Afford Anything - The Reality Behind High Home Prices, with BiggerPockets CEO Scott Trench

Episode Date: August 25, 2023

#458: Today we chat with Scott Trench, the CEO and President of BiggerPockets, a real estate investing education company with more than 2 million members. He joins us to share cutting-edge insights on today’s real estate market. We discuss economic trends, demographic shifts, and talk about how interest rates impact home buyers. Whether you're a potential homebuyer, an investor, or simply curious about the housing market, this conversation will shield light on what’s REALLY happening in today’s confusing real estate market. For more information, visit the show notes at https://affordanything.com/episode458 Learn more about your ad choices. Visit podcastchoices.com/adchoices

We all know that interest rates are high. As of August 23, 2023, the national average for a 30-year fixed rate mortgage stood at 8.03%. The mortgage rate is now the highest that it's been since the year 2000, and home buying activity is at the lowest level it's been since 1995. Why do home prices keep rising? Here to discuss that today is the CEO and president of Bigger Pockets, Scott Trans. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, to any limited resource that you need to manage.

So what matters most, and how do you make decisions accordingly? That is what this podcast is here to address. My name is Paula Pant. I'm the host of the Afford Anything podcast. As I mentioned, in today's episode, we will be chatting with the CEO and president of Bigger Pockets, which is a real estate investing education group that has over 2 million members. In this conversation, which we recorded in person in Afford Anything's newest studios in the financial district of Manhattan. And by the way, tune into YouTube if you actually want to see it in. person. It's not going to be up quite yet. We have a bit of a lag time between when things air in audio versus when they air in video. But go to YouTube.com slash afford anything. Hit subscribe. Hit the little bell so that you get updates when we post stuff. And in a couple of weeks, you will see our interview with Scott Trench. In person, in studio, with all the expressions on our faces. And yeah, it's fun. I'm loving being able to record in person. Anyway, we talked

about, obviously, why aren't home prices lower? What's going on? We discussed regional market dynamics because the market is not a monolith. What's happening in the Sun Belt versus the northeast versus the Midwest? We talked about trends related to migration, to development, all these factors that influence demand. We talked about interest rates, yield curves, trends related to new construction, both in single family and multifamily. We talked about how to think through investing in different markets and whether or not there will be a correction with single family homes. And we talked about syndications and why they are riskier in 2023. And we wrap all of this up with the ultimate question, what should we be doing right now?

So buckle up because you're in for quite a discussion. Here is BiggerPockets CEO and President Scott Trench. Hi, Scott. Hi, Paula. It's great to see you. It is great to see you. It's been a couple of years since I think I saw you in person last. Yeah, exactly. It was pre-pandemic for sure. Yeah, absolutely.

The last time that we spoke was a very different real estate market. So much has happened in the last three years in real estate. Let's take a snapshot of where we are right now and bust through some of the myths and misconceptions. First of all, we're recording this in August 2023. Can you give us a snapshot of where are we at this moment in real estate? state. Interesting. I'll break that into a tail of different parts and we'll focus on the residential real estate market, right? So there's places in the commercial, a multifamily space, different world. In the residential space, we're at this kind of point where I think a lot of people are

surprised that prices aren't lower, right? When interest rates have doubled, why haven't housing prices come down? The lack of affordability is skyrocketed in the last year. Mortgage payments are 40, 50, 60 percent more expensive for the same level of house, but prices haven't come down. what gives. That's, I think, the big question right now. And the big part of that story is what we call the lock-in effect. Homeowners around the country locked in three, four percent rate mortgages in the last couple of years have a lot of equity. Many homes in this country are paid off, and they're stuck. They can't move because if you move, if you have a $700,000 house and you want to upgrade to an $800,000 house, maybe you could have afforded that a year or two ago. Maybe you want more square footage.

Maybe you want to move to different place. You can't do that now because you're giving up this low, locked in mortgage rate, and you're going to have a skyrocketing home payment. So all but the best opportunities, the most dire situations, are eliminated from the transaction market. And so that's leaving a lack of new supply and new inventory coming on, which is keeping prices high. Right. Well, in addition to that, higher interest rates also mean that it's more expensive for builders to build, which then also contributes to lack of new inventory. Absolutely. And, you know, I would have thought that builders were going to get crushed this year. That was, I think, where the smart money was at, boy, is that wrong.

Right. Home builders have been thriving in this environment because of that lock-in effect. One of my buddies doubled down on building more homes earlier this year, and I was like, oh, my gosh, I wouldn't want to be on that side of that bet. And again, boy, was I wrong. This guy is thriving right now. He's putting a bunch of properties on the market. They're not competing with existing property listings.

Right. And so they're able to kind of set their terms. Sure, they're not selling for as much as they were a year ago, but they're selling for a lot more than they feared they would be at this point in time. They're still very profitable. And are we also seeing the stock prices of Home Depot, of publicly traded companies that benefit when a lot of people are renovating their homes, those stock prices have done very well?

Has the trend followed? There's been a lot more renovation because of that lock in effect? You know, that's a really good question, and I actually don't know the answer to that. Before this call, I would have wondered if Home Depot was actually struggling a little bit this year. And what we found in the real estate community is that a lot of financial. Flippers, for example, are reporting that prices for dilapidated properties that need a lot of work have fallen a lot more than properties that don't need a lot of work.

Perhaps ironically, because a lot of households don't want to spend the cash to fix up the property. They'd rather just pay more for the property. So there might be something to that effect, but who knows, those are some different data points there. Right, right. Well, I mean, it stands to reason that the interest you would pay on a $2,000K loan would also be, you know, substantially higher and that would probably also have an adverse impact on the number of people who renovate. Yeah, there might just be fear of the unknown in rehabbing the properties, not knowing what to do, not knowing how much it's going to cost, all that kind of stuff. Right. And I mean, that is always present, but I suppose in 2023, when inflation is so out of control, the question is always why now, right?

Fear of the unknown is omnipresent and universal. It's evergreen. But in an inflationary environment, there's added uncertainty. Absolutely. Speaking of an inflationary environment, what is happening with home prices? That's a pretty interesting phenomenon. Our VP of Data Analytics, Dave Meyer, did a pretty extensive study on 295 housing markets around the country. And what's the story with home prices? It's really hard to make one right now. What is that story?

Well, on average, home prices, and this is a month or two out of date, so this is end of May report. But prices are down 2% nationwide, but that doesn't really tell the story. 200 out of 295 markets are seeing home price appreciation. But the magnitude of the fall in many of the markets where you're seeing home price depreciation is counterbalancing that to get to that negative 2% growth rate. So markets like Boise, Idaho, for example, have fallen like 20% year over year. But markets like Rochester, New York have seen pretty smooth and steady growth. They almost haven't noticed the interest rate rising environment at all. So it's a pretty wild situation And it's kind of really hard for, I think, investors and homeowners like to kind of make out what to do in that context.

