The Science of Flipping - Navigating Short-Term Rentals and Real Estate Market Potential | Fouad Bazzi

Episode Date: September 11, 2023

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Yo, yo, what is up, everybody? What is up? Welcome back to the Science Flipping Podcast. I am your host, Justin Colby. And if you're watching this at justincolby.tv, you see I have another incredibly special, talented, successful guest on this show. If you're not watching it, get over to justincolby.tv to do that. Now, this episode, as all episodes, are brought to you by minutepages.com. If you're a real estate investor or an agent, you need to have a professional website with a lot of credibility, influence, and authority for you and your business. Go to MinutePages.com. Now, I have a close friend, recent close friend, being in our mastermind, and he is an oppressive young man. His hair will show

you that he is. And so we really got to relate over the last couple of days here at Boardroom out in Austin. And I just said, hey, dude, would you be a guest on my podcast? So Fawad, what is up, brother? What's up, my man? And by hair, you meant the grays in my beard, right? Yeah, it's the only kind of hair people have these days. Yeah, no doubt. No doubt.

So you can see we get along famously, but he runs a business model that if you are into short-term rentals, if you are considering Airbnbs, maybe you're in Airbnbs as I'm recording this podcast. This is your episode. This is a dynamic individual who has done very, very well. He comes from a banking background, gave it all up. I'll let you kind of tell your story, but gave it up to go eyeball deep into real estate, specifically the short-term rental space, the Airbnb space. Why? Why did you go from most likely a very heavy, nice income to say, F it, let's roll, let me go into real estate? Yeah. I mean, control of time. I mean, so we had our third kid in March of 2019. And you know, what I, what I realized was by having to be at somebody else's time, nine to five every day, sometimes longer, as you know, traveling

all over the country, 12 to 15 weeks out of the year. I really, really missed my kids. I really wanted to be here for that. That was a huge part for me. Of course, I'm very lucky that I had a very productive wife as well. She's got her own law firm. She's a badass, just so everyone knows. She motivates me. I've got to keep going. It's like the younger kid that's behind the older kid that keeps pushing it, you know what I mean? And we've got that dynamic for sure.

For so long, we had relied on my income when her firm just kind of took off. It was like, okay, cool. My income is a little bit less important for our day-to-day needs now, but we really needed to start building up our portfolio and our asset generation for wealth. So we got debt-free, made a bunch of money, saved it all up, gave my boss a nine-month notice because I really, truly loved what I did,

loved my relationships, loved the people I worked with, loved who I did it for, all that. Transitioned everything really, really nicely. And then after nine months, started a business, got into long-term rentals, hated that business, COVID hit, and it was a kid's play place with a coffee shop. And so everything just kind of left like it did for everybody. And then alongside all of that, my daughter, who at the time was one, we found out she was allergic to nuts. And the best food allergist in the world was in Los Angeles, Long Beach. And we're in Detroit. So we learned that for the next three years, we're going to have to be there every six weeks to kind of get her challenged up and dosed up and then through all of her allergies.

So we said, rather than, you know, I hate long-term rentals rather than just, you know, have to rent every time we go, let's buy a house to put on Airbnb and we'll use it when we're there. And so we did that. And, um, she's now through her allergies just two weeks ago, we sold that home. We no longer are in the Huntington beach market, but we did really well with it. We, we, um, bought on the potential of with it. We bought on the potential of the market. We made a couple hundred grand on the sale of the property. Haven't put any money into it other than a paying job, really. And that's it. You said something real quick that I want to tap heavily on. You bought on potential. And I think what a lot of real estate investors need to understand, if you're a newbie trying to get

your first deal or you're an experienced veteran, buying on potential is different than buying on speculation. If you're speculating the market, that is not buying on the potential of the property. So let's dive in a little bit now. That purchase, and I know your business model, as I got to spend two days with you, was heavily bought on potential of areas, locations, not just the property. Let's talk about that, the word potential and how that relates to your business model. So, and every market potential is showing its way a little different, right? That one there, Huntington Beach, you're a six minute walk to the beach. That's where this house was. And we were sandwiched right between their two primary kind of kind of tourist

