first one. Question number one, what is your favorite real estate book? Which is hilarious because I think you said earlier you’ve never read one. So I’m curious how you’re going to answer this.

Jeff:
I don’t know if I’ve… I’ve read real estate textbooks in classes, commercial real estate, et cetera, that kind of stuff, but I’ve heard great things about the BRRR Bible. I’ll throw that out. There are a lot of folks who have been writing really, really great short term rental guides. And like I mentioned at the beginning of this podcast, I had a great mentor who I was lucky enough to walk me through a lot of this stuff. But back then most of these books weren’t around. So I think that I’ve heard great things about the BRRR book. I’ve heard great things about… And I have Avery Carl’s book on my shelf that I’ve been meaning to get to. So there are a lot of really great resources out there specifically for short term rental companies. So I would throw that out there.

Rob:
Okay. Awesome. Well question number two, curve ball number two, if you will. What is your favorite business book?

Jeff:
My favorite business book, there’s two. The one that comes to mind right now is probably Getting to Yes, which I really think is a great book on how to think about negotiations. It totally reshaped how I approach conversations with people. And I think that for anybody that has to… Everything is kind of a negotiation when you think about it at the end of the day, every deal you’re going to sign, every vendor you work with so I think that’s a really good one. If you haven’t read it, you should.

Rob:
When you are not out there creating rental arbitrage empires, what are some of your favorite hobbies?

Jeff:
Hobbies, so I play music actually. I’m a saxophone player. So I like to play shows whenever I can and just kind of jam out with friends. That and travel, probably my two favorites.

Rob:
All right. In your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Jeff:
I think a successful investor is someone who is willingly ready to pivot whenever that needs to happen. So I think anybody who has a strict mindset and is rigid on “This is what I’m going to do” and is unwilling to actually look at the data in front of them or look at what the deal is in front of them and pivot what they were hoping for is destined for failure. And I think that somebody who is flexible and treats each deal and each property like a snowflake is more likely to succeed.

Rob:
Awesome. Lastly, Jeff, tell us where people can find out more about you.

Jeff:
So you can check out hostgpo.com, that’s our buying group for vacation rental companies. There’s a bio about me on there. If you sign up, you’ll be able to chat with us, chat with me and learn more about kind of my experience and how we got to starting HostGPO.

Rob:
Awesome. David, what about you, man?

David:
Man? I’m @davidgreene24 all over so social media. Please, if you have me reach out to you and ask you for your money or crypto or some amazing deal, that’s not me. I will never reach out to you as a stranger with an opportunity like that. So be careful because I get new accounts every freaking week trying to work on getting the check mark. So that doesn’t happen. But that’s hard in case no one’s ever heard. There’s so many scammers out there that we got to do something about it. And then my YouTube channel is David Greene Real Estate. Robbie, how about you?

Rob:
Hey, by the way, I see your YouTube channel subscriber. You’re creeping up there, man. You’re doing a lot of lives. Maybe you can have me on one day. I’m still waiting for you to follow me back on Instagram, but it’s all good, man. You can find me on Instagram @robuilt, on YouTube at Robuilt, and on TikTok, @robuilto.

David:
I think I did follow you back. Didn’t you actually ask me for 10 grand or something? I wired it to you. Not that long ago.

Rob:
Oh no. You fell for the one thing that we tell people not to fall for all the time.

David:
Yeah. Jeff, thank you very much for coming on here. Really appreciate. This was some great information. Selfishly, I think it’ll help for me because I’m already thinking about, “Oh boy, I need to figure out how to get commercial-grade furniture, linen sheets, towels, all that jazz.” So this came at a very opportune time. I’m hoping to put a couple properties under contract while I’m out here in Scottsdale so that might be the first place that I can put this to use. Really appreciate you. And thank you for being here. Hopefully we can have you back again.

Jeff:
Of course. My pleasure.

David:
This is David Greene for Rob, buy nice, not thrice, Abasolo, signing out.

Having an occupied property rented substantially below market price is a problem that’s afflicted many real estate investors. Every month a property is rented below market rate is lost money (or at least, the opportunity cost of lost money). Yet, jacking the rent up will likely lead to a vacancy and even more lost rent, at least in the short term. You will also likely have an angry tenant on your hands and definitely might carry the bad karma of pushing someone to move out of the home they’ve lived in, potentially for a long time.

So what should you do? 

Should you leave the rent in place? Not renew the tenant’s lease? Bring the rent immediately to market price? Somewhere in between?

Unfortunately, there is no perfect solution because much of it depends on your situation and what you are looking to accomplish. Fortunately, there are guidelines to help.

How Below-Market Rent Typically Occurs

This article will not go into how to find and set the market rent price for a property. (For that, see here.) Instead, it will focus only on what to do when a tenant is paying well below market rent.

First, however, there are typically three reasons why you will find yourself in this position. Knowing these can help you prevent yourself from getting into this position in the first place.