That's interesting. So the year to date, the K. Schiller Index is up, you know, from where we were January 1st, overall nationwide, the K. Schiller index has risen. How can both be possible? How can the K. Schiller be high while nationwide you've got negative two? Yeah. So in 2022, prices came down towards the end of the year, right? They came up at the beginning of the year in Q1 period before interest rates rose. And then prices began falling.

So year over year, starting in May, that's when you're starting to see some of that price decline. Got it, got it, got it. Now, Boise is a particularly interesting example because Boise had the shortest number of average days on market of any major metro area in 2022. I actually was just looking this up for an article that I was writing for our newsletter. Boise in 2022 had as little as an average of eight days on market, which is just phenomenally quick sales. Why have prices fallen? Was it simply that people over-speculated in Boise? And so you're having a hyper-local effect there?

You know, I think it's going to be really hard. Real estate's so regional. Why is Boise doing this? Why is a market in Austin, Texas, doing this? What's going on with Charlotte, right? You can make up a different set of answers for each one of those. I might speculate that Florida, for example, some of the markets there are seeing negative rent growth and negative year-over-year home price appreciation because of the

insurance things you've seen, right? It's almost impossible to get insurance. in some places in Florida. Right. As a result of that. For Boise, I'm not sure specifically. It seems like a lot of out-of-towners moved there over the last five, six, seven years, and it was one of the hottest markets in the country.

And maybe in the last year or two, the appeal of that or the relative spread, one of the benefits of moving to Boise from Southern California, for example, might have been the much lower cost. If that's no longer there, maybe folks are moving back. Maybe there's other dynamics at play in a market like Boise. But I'm not an expert on Boise in particular, so I'm only speculating here. Right, right. Yeah, at least anecdotally, a lot of the interest in Boise seem to be coming from, you know, well-compensated knowledge workers migrating from coastal cities, right, migrating from California.

And it created some frothiness in the Boise market for a while. But it goes to highlight how all real estate is local, how whenever people talk about the national real estate market, it's, yeah. Your headlines 2% down year over year. Again, depending on how you want to look at it, we'll see how it plays out over the course of 2023 versus 2022. Right. End of year, end of year comparison. But it's local in that story, that 2% national headline has nothing to do with your reality. You ask people around the country at random.

Some people are going to say the market's up. Some people are going to say it's flat. Some people are going to say it's down and they're all right because it's so local. Because it's so hyperlocal. To what do you attribute the 2023 year date rise? Like, why is it that we reversed out of the decline that was happening towards the end of 2022? Sorry, the current housing market is slightly negative to last year. Year over year, yes, but I'm thinking year to date, January 1st through August, right?

Overall, nationwide, we've seen some growth, right? So to what do you attribute that? Why has the aggregate market picked up this calendar year? One dynamic is with interest rates high right now and typically tending to rise, when they fall briefly, like let's say it's interest rates are seven and a half and they come down to seven or six point nine. Right. A lot of people go in to get pre-qualified for mortgages. That creates a ton of competition in the weeks after that, after they get pre-approved or lock in those rates. When the rates go back up, that comes out. And so I wonder if you're seeing pulses of pricing around the country in markets that are being impacted by that kind of macro dynamic that's creating pockets of competition. And depending on when you look at the data, you're going to see these increases or decreases. So that's one speculation I've had because over the course of the year, you've been like, wow, there's nobody buying. And then there's like, nope, I just had to be. I think that's a dynamic that's going to happen as interest rates are volatile but climbing in those little pockets of downturns there. I also think there's just a lot of demand for housing right now. You know, millennials are trying to move in and get houses.

Right. A lot of them are moving back to where they grew up and trying to buy those houses. Denver, for example, had net outbound migration the last two years. I would never have predicted that a couple years ago. Right. But I understand exactly, right? I'm 32 years old and a lot of my friends are moving back to Ohio. Maryland, Northeast, because that's where they grew up and that's where they're starting to settle down again.

We've got a couple of trends happening at the same time. We've got millennials. The population of millennials is significantly larger than the population of Gen X or of Gen Z, right? Millennials, as the children of baby boomers, millennials are a particularly large demographic relative to Gen X and Gen Z. And millennials are exactly at that age where many become first-time home buyers. So you've got this trend where you have a lot of demand. And we've also known for more than a decade that housing supply is short. Why is it in most markets or in most spaces when there is low supply and high demand, the market takes care of that? Why is that not happening in housing? Why do we consistently and predictably have demand that exceeds supply, but we just can't get supply up there. Another great question. Obviously, there's supply or there's labor supply constraints.

Right. There's materials supply constraints. But I wonder if in 2023 and 2024, the exact opposite of what you're talking about is going to happen. We have the most new housing units under construction in history, at least where we've been tracking it. We have, I think, 1.6 million units under construction. Now, 900,000 of those are multifamily units. So the multifamily market is going to have a lot of stuff coming on. And that's all happening in the south and the west. But there's another, so what is that, 6,700,000, whatever the balances, single family homes that are under construction currently.

And why is that happening? Well, it's a two or three-year lag. This is not a overnight project. You didn't start that last month. You started three, four, five years ago, maybe a decade ago. Same thing with multifamily construction. So I wonder if in the next year or two, we're going to continue to see the pressure of both interest rates and massive supply coming online. But again, to our point earlier, it'll be hyper-local.

The south and the west are going to see the brunt of that new supply coming online, and the northeast and the Midwest are not going to see as much supply coming online. So if in the northeast, you might not see prices come down or rents, you know, stabilized. They may continue to grow. But if you're in the sunbelt, you might see housing prices become much more affordable in the next couple of years, next two years specifically. We'll see. So your theory then is that supply will catch up with demand, it's just taking some time, essentially. Yeah, and there's a large body of thought around this. Who knows, like, the real fundamental answers.

A couple of other key points around why supply is constrained. We have what's called the National Local Problem, which is a kind of an ironic phrase about how most parts of most cities are zoned for single family only. Right. So everyone wants more housing supply, but nobody wants it in their backyard. Right. No one wants their single family development to be the one that allows duplexes, triplexes, or aquatic complexes, much less a 15-story apartment building that blocks their view.

You. Boston, for example, this came up in a forum post in bigger pockets. 85% of the land in Boston is zoned single family. So in order to even have the opportunity to build, you have to have the right zoning. So that's one factor. Again, we talked about labor supply. We talked about material supply. Another factor is the labor itself, not just how do we encourage more people to do this, but housing booms and busts. So I would predict, and this happened in the Great Recession, so I had to predict a similar type of story here where

tons of new construction happening in 2004, 2006, 2006, 2007, no construction starting 2008, 2008, 2009, 2010. Right. So you have this pool of labor that's highly skilled in construction, and then they exit because they're all getting laid off because there's no more building activity. Right. So now you don't have skilled laborers to do these big projects, right? Couldn't even hire them if you wanted to. Right. And so I think that's a dynamic that's impacting housing construction costs as well, is the lack of this skilled labor to do it.