attraction areas of main street with all the kind of local pubs taverns restaurants shops all that and then pacific city which is like an outdoor shopping mall with your tommy bahamas you know one thing has always you know been true we've got four oceans and the closer you buy to one of those things the more protected you are and And that, that I don't care what the economic environment is because it's a, it's a, it's a specific buyer that's coming to be that close to the ocean. That buyer is not going to be impacted by a, a, a strong or weak economy, right? They're there. It's always good for them. So we knew the potential of this. We knew that as that area continued to be

gentrified, when I buy, I've got this weird formula in my head. I go five blocks in every direction, north, south, east, west, and I want to get to know that five blocks really, really, really well. And if I see in that five blocks that we are lower than about a 30 to 40% gentrification kind of a rate. I love it because you know how much new money is going to be coming there. There's already been some sort of comp for it. So whether it's a year, three years or five years,

that block is coming. It's already proven. So get in there and new money is going to follow you. And gentrification, is there a website you can just quickly go to? There might be. What I do is i use kind of like when i'm first getting to know it i find the address i find the listing so i just use

google maps because you could do the street view drive up and down five blocks every single way so it looks a certain way and we kind of all know what to look for you know with with with you know what homes look for if you got one that's on the brink, go on Zillow, check it out, see if you can find pictures of it and whatnot. But you start to really kind of get a feel for it. How many dumpsters do we see in driveways in this five-block radius? What do we see? Is there new money coming? And when you see that and you see all those other real local attractions, it's really strong.

In Phoenix, it was a little different. In Phoenix, you don't have an ocean. You've got mountains, of course, but that's probably a hair under the mountain so what else do you look for there it's school districts you look for are people moving here what's the population growth population growth there's just it's it's just booming and we're in a shortage of homes businesses are moving their headquarters their startup money is is at a country-wide high there you've got 16 teams that do spring baseball. I mean, so there's just things that always, always will keep that market

humming. It's funny. I, you know, it's funny. I coach a lot of newbies, right? So my platform is really kind of bringing in the newbies to go get them their first check or their next and systemize that. People like me, basically my number one question, what market should I choose if I'm going to do this virtually? You live in Detroit. You're doing heavy stuff in Florida and Arizona and Phoenix. I do this across the nation. And funny enough, what you're mentioning without us planning this is I look at three basic things. Is there a major university in the market? Are there one or more major sports teams in the market? And then what industry is either coming to the market or it has a stronghold on the market?

And honestly, Phoenix is the reason why I built my entire career over 15 years in Phoenix. 12 of those years were physically living in Phoenix and doing deals in Phoenix. Since COVID, essentially the last three years or so, I've really built this national virtual business in a very strong way. Phoenix is one of those markets that had all the characteristics that I talk about. And that is why you will never see Phoenix homes go down to 50 grand again. It just won't happen for exactly what Fawad is talking about and what I'm talking about, which is the potential of the real estate, the potential of the market, right?

And so understand, and I'm going to allow you to kind of go deeper in the asset itself, but real estate and in any class, what is the actual potential should be your start, right? You want growth. You want appreciation. As I buy rentals across the nation, I want to like a 75-25 split. I want to have 75% of my rentals in appreciating markets, a Phoenix, right? A Jacksonville, Atlanta.

I want 25% in just consistent cash flow. You may never appreciate like the Cleveland, Ohio's of the world, right? But man, you can get like a 2% rent ratio there, right? Or more. So talk to me about Phoenix, because I know this is one of your heavier markets. It's been historically one of mine. Why Phoenix? I mean, Detroit, there's other markets, but why was Phoenix your market that you chose to go heavy in? So my business on the short-term rental side, which is what I ultimately use to cashflow my properties once I choose a market, I like to chase rich markets. And I say that because, going back to what I said earlier, in good environments, bad environments economically,

rich people are traveling and they got no problem doing that. And you go to Scottsdale, I mean, every square mile you've got, you know, how many different $200,000 vehicles, how many different $2 million homes, how many of all of that stuff. You've got the little, the 16 league, the Cactus League is what they call it, the 16 teams that do their major league. Every February you've got the Waste Management Golf Tournament. A lot of people don't know this, it's the capital of the bachelorette parties for all of America. More than Vegas, more than

Nashville, more than Austin, it's Scottsdale. There are service companies, third-party service companies built all around making their money 100% on bachelor and bachelorette parties. I hate bachelor parties, by the way. I'd take bachelorette parties any day. I mean, they're great. I mean, they sometimes are more wild than you'd like them to be, but worst case scenario, I mean, they break a couple of wine glasses and that happens. So it's all good. But we love that market because of the wealth that is in the market. Again, there's a bunch of startup money being poured in there. You've got the semiconductor chip plants being built. You've got the world's largest outdoor sports complex being built.