1. Inherited residents

Sometimes we buy properties that already have a tenant in them. This is virtually always the case with multifamily properties. Fortunately, tenants often know that when a property changes hands, the rent will likely go up (especially if the new owner makes capital improvements). This is why many are nervous when hearing a property is up for sale. But it also means most won’t be surprised when they see their rent increased.

2. Not raising rents annually

I would argue that you should always raise the rent upon renewal, even if it’s just $5 per month. You do not want your tenants to be surprised by a rent increase. Many smaller landlords find themselves with severely below market-rented properties because they refuse to raise the rent (or don’t come close to keeping up with the market). They do this often because they’re afraid of a vacancy. But it ends up costing a lot more to have a severely under-rented property. So, make sure to raise rents every year.

3. Long-term month-to-month tenants

Normally, landlords don’t allow month-to-month leases upfront. In my company, if we switch to month-to-month at the end of a lease term, we charge $100 to $250 extra per month. Still, sometimes you find yourself with a long-term tenant on a month-to-month lease. And since there is no renewal date, there’s no reminder for you to increase the rent. This has even happened to us with month-to-month tenants who have lived in the same property for three or four years, and all of a sudden, their previously above-market rent is now below-market.

Again, you can’t be afraid to lose someone by raising the rent. So, make sure to put your month-to-month tenants on an annual rent increase schedule, just like with annual leases. Setting up a reminder in any property management software shouldn’t be hard. 

Why This is So Important

In the current economy, I would contend a fourth reason has entered the fray: It is very hard to keep up with this scorching hot market.

It used to just be when we inherited a resident who lived in a property before we purchased it or an old month-to-month lease that fell between the cracks. But now, it feels like just about everything we lease is below-market rent. And I can say confidently that it isn’t just us who feel this way.

Nationwide, rents haven’t shot up as much as real estate prices, but they have still gone through the roof. A recent Realtor.com report found the median asking rent for properties on the market has gone up 16.7% year-over-year, substantially more than wage growth and even more than inflation in a very high inflation year.

This, of course, varies by the city and state, with some seeing even higher rates of rent growth. A recent Rent.com report finds even faster rent growth, with some metro areas having truly obscene year-over-year rent increases. From their analysis, for example, Newport, Virginia, and Greensboro, North Carolina, had increases of 74.2% and 60.7%!

Yet these rather shocking statistics are a bit misleading. The issue is that they are only comparing new rental listings with those from last year. As NPR notes,

“Government consumer price data show that the average rent Americans actually pay—not just the change in price for new listings—rose 4.8% over the past year, which is a higher than usual rate of increase.”

So, if rents went up almost 17% last year, but the average tenant only paid just shy of 5% more for rent, then that would infer there are a lot of occupied properties with tenants paying below market rent these days.

Below-market rented properties are an endemic problem for landlords right now.

Understanding Tenant Psychology

Tenants are not surprised to see rent increases. Unfortunately, they are surprised (and quite upset) to see really large ones. Indeed, we’re starting to see more and more pieces in the media about the outrage of large rent hikes. 

We have even heard prospects tell us they didn’t renew their lease simply because the increase was too high despite the fact it was actually less than we were charging. Investor G. Brian Davis makes a similar point based on his experience,

“A good rule of thumb: don’t raise the rent by more than 5% per year. Any more and the sharp rent increase often jolts the tenant into moving—even if you’re raising the rent no higher than nearby market rates.”

Of course, this is assuming the property was rented at market rates beforehand.

Still, Brian’s thoughts fit with a survey of 1166 renters Buildium did a few years back. As they found,

“Most tenants will only tolerate a rent increase of 1-5% every 1-3 years, while nearly one-third feel a rent increase is never reasonable.”

Even back then, a raise of 1-5% every 1-3 years wouldn’t come close to keeping up with inflation. The average tenant (like everyone else) isn’t always the most realistic. 

But still, it’s important to understand that people don’t like big changes, especially negative ones. And in negotiations, if someone feels insulted, they will often refuse to do a deal even if it makes sense. While I don’t recommend negotiating lease terms with your tenants, even a simple “take it or leave it” request is a negotiation. And increasing the rent to market price in this rental market can come off as insulting.

How to Decide

Ethical considerations

So, what should you do? 

First and foremost, some people feel guilty about raising the rent to market rates, especially if it’s a long-term tenant who is paying substantially under market. And even more so if raising the rent to market will likely require them to move.

The most important thing to internalize here is that there is nothing immoral about charging the market rate. It may be jarring to some tenants, and they may even get mad at you. But you could simply turn it around and note that they have been living in that home at a discount for some time. Of course, the discounted rent was what had been agreed to, so they were not doing anything immoral either.

Thereby, I would lean toward seeing this as simply a business decision. That being said, if you are in a good and comfortable spot and can afford to charge your tenant less than market and feel that would benefit them more than the extra money would benefit you, then go ahead and charge less.

Just see it as an act of charity and not a business decision. But also, understand it is an act of charity you won’t get any credit for.

Financial considerations

According to RealPage.com, on average, 57% of tenants renew their lease each year, up substantially from 2010.