And so, you know, to really get skilled construction supervisors and leaders need to be in business for 10, 15, 20 years. And if the boom and bus cycle of real estate is so cyclical, oh, you're not your floor of labor is not high enough. So those are some theories, for example, that people have around why there's not enough housing. Right. You've mentioned how most of the development is happening in the Sunbelt, in the South and in the West, right? That is public knowledge. It's public information. to what extent is that being factored into new developments in the Northeast and in the Midwest, right?

Which is another way of saying, are we going to see that shift flip as developers recognize more opportunities in overlooked parts of the country? Interesting. I think that the folks who are doing this like to think that they're really smart investors. And they're basing it on migration patterns. Right. So part of that is, hey, why are we building so much in Denver and Phoenix? because we're expecting more people here, we believe there's going to be a lot of demand there. I don't know if people have got it right or got it wrong, but if the demand doesn't turn up,

you're at more risk in these places where a ton of supply is coming in, right? So I think, like, I'll pick on Florida and Texas here, right? Florida has got this insurance problem, lots of natural disasters. They're very business-friendly, and a lot of people want to move to Florida for the climate, but they've also got offsets around politics, right? That's a draw for some people and it's not a draw for other people. Same with Texas. And I think that there's a risk in those states that you're over emphasizing the benefits, not really factoring in the risks specifically with, you know, I think insurance is the big one in Florida.

I think property taxes are going to be a big one in Texas. Right. And you said there was net outflow from Denver for the last couple of years. It's minor, but a little bit. Minor, yeah. And that's not something that I would have expected from a place like Denver. It kind of scares you as a real estate investor in Denver because you see, you go look outside and there's 40 cranes, you know, or 15 cranes or whatever it is, all build multifamily. Right. The thing about population dynamics is that they change very rapidly because people have mobility and can move quite quickly, you know, especially inside of the United States.

I mean, there are no restrictions against interstate movement. So it's very easy to move from Texas to Maine or from, from, from, you know, from. Florida to Kansas. You don't need a passport. You don't need a visa. You don't need currency exchange, right? You don't need special work papers for one state over another. So given that migration can happen so quickly, and yet there is such a lag time when it comes to real estate development, does that entrench the population patterns that we've seen five years ago? I guess that's kind of a complicated way of saying, are developers building based on outdated data because of the necessary lag time? You're asking great questions that, again, I can only speculate on.

So these are, you know, this is a fun, fun discussion here, but no, I don't think anyone really knows the answer to these things. If I'm going to speculate, I would say that in the COVID pandemic, it was a big reshuffling. Right. There's a lot of fuzzy data, right? So, for example, household formation spiked during COVID. Really? Like, do we really have a lot more households form or did people, you know, break up? When a divorce couple breaks up, there's a two-net household formation.

When roommates separate, there's net new household formation. When someone in New York City is renting an apartment and they don't want to be in New York City during COVID and they move out to a house with some land where they can actually get outside and breathe during the pandemic, maybe there's some sort of data manipulation. There's two households or something, two rents that are being paid to leases. So there's a big shuffling there. And so that's the big question is, are there going to be enough household formations nationwide? Where are they going to take place? And everybody is placing their bets when they're developing. That's part of the bet behind it.

I also think that with COVID, you had a great reshuffling of labor, right? Instead of having to work in Denver at this job, you now had access to every job that you were qualified for the entire country. Right. So wages skyrocketed for that cohort of workers, white collar workers, that could do their work remotely, right? Because you just, why wouldn't you arbitrage that and take the highest check? Now, what's going to happen next?

I think, you know, folks have largely probably optimized for that environment. There's always going to be people changing jobs to optimize for that. But that burst of activity, that burst of optimization for a lot of white-collar workers, I think, is over. And a lot of companies are starting to require you to come back into the office. Requiring someone to come back to the office, you know if you're the CEO that there's probably going to be some people who are going to leave and there's going to be a different set of talent in there. I don't know how big of a thing that's going to be. I don't know where that's going to lead. But I can see that forcing people into bad situations.

I got a remote job in New York from Denver. CEO now says, I want everybody in here. I have two options. I can look for another job, which is harder now, or I can move to New York and give up my 3% interest rate mortgage and get a more expensive housing environment. So I think those are going to be challenges that people are going to face in the next couple of years. And I don't really know.

I haven't thought through it enough to think how that will play out in terms of markets. We interviewed a researcher who's been studying work from home, a remote work, since the late 90s, back when it was referred to as telecommuting. And one of the comments that he made in our interview was that he was starting to see a trend that he predicted would continue of the outer rings of major metro cities becoming very attractive because a lot of offices will require workers to come in maybe two days a week. They have a hybrid work environment. And so people need to live close enough to their job that they could commute in every Monday and Friday or every Tuesday and Thursday. but they don't necessarily need to be right in the city center anymore. I think that's a great theory.

That makes all sense in the world of me. That's exactly what I did. I live 30 minutes outside of Denver in the pocket of the mountains and go in once a week to the main office. It's 30 minute drive, but I would not do that every day if things were different. But that's exactly what I'm doing. So, yeah. All right. Excellent.

But this is all speculation. I mean, so for the average person who's listening to this, who lives in some, we'll say mid-sized, city. Maybe they live in Kansas City, right? And they're thinking about their knowledge worker. They're thinking about buying their first rental property or their second rental property. They're nervous about home prices, but they're also a little bit overwhelmed by all of this talk about home building and interest rates and all these macro factors. To what extent do they really need to think about this? I think all investing decisions start with a macro look and then boil down into a very tactical one. So if we zoom way out to the macro, as a middle class American worker,

trying to get started in investing, I have a couple of broad options available to me. I can invest in the stock market. I can invest in the bond market or debt. I can invest in real estate. And I can try my hand at some alternatives, perhaps like Bitcoin or private businesses or whatever in there. If we're agreeing with that premise that that's kind of the broad opportunity set here, you know, how do things rate in relation to one another in terms of opportunities or diversification or whatever I'm looking for? The stock market, we just talked about how the real estate market is down a little bit year over year from a price point trending up year to date, confusingly. But the stock market is up like, what, 15, 17 percent, something like that year to date.

If you exclude the fangs, it's down 2%. So, you know, if you exclude like five tech companies, essentially, the U.S. stock market is down 2% year to date. That makes sense because Microsoft, Nvidia, basically any company that would profit from AI that has led the charge. Google, Apple, Microsoft. Yeah. Tesla.

Is Tesla? Yeah, I think Tesla is having a good year, but in the context of bad two or three years, something like that. Yeah, I haven't checked. Maybe I'm off on that one. You exclude these like five select tech companies that are pretty big. Mark us down. The rest of the market. How do you play into that?

Interest rates. Interest rates are rising. There's not a lot of reason to believe that the Fed is going to bring them down in the near term. There's a lot of reason to believe they're going to stop raising them. Right. But that's not good news. The yield curve is inverted. And so if the Fed doesn't reduce rates,

the interest rates on longer term debt are going to keep marching up, which is bad news for the bond market. You got real estate, which, you know, hey, what's going on here? Why haven't prices come down more with the interest rate environment? We talked about the intricacies of supply. What's holding back inventory is this lock-in effect. There is a lot of new constructions that is a risk. And then you have, you know, small businesses, which are a lot of work and maybe inaccessible to a lot of folks. So in that context, you know, obviously, you know, I'm a real estate investor. And like real estate, I like the fact that I can lock in debt, amortize it over a long time horizon. I'm going to make money through amortization of my debt, some appreciation.

I'm going to produce some cash flow. Once I've made that determination, now I pick those markets. Kansas City? I like Kansas City. I think that's a great example of a place where there's potential opportunity in this country. I don't know the supply and demand dynamics. You need to dive into that. Is some of that supply that's cutting in the south and the sunbelt hitting Kansas City,

or is that, are you pretty insulated from that? But if so, that might be a great place to hold real estate for a number of years, and you can probably get a pretty good cash and cash return in a market like that in the Midwest. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays.

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trying to figure out which city they should be investing in, right? But as we discussed at the beginning at the top of the show, all real estate is local. All real estate is hyper-local. So there is no such thing as a national market. There's only a bazillion mini markets, or a bazillion local markets, right? But for a person who lives in Manhattan, who is definitely not going to invest in Manhattan, they're trying to figure out if they're going to invest in Kansas City or Omaha or Cincinnati, how do they get started?

Yeah, I think, all again, quote our VP of Data Analytics, Dave Meyer, I think he has a good handle on this. But, you know, I think there's three ways to think about what you want to go for. Do you want cash flow? Do you want appreciation? Or are you looking for a hybrid? There's nothing that offers everything all at once. Right. But you can get a blend of, you know, if you're to plot out the appreciation and cash flow of the market,

just a distinct trendline where there's a tradeoff, there are bubbles, you know, over the last five to ten years. There are bubbles in a couple of markets that have done well with both. but you're really going to have to make a trade-off decision there. Many investors choose cash flow. I think that's great. But I personally think that, you know, unless you are needing the cash flow in the near term, appreciation is going to net you off in a better place in five to ten years. So you look at those net migration patterns.

You look at where the supply is coming online and where it isn't. You look at places that you know that you like to be a part of your life is you can actually physically go there, visit, meet the people that are going to be managing your property and helping you find deals. I think those are going to give you distinct advantages. And it's a bet what's going to happen over the next 10, 15, 20 years, right? Dave Meyer has some projections. He's got, here are the best 10 cash flowing markets currently in the country.

Here are 10 that might have great appreciation prospects next year. Here are some hybrid markets. So you have to read that and determine if you agree with his calls on those ones. All right, well, we'll link to that in the show notes. So what you just outlined, determining if you're going to pursue an appreciation strategy versus a cash flow strategy makes me think of the analog to that would be essentially growth stocks versus dividend stocks. You got it.

And the trade-off, you know, if you're going for a high-dividend portfolio, you know, the trade-off of a stock spits out high dividends because it's not reinvesting in growth. Absolutely. Now, I'll also answer from a context of what I'm doing personally. I invest in Denver, Colorado. I am not bullish on Denver-Colorado real estate in the next two or three years, but I'm not doing anything with my portfolio. I'm logged in to that 3%, 4% interest rate mortgages, right? As a landlord, I'm holding those properties. I'm expecting relatively low appreciation

compared to the rest of the country. So if the country's negative, I expect Denver to be more negative. If the country's positive, I expected to be less positive over the next couple of years because of the supply dynamics that I was telling you about. But I also believe that over the next 10 to 15 years holding on to this great low interest rate debt in my backyard operating well. I'm going to harvest cash flow and I'm going to amortize my debt. And over 10 to 15 years, I think Denver is as good a bet as any other market in the country because of the fundamental reasons people want to be in Denver. It's like fairyland in the summer in particular in the front range. I don't know what we do in the winter besides skiing and snowboarding. So I'm just bullish on that. And that's what it really

comes down to at some point for a lot of investors is, okay, well, call me up in 15 years, see how Denver has appreciated from 2023 to 2038. We'll find out at that point. Are you an advocate? So what you've also outlined is you're in just one metro market. What do you see as the pros and cons between consolidating all of your rental properties into one metro market versus diversifying across two, three, four markets? I believe the advantages are in control. Yes, you're taking more concentrated, geographic risk in the market, but I think that the mandate, I know the market. I know that this area of town is likely to appreciate rapidly over the next couple of years and this area

isn't going to change much. Or I can make those bets with relative confidence because I live here. I know the contractors in my network. I've met the agents that I work with, the lenders. All that stuff, I think, gives you an advantage over time. When things get particularly painful, I can go to the property, see what's going on and make a call on, okay, this is how I want to handle this negative rehab situation, right, a basement flooded one of properties recently. Okay, here's the plan. That's not going to release. That's going to patchwork it. I need to fundamentally solve this problem by doing this, this, this, and this. I can see that in Denver in a way that would be much more painful for me to get in a flight and go out of town for. So I always think that despite the

differences, you know, regionally, if you're going to look for an out-town market, pick the best one. Pick the one that you think is going to be most conducive to your goals. But I also heavily bias you. If you're looking to invest in real estate for the next 20 years, do it in your backyard might just be the best way to win. Or at least somewhere that's maybe within driving distance rather than flying distance. Yeah. So if you live in New York City, for example, maybe someplace, maybe Albany or Rochester. And, you know, I'm hearing success stories from New Jersey and pockets there.

So again, I'm fairly bullish on the Northeast. And I won't be surprised if New York isn't a particularly good place for the next couple of years as well. So I know it's really expensive, but I'm not a bear on New York real estate here. Interesting. Yeah, it's hard to squeeze a good cap rate out of New York, or at least out of Manhattan. But you're going to have lots of rent growth, too. So there's lots of good reason to believe in rent growth and lots of cash flow growth. Right. Now, how do you make projections around rent growth? So this is a topic that seems to have come on people's radar fairly recently because for the last decade, we've seen rent growth be 2%, 3% per year. And in the last couple of years, rent growth has exploded nationwide, but property taxes, You know, a lot of that gets offset by higher property taxes because of higher home values.