That means, in normal times, you have a greater than one-third chance of having a vacancy each year. 

Now, I think you can do better than that by offering a good property with quality maintenance. Indeed, our average stay is about four years, and Jeffrey Taylor (Mr. Landlord) has boasted of getting to six years with his unique property management ideas. 

But there are good ways and bad ways of getting low vacancy. And keeping your rents really low is a bad way.

For example, let’s say Bob and Fred both lease identical properties at $1000/month. Bob increases his rent by only 1% each year while Fred increases it by 5%. Bob has no vacancies (best case scenario), whereas Fred has a move out every third year, and the vacancy lasts two months, and he incurs $1000 in turnover expenses above what the deposit covers. (We won’t count maintenance or capital improvements as we’ll assume they are the same.)  

Here is what the ledger would look like:

Despite the extra vacancy, Fred still does better by over 10% and brings home about $15,000 more. 

So, in general, with all things being equal, it makes sense to increase the rent to market. This is especially true with apartments as the value of an apartment is directly related to its income, unlike with a house or even a duplex. This is because the value of an apartment is based on its cap rate, which is determined by taking the net operating income and dividing it by the purchase price.

A lower rent means a lower net operating income which means a lower price.

However, there are times when it’s not wise to push rents to market. Everything depends on your situation, as I noted above.

For example, if you have a glut of rehabs or turnovers right now, you should be more conservative with rent increases. This issue has haunted us at times as we are constantly growing. In such times, we know extra turnovers will cause additional holding costs as we don’t have the resources to start more new projects. 

So, if we get excess turnovers, we may have to leave properties empty for a month or more before work can start on them. By looking at our business holistically, we see that while it may make sense to increase the rent to market for that property by itself, it doesn’t make sense for our business.

Another possibility would be if the property is not in particularly good condition. Perhaps it’s being rented below market because, in part, it’s not in marketable condition. In this case, the two options you have are:

1. Increase the rent to market for its condition (i.e., from $500 to $750/month instead of a market rate of $1000).
2. Give the tenant notice to vacate. This is tough but often the best choice. If you want to be kind, you can offer to pay for some of their moving expenses. (Or you may have to—see the next section.)

Lastly, you may decide to move the tenant to market incrementally over several years. For example, if they are at $600 and market price is $1000, go up to $750 next year, then $900, then to market. 

This is tempting and can make sense sometimes. But I would recommend against doing it simply because it feels better than increasing the rent straight to market. If you do it incrementally, it should be because it’s the most economically rational thing to do.

In general, however, the rule of thumb is that you should lean on the side of raising the rent to its market level as quickly as possible.

However, this particular rental market may be an exception. Rents are going up at an unsustainable rate. You can get a substantial rent increase and likely do so without a vacancy, even without going all the way to market levels. In this abnormal market, it probably makes sense to have your rent increases be a bit under market. (Maybe 10% instead of the national average of 16%, for example.) Rent increases will inevitably slow, and you should be able to catch up soon. And this way, it’s less likely to offend your tenant and have an unnecessary vacancy.

Legal considerations

Lastly, it’s important to understand that some cities and states restrict how much a landlord can charge in rent or increase the rent per year. For example, in New York City, some apartments have rent control. And in Oregon, they passed a law restricting rent increases to “7% plus inflation annually.” In addition, if landlords give a “no fault” eviction notice, it must be served 90 days in advance, and the landlord must pay a relocation assistance fee (one month’s rent). 

So, make sure to check your local and state laws and act accordingly.

How to Actually Raise the Rent

One of the most important things to understand in business is that people get more upset about their expectations not being met than bad things happening. This is why it’s so important to set expectations right from the get-go. You should tell people during their lease signing that rent will likely go up each year. It’s not a bad idea to say a similar thing to the residents after you buy a property with inherited tenants too.

When you do send a rental notice (usually 60-days before their lease ends), I would do so in writing and not over the phone. It’s probably wise to both mail and email the notice. The notice should be respectful and professional and include a brief explanation if it’s more than a 1-3% increase. For example, “inflation has increased substantially” or “the property has not seen a rental increase in four years.” Say “property,” not their names. Otherwise, it sounds like you’re accusing them of mooching or something like that. 

This will allow them a chance to cool off if they get mad about it and also not commit themselves to moving if their first response is anger. (It’s also important to have everything in writing.) If they do call angry, stay calm (people will mirror the tone of voice of the person they’re talking to) and explain the reasons for the increase. Like with the letter, I would try to keep the explanation short and to the point.

An example letter can be found here. 

Conclusion

Generally, it’s important to keep up with rent increases to avoid finding yourself in this situation. But particularly in this market, you will find yourself with a below-market rented property from time to time. The key is treating the tenant fairly but approaching this as a business decision. Because in the end, that’s what this is, business. 

Run Your Numbers Like a Pro!

Deal analysis is one of the first and most critical steps of real estate investing. Maximize your confidence in each deal with this first-ever ultimate guide to deal analysis. Real Estate by the Numbers makes real estate math easy, and makes real estate success inevitable.

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