So net to the landlord, you know, it's kind of a wash. How do you price in rent growth when you are forecasting for a rental property? I think rent growth predictions are all over the place nationwide. I think that there's this really complicated supply and demand dynamic, but then there's also the simple fact that mortgage rates, which is effectively competition to renting, have skyrocketed so much, that makes housing so much more expensive and should be significant. an upward pressure on rents. Here we are in 2023 with, I think, negative rent growth by 1% for the first time in a couple of years. That was a headline recently, year over year again,

from this month to the same month last year, July, compared to July 2022. So I think it's anybody's guess. I think you're going to have a lot of downward pressure on rents, though, in my opinion, because of the supply dynamic I just told you about, again, your competition from multifamily. You got the single family stuff coming online, but that's typically owner-occupied. all of the multifamily units are rentals. So I think that in some markets you're going to see significant downward pressure on rents, and in some markets you're going to see rent going up. The major thing that I'm hearing from you, I think my key takeaway from what we've spoken about so far,

is that if you're thinking about investing in a market, look at how many new multifamily starts are happening in that market, and that's going to be a key indicator on price pressure within that market. Would that be accurate to say? I think that's right. And I think, kind of listening to myself talk here about the rents and stuff, I'm like, you know, I think the higher level pieces have a long-term outlook. Buy an asset that you're going to hold on to for a long period of time because this is anybody's guess. And there's going to be volatility in a lot of these regions.

It's super complicated. You have to guess what the Fed's going to do with interest rates. You have to guess at what's going to happen with migration patterns and demand dynamics in your market. You can get a pulse on supply. So that's one thing that you can actually look at. And you're going to have to use that information to make a calculated guess if you want to do like a third. three-year investment thesis. If you're doing a 20-year investment thesis, you buy a good property in a good part of town that cash flows from day one, run your numbers really carefully,

add value, put it to its highest and best use, and hold on and let the tenants pay off the mortgage and produce a little bit of cash flow, and things are going to be good there, buy a good deal at a reasonable price running your numbers. So I think that's the big message. Then again, I, of course, have spent the last 30 minutes diving into great detail trying to guess the outcomes of these very specific markets and understand the nuances of what happened last year and try to break what's going to happen in that last year. So again, what I'm doing in Denver, I'm holding on my properties for the next 10 years. That was the decision.

I might sell them earlier, but I mentally prepared to hold on for the next 10 years. I expect them not to appreciate a ton. They may come down in the near term, but in the 10 years, I'm going to have amortized the debt to a significant degree, produce in cash flow. And I'm also really liking the blending market right now. Because I'm less bullish on things like stocks or real estate, I'm. I like the fact that interest rates ever isn't, and I can get a 7, 10, 12 percent yield on a hard money loan, for example, or corporate bond debt, for example. So you're a big fan of private lending right now?

Yes. Interesting. Can you elaborate a little bit on why you are bullish on the Northeast? The one major factor that I've heard is there's not a lot of new construction happening in the Northeast, which is a reason for bullishness because supply will remain low, which puts upward pressure on prices. Beyond that, are there any other reasons that you're bullish on this region? I guess, I'm a little bearish. I'm more neutral, neutral positive. I think the real estate market's going to be fine. It's not going to explode in the next couple years. I think it's going to be, there's a risk of it negatively impacting the South and the Sun Belt. I think that there will be business as usual in pockets of the Northeast and the Midwest. And I just think that's because nothing's happened in there. The changes are not, they didn't explode and price a lot of these markets. Again, it's very regional. Northeast. It's a broad category. Tons of places in Northeast. But, like, like you take a town like Rochester, New York, right? Nothing exploded, nothing came down with a high interest rate environment. 22, 23, patterns for home price appreciation look almost remarkably

similar to preceding 10 years, right? So there's a very pretty chart of no change. That's comforting in an environment like now compared to a Boise, which is coming down 20%. You're like, what's going to have in there? What's the issue? It's still really expensive out there. So that's more of my mentality on that. And if I'm looking for a safe haven where you can operate consistently and have good odds at a predictable pattern, I think that there's a lot of markets outside of like the really big cities. New York is a zone beast where you can do pretty well with a consistent approach. Right. Exactly. Does that make sense? Yeah, absolutely. Given how much multifamily inventory is about to come online in the next coming years, new construction necessarily is Class A, right? Everything is Class A when it's first built.

So what type of pressure could that put on any multifamily unit, including residential multifamily, duplex, triplex, fourplex, that is class B or class C? The conventional wisdom is that class C and class B get crushed in that environment. Right. Again, third time today, I'm quoting Dave. Dave just did a really good, a brilliant piece of analysis here and found that Class A apartment units existing are down 13% year over year on a price per unit. basis on terms of sale price and class B and C down very moderately. So it's really interesting to see that the existing Class A inventory is getting hit first and hardest in this kind of first

or second, maybe third inning that we're in here of the multifamily game where a lot of this debt has come and do. So yeah, so that goes against the conventional wisdom. I would not have guessed that. Right, right. And just to explain to the audience why the conventional wisdom is the way it is, We'll use commercial as I think it's probably easier to illustrate this concept when we talk about commercial real estate, right? So the building that we are recording this in right now is this beautiful building, right? Beautiful, beautiful office building with views of the Statue of Liberty. People who are watching on YouTube see a sound booth basically. But outside of this, you have, as you saw, beautiful, big, gorgeous windows.

You can see the New York skyline. You can see the Statue of Liberty. You can see the Hudson River. If you're going to come to work, if you have to commute to work, you would much rather commute to a place like this than you would commute to some dingy little office with ugly office carpeting and fluorescent lighting and low ceilings, right? You would much rather, if you have to commute to work anyway, you would much rather commute to a beautiful office than you would to an ugly office. And so in the commercial space, class B and Class C is getting absolutely hammered while Class A is doing pretty well. But then you take that, and so just to explain to the audience the reason that that conventional wisdom exists, yeah, the conventional wisdom is if you build a whole bunch of class A, people are going to flock to class A and that's going to hammer class B and C. So it's interesting to see how that's not happening in residential.

It makes sense that if you flood the market with residential class A, that just means there's more competition. Maybe the demand for class A is the same, but there's more supply for class A, you know, whereas with office spaces, it changes the demand appetite. but with residential, the demand appetite doesn't change. So it's simply the supply in each relative class that changes. Yeah, I have no idea there. And I was surprised by the data. I am in a Class A apartment building as an LP on one of my syndications. So we'll see how that plays out how that market's affected.

So anecdotally, syndications, I'm hearing more about them lately. More people are talking about them. They also seem to be a smoke and a hot pile of garbage. What is happening in that world right now? I think a lot of syndicators are in trouble. There's going to be a wake-up call. People are going to lose money. They're going to have it locked up for a very, very long time, and a lot of these

syndications. And you need to get educated. You understand what the pricing is. Then you can understand the actual asset class that you're investing in. You need to go through all of the things that I just talked about earlier around supply, theories around demand, right? How are you going to raise the rents on these properties or increase the net operating income by cutting expenses?

And then what's your exit cap going to be? So there's a multifamily property is price. on a cap rate basis. So if it's a five cap property is for $100 million, that means it produces $5 million in income. If you can invest at $6 million, now your price goes, what, to $120 million, or something like that, right? But if your exit cap is not 5%, but 6%, all of a sudden, you didn't create any value by increasing that cash flow from $5 million to $6 million. All that work you did to raise rents, reduce costs. Those are things that you're going to have to figure out. And I think, yeah, this is going to be, the syndication market's going to be an

interesting eye-opener for a lot of investors. Why now, though? Because I feel like, at least anecdotally, it seems like syndication has gotten worse or riskier in 2023 than it was in the past few years. That's at least the general impression that I've been getting from hearing stories in the battlefield. Well, okay, so going back to that cap rate dynamic that I was talking about earlier, you're investing in a syndication.

And because the competition, lots of LPS. wanted great returns. Lots of general partners wanted to make the Buku dollars that I just told you about. Okay, so now that's increasing the price of properties or reducing the cap rate. And an interesting phenomenon happens. If a cap rate is 10, right, so 10%, so $10 million in profit for $100 million complex. And I increase the profit by a million bucks. I've increased the value by $10 million. But if the cap rate is 4%. I have a $4 million property and I increase it by, I've increased the value by 20 times or 25 times, right, in a 4% cap rate environment. So as the cap rate gets lower, every dollar of income that you produce generates that much

more wealth because the value of the property is increasing by so much more. So it's almost easier and easier and easier and easier to make your financial models explode and the returns explode and produce incredible amounts of wealth in a more expensive commercial real estate market because if you can drive $1.00 of income, you're driving $25 of wealth instead of $1.00 of income in a 10% cap rate environment, creating $10 of wealth. Right. So that, I think, fueled a lot of this with that low interest rate environment in particular.

And what's changed overnight is that rising interest rate environment. Go from, you know, these low interest rates to a 6, 7, or 8% interest rate environment. Now all of a sudden you can't buy a property at 4% cap rate with a 7% or 8% interest debt, right? You're just negatively arbitraising that. You have to believe. that rents are going to explode over the next couple of years for that to make any sense whatsoever, right? Or that interest rates are going to come cratering back down, and nobody's believe in that

right now. Right. And so that's the problem that people are running into nationwide and in specific sectors one by one. Look, a lot of syndicators did nothing wrong. The first pieces that are crumbling here are the folks that are unethical were wildly inappropriate and speculative. And there's a couple of news stories around that. But a lot of good, hardworking, people who underwrote and tried their best here are still going to lose money or be locked up for a long period of time because of the environment, the dynamic I just talked about. Let me reflect that back to you what I heard you say. If you've got a property that has a very low cap rate, let's go lower, let's say a three cap,

you got a three cap and you increase it to a four cap. You have just added a third of its value. Is that right? Sorry, you're not increasing it to a four cap. If you take a three cap and you add $1 of income to the property, You divide one by 3%, and you've added a dollar, a property that generates one dollar of income at a four cap would be a $25 property. Right. A property that generates $1.00 of income at a $3 cap would be a $33 property.

So if I increase the value, the dollar from one to two, I've increased the value from $33 to $66, $66, right? In the 4% cap rate environment, if I increase it by $1, I've increased it from $25 to $50. So it just multiplies like that as the cap rates come down. I know I'm getting really technical here. Hopefully I'm not losing everyone. Yeah, yeah. And so when you say you add a dollar of value to that property, are you talking about forced renovations? Yeah, you can increase the profit, the net operating income of a property by increasing rents.

Increasing rents or reducing operating expenses. Yeah, you can charge the tenant's utility fees. You can meter every unit. Now the tenant pays utility fees. That reduces your costs. But when you improve the net operating income, that necessarily improves the cap rate. Let's say you're buying a building in New York. It's almost like how much is a... Because it's N.O.I over the value of the property. That's right. It's the unleveraged dividend yield on the property.

Yes. And it's a way to compare two properties, right? Two properties. Exactly. Yeah. You know, one property might have 400 units. One property might have 300 units, but they'll both trade it a four cap in New York with the same type set of assumptions. Then if you improve the NOI of a property, that necessarily also improves the cap rate of the property. If cap rate is calculated as NOI over value. Not necessarily. So the cap rate is just what the property trades at. It's a metric of kind of comparing two properties to one another. So they'll both trade at a four cap. A 300 unit apartment building and our 400 unit apartment building will both trade at a four cap, for example. One will be worth 100 million and it will be worth 75 million because one is bigger than the other. But the cap rate, you're buying the incomes. You're just comparing, they're both worth the same per dollar of income. So what you're saying, if the formula is NOI over value equals cap, then if you were to hold the cap rate steady and improve the NOI, then the value increases. Yes. And the lower the cap rate, the bigger the multiplier effect that is.

And so that's why people are chasing this down and down and down and down and down into the fours or the threes. And when we think about that, that's saying, I'm going to spend a hundred million bucks to buy three percent cash flow yield. Right. Right. That's insane. Exactly.

When I can go to my bank and get a four and a half percent yield. Right. So that's the thing that was happening here is as things became more expensive, ironically, people made more and more money. And their financial models had more and more operational leverage. Right. And the returns piled and piled and piled up. And now I think a lot of people rolled and rolled and rolled into more investments. And that's where I think a lot of LPs are not feeling so great about certain investments.

And again, I'm not even saying that everyone did it wrong in the lower. interest rate environment, this was the play. This made all the sense in the world. What's changed is doubling interest rates. And I'm not going to sit here and tell you I would have thought interest rates would be where they're at right now two years ago. I don't think anyone would have predicted that. Right. Interesting. And the model of holding cap rates steady, right? So holding cap rate steady and thereby increasing the value by virtue of improving the NOI, that happens in commercial in a way that it doesn't happen in residential. Yeah, residential. Eventually you compare the, you know, what's my property worth? Well, my house has four bedrooms and two baths and the house next door has four bedrooms, two baths. Therefore, they're worth about the same amount, about the same condition. It's a comp. Comparable properties, exactly. And even multifamily residential, the cap rates tend to fluctuate, you know, those aren't held steady, I think, in the same way that they are in commercial real estate or major multifamily.

Yeah, I mean, in a small multifamily space, duplex, triplex, quadplex, you're still on the comp on basis. But once you get into like the larger multifamily, typically folks are. comparing or looking for like okay what's the best cap rate and like the cap rate can confuse people with this but it's really just i'm going to pay like a higher cap rate i'm going to pay less money for a multifamily property that's dilapidated needs a lot of work and a big rehab than i am for one that's brand's making new and everything's in great condition that's fully renovated well yeah and that makes sense because you you would want returns to be commensurate with risk and so of course you would demand a higher cap for a dilapidated property because that necessarily is a bit riskier But, yeah, I think the part of the financial model that's different is the model of holding the cap steady.

You know, that doesn't happen in residential. Well, the cap does not stay steady, right? Everyone modeled it like it was going to be, I'm going to buy it at a four cap. I'm going to raise rent by a million bucks. I'm going to sell it at a five. That's not happening. Not only a rent's not going up, right, they're going down this year. Right.

But the cap rate is increasing from 4% to 5%. If I have a $5 million, an NOI, 100 million dollar property at a, I'm at a, at a, I'm at a, five cap and then next year it's a six everything's trading at a six cap but I didn't increase the net operating income now all of a sudden that property is worth what like 20% less yes significantly less but that that's a disaster right I mean you leverage this thing at 30% 30 million dollars in equity 70 million dollars in debt to buy a hundred million dollar asset now you've got 12 million dollars in equity left that's an absolute devastating experience and now you have to wait years to amortize that debt to try to pay everybody off that's the reality that's the reality that

happening in the multifamily space right now. I know a lot of people will beat me up and say it's not that bad. It's not happening. But that's what I'm fearing is happening right now. And I think that people just aren't trading because they don't want to realize that loss right now. There's no reason to do it. I've locked in my debt for five, seven or ten years. I'm not going to value my property at $12 million, $18 million lower. No one's forced me to do that. There's no reason to do it. I'm just going to hold on. We'll return to the show in just a moment. Within real estate asset classes, are you relatively more bearish on large multifamily? Oh, yeah. I don't think I don't think single family's going anywhere. Like, going to be the shock.

Right. Like, everyone's locked in there long-term debt. Everyone's got good credit. Nobody's got crazy mortgages. Right. Right. There's a higher percentage of people who own single family free and clear now than there has been in decades. Yeah. Largely baby boomers, you know?

Maybe it'll come down. Maybe it'll flatline. But, like, I think there's a reasonable chance that stays pretty flat. Maybe even continues appreciating a few points. I think multifamily is going to have a correct. A pretty big one. What about residential multi-duplex, triplex, triplex, fourplex. Do you think it's going to trend more like single family? Yeah, I think it's going to mirror more of the single family space.

I think it trades on a comp basis for the most part. But it'll be in between, but more leaning towards the single family space. Right. I hope because that's what I owed. How many units do you have? I have 13 units. Oh, nice. So plus a small piece of a couple hundred units in one of those syndications.

Oh, cool. Very cool. I've got seven. Yeah. Yeah. Well, so this is actually quite validating because what I'm hearing, I'm, I'm I've always specialized only in buying residential. And what I'm hearing is residential is the place to be,

residential either single family or small multi-family. As long as it's classified residential, there seems to be, at least in your opinion, more stability in anything that's classified residential and perhaps some more risk in anything that would be classified as commercial. That's right. I waffle between thinking that small multifamily and single-family rental real estate is either the best asset to invest in or the low. least bad asset to invest in. So I waffled between those, you know, with a long time horizon.

My personal view, of course, that's like the fox counting the chickens in terms of, you know, promoting real estate. I work at bigger pockets. Right. Yeah, exactly. But it's refreshing to hear that when you are bearish on some component of real estate, you are unafraid to express that. Yeah, I mean, I'm not trying to pump up the real estate market here. I'm trying to to get to the most realistic assessment I can get to. And, you know, that sometimes angers some of the syndicators in our platform. And I think there's really good smart people who disagree with me. So, like, don't just take my analysis here. I could be completely wrong on all this stuff. This is just what I'm seeing and how I'm how I'm feeling about it right now. But yeah, I think that that's,

that's the deal. In two years, there's a good chance that if any of this comes remotely true, I'm going to be saying, now is the time to buy a lot of multifamily. Because as soon as that construction Glut is done with by middle to end of 2024, there's not going to be any new multifamily coming on the market. Nobody's starting a new project at that point in time. New supply is going to be much, much lower. It's going to be that boom and bus cycle. So, yeah, I'll be back in two years telling you how it's time. Excellent. Are there any things that I haven't asked you about that you want to cover? Maybe one last thing to cover would be just kind of like practically, well, like, what should we be doing right now? Oh, yeah. All right. How does this translate to something like,

Look, I think nothing changes about the fundamentals. You earn more than you spend. You accumulate a pile of cash each month, and then you direct it towards an asset that you think is going to be performing over the next five to ten years. Real estate's one good option in there. If you have a long time horizon, if you're willing to operate it to some degree, if you're willing to run the numbers in there. Index fund investing, always a big fan of that. A big portion of my personal wealth is going to that. And I think that people should wait debt more heavily than they have over the last 10 to 15 years.

I think that's one big takeaway here is all this stuff, all this work that's going on, all this analysis, or you can just lend to somebody and let somebody else take the first 30% of the risk on a property. I love real estate, note investing. I love bonds, all that kind of stuff. You talk about passive income, simple interest is right there waiting to be collected in this market in a way that I think a lot of people haven't like internalized yet. It's so simple. It's so obvious with rising interest rates lend. So I would just encourage people to look into that as well as another part of their portfolio allocation in the current climate. When you lend privately, do you use a platform or do you tend to do one-on-one deals through

your network? I'm not bold enough yet. I consider myself a complete novice at this. So I actually have networked with a number of hard money lenders. They're on bigger pockets, for example. And those hard money lenders originate a loan with a lender that they'll know. And then they keep originating loans, but maybe they have a $10 million or $20 million pool of capital they can lend.

Once they've lent that, they can't do any more loans. So they sell those loans. Wall Street has stopped buying them. So I'm looking around and I just bought a loan from one of my local hard money lenders in Longmont, Colorado, 40-minute drive from where I'm at. Yeah. A property. I called up my friend Vindy Jensen. She told me, oh, yeah.

If you had to foreclose, this would be a great property to own at this amount at this price point. So that's how I did it. I called up a hard money lender and bought a loan, did some due diligence on the property and all that kind of stuff. And I did another one out in Washington State as well with another hard money lender. So looking to slowly get into a couple more of those. Fantastic. All right. Well, thank you for spending this time with us.

You've said it a few times. Where can people find you if they want to hear more of you? You can find me at BiggerPockets. I host the co-host the BiggerPockets Money Show podcast with Minnie Jensen. That's a great way to find me. And my email is Scott at BiggerPockets.com if you want to beat me up for any of my bad analysis today. Oh, thank you. Thank you for taking the time.

It's good to see you. Great to see you. Thank you so much. Really exciting to be here. and had a really good conversation. Thank you, Scott. What are three key takeaways that we got from this conversation? Number one, the lock-in effect is impacting demand and keeping prices high.

Homeowners around the country locked in three, four percent rate mortgages in the last couple of years, have a lot of equity. Many homes in this country are paid off, and they're stuck. They can't move because if you move, if you have a $700,000 house and you want to upgrade to an $800,000, thousand dollar house. Maybe you want more square footage, maybe you want to move to a different place. You can't do that now because you're giving up this low locked in mortgage rate and you're going to have a skyrocketing home payment. So all but the best opportunities, the most dire situations are eliminated from the transaction market. And so that's leaving a lack of new

supply and new inventory coming on, which is keeping prices high. So why does this matter? Well, I've heard anecdotally I've heard a handful of people say, I'm going to wait for mortgage rates to drop, and then I'll buy. Well, let me ask you, what do you think is going to happen when mortgage rates drop? Do you think that there will be more buyers or fewer buyers? And also, do you think that there will be more supply or less supply? The evidence indicates that there will be an increase in both. When mortgage rates drop, it's likely that supply will increase and demand will increase, but this may not happen in lockstep. And there is a chance that demand may outpace supply, at least in some markets, leading to the type of bidding wars that we remember from 2020.

Remember that when it was like every time a house came on the market, it got multiple offers on the day it hit the market? That was what happened in 2020 and the first half of 2021. That's not a problem anymore, but it could be again. And so marry the property, date the rate, right? If you're going to buy a home, buy the home that you plan to buy and hold, and date the rate. You can refi when mortgage rates drop. You're not stuck with an 8% rate forever. So that's key takeaway number one.

Key takeaway number two. The NIMBY effect is really impacting housing supply, particularly when it comes to multifamily builds and any type of push towards increased density. Everyone wants more housing supply, but nobody wants it in their backyard. No one wants their single family development to be the one that allows duplexes, triplexes, or quadplexes, much less a 15-story apartment building that blocks their view. Boston, for example, this came up in a forum post in bigger pockets. 85% of the land in Boston is zoned single family.

So in order to even have the opportunity to build, you have to have the right zoning. So that's one factor. Again, we talked about labor supply. We talked about material supply. Another factor is the labor itself, not just how do we encourage more people to do this, but housing booms and busts. So I would predict, and this happened in the Great Recession, so I had to predict a similar type of story here where tons of new construction happening in 2004, 2006, 2006, 2007, no construction starting 2008, 2009, 2010. Right. So you have this pool of labor that's highly skilled in construction.

and then they exit because they're all getting laid off because there's no more building activity. Right. So now you don't have skilled laborers to do these big projects, right? Couldn't even hire them if you wanted to. Right. And so I think that's a dynamic that's impacting housing construction costs as well, is the lack of this skilled labor to do it. And so, you know, to really get skilled construction supervisors and leaders,

think to be in business for 10, 15, 20 years. And if the boom and bus cycle of real estate is so cyclical, oh, you're not your floor of labor is not high enough. So those are some theories, for example, that people have around why there's not enough housing. If we want more housing affordability, we need greater supply. And the way to get greater supply is through new construction and more multi-unit, higher-density construction. With a multi-unit, you take the same piece of underlying land and you have more units of housing on that same parcel of land. That is increased density, and that increased density is what we need.

in order to have sufficient housing units to keep up with demand. And that's essential for maintaining housing affordability. And that key factor is what I want every not just real estate investor, but home buyer, to understand. There is simply not enough housing. And so the more housing we can build or the more we can retrofit existing homes to add an additional bedroom, for example, If you can take the same square footage and let's say you can build a partition wall in the living room such that you create a new bedroom, you take something that was a two bedroom and turn it into a three bedroom, now you have just helped increase density. Or let's say that you retrofit a basement or an attic or a detached garage and turn that into an in-law suite or an accessory dwelling unit, right? That increases density.

It increases supply. And that supply increase is what we need. That is the second key takeaway. Finally, key takeaway number three. Scott has a nuanced take on how to think through which cities to invest in, and I'll let him explain this in his own words. I think there's three ways to think about what you want to go for. Do you want cash flow?

Do you want appreciation? Or are you looking for a hybrid? There's nothing that offers everything all at once. But you can get a blend of, you know, If you're to plot out the appreciation and cash flow of the market, so you're a distinct trend line where there's a tradeoff. There are bubbles, you know, over the last five to ten years. There are bubbles in a couple of markets that have done well with both,

but you're really going to have to make a tradeoff decision there. Yeah. Many investors choose cash flow. I think that's great. But I personally think that, you know, unless you are needing the cash flow in the near term, appreciation is going to net you off in a better place in five to ten years. So you look at those net migration patterns. You look at where the supply is coming online and where it is.

isn't. You look at places that you know, you know that you like that you like to be a part of your life is you can actually physically go there, visit, meet the people that are going to be renting your, that are going to be managing your property and helping you find deals. I think those are going to give you distinct advantages. And it's a bet. What's going to happen over the next 10, 15, 20 years? Those are some of the factors that you'll want to consider as you are deciding where to invest. So those are three key takeaways from this conversation with the CEO and president of bigger pockets, Scott Trench. We Afford Anything, have a course on rental property investing.

It's called Your First Rental Property. We only offer it a maximum of twice a year. This is the first time in all of 2023 that we are offering it. We only offered it once last year. Enrollment opens September 5th. And if you want to learn more about it, go to afford anything.com slash VIP list. That's afford anything.com slash VIP list. and that's where you'll get loads of information about it.

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Spotify has this new feature where Spotify will ask, hey, what did you think of this episode? So I want to give a shout out to the people who answer, the people who voice. their comments around the episode, Katrina Gabriel, one week ago, says in response to an Ask Paula and Joe episode, she said, hey, things I never expected include Paula referencing someone watching the Kardashians instead of checking their portfolio. Yeah, I like to keep fun that way. So thanks to everyone on Spotify, who is listening, who's part of this community. If you are listening on Spotify, come leave a comment, share what you thought the episode, say hello. Also, if you're on Apple Podcasts, please do the same. I want to give a

shout out to somebody, Maxie Sophie on Apple Podcasts, who wrote a review called Best Financial Podcast. And Maxi Sophie says, Afford Anything is a very professionally done podcast with a wealth of information. Paula Pant is a great host, and she is an excellent speaker with a very nice radio voice. She also is a clear thinker and uses some unique ways of problem solving and decision Thank you, Maxie, Sophie. I appreciate that. Thank you so much. So thank you so much to the community, to all of you who have left reviews, who have left comments. I read every single one. Thank you so much. And I hope that you had to afford anything.com slash VIP list if you are interested in real estate. My name is Paula Pant. This is the Afford Anything podcast,

and I will catch you in the next episode.