Is that Chandler or Gilbert? I think Gilbert, actually. You've got the university, as you mentioned, Arizona State University. So there are just so many reasons that that place is humming on an annual basis. There's too much to pass up, too much safety to pass up there. So what brought you, you come from a banking background, what brought you into the short-term game? Why was the short-term rental game more appealing than wholesaling, fix and flipping, or even long-term rentals? Why short-term rentals for you?

You know, I really, at my core, I'm a people person. I built relationships in my banking career growing up and that's why we were as successful as we were, our team, our group. It was all built on relationships. And in the short-term rental space, I still get to build relationships. I do with my investors. I do with my guests. I do with my vendors, my teams, the people that take care of my homes. It's still very much got this thing where I get to build a brand. I get to build a customer base. I get to really enjoy marketing to them. And yeah, I've got, you know, I got behind me somewhere on the shelf. I get to build a customer base. I get to really enjoy marketing to them. And yeah, I've got, you know, I got behind me somewhere on the shelf. I've got like beats boxes because I get to host the product met the VP of product that beats. And every time they stay at my home, I get a beats

box in the mail about a week later with new headphones, just, just little things that happen like that. But we get to really go on fun journeys with our guests, right? We get to use our properties for ourselves as well. So lifestyle assets as well as anything. What we're really shifting into is hosting corporate retreats, masterminds, weddings, things of that nature at our properties. And we've got a couple properties that already do that very well. And the more and more I get to do that, I love masterminds, I'm addicted to them. So being able to then build out an infrastructure that services this this i mean sky's the limit really with the shorts of rentals right and then at the end of the day we have a uh you know the

entire goal my my option a is get vertically integrated by my servicing companies the pool servicing the the cleaning company all all of that stuff, get vertically integrated and sell it. And if it doesn't sell, then you got a portfolio of businesses and homes that you get to run forever. I think the points that I want to highlight for the normal listener here, he's very high level with this, right? He didn't come in saying, let me just go get a short-term rental because the sexy cute girl in the corner right now, he came in thinking business. You just heard him say businesses within his own vertically integrated business, which is the short-term rental space. That's a little advanced for most listeners, right? So the thing I also want to

highlight here is he's definitely treating it like a business where I think the ball gets dropped a lot at the short-term rental space that they think is just like income, right? They don't actually treat it like a true business that has housekeeping and has to fill tenants and, you know, the calendar dates and all these other things. I think people go into short-term rentals with their, you know, dollar signs in their eyes, like a cartoon, right? And they think, oh, why can't buy this home? And I can 3X rental rates because of the short-term rental? Yep. I think it's a major thing that people don't realize the actual business component of it,

and it takes time and energy. The other part of this that I want people to hear what he was saying was he's a people person, right? There's an enjoyment he gets out of the facilitating of this business, which many other people may not, right? So be very clear. You know, I have my five principles of success. And number one is decide what you want and who you need to be to get it. Decide what you want. He was clear that he wanted to build a business vertically integrated with businesses. For those out there just wanting to be in the short-term rental game, me personally, as a coach, I would actually tell you there's a lot more hair on the teeth and it's not quite as easy and pretty as it has been viewed. Why don't we talk a little

bit about that? What about all these regulations that are coming down? I mean, Scottsdale, you talk about Scottsdale. There are more and more communities not allowing Airbnbs. And there's already a supply and demand issue, meaning there's way too much supply out there relative to the demand. Now, it could be a price point thing, right? If you're going luxury, maybe that's not the equivalent. But your typical normal Scottsdale home, you know, the $750 to $1 million home, $600 to $1 million. They're everywhere, it feels like. Are you feeling that? Are you pivoting or making adjustments around that?

What are your thoughts there? We are. So all of that you just said is so spot on. I mean, supply is up 30%, specifically Phoenix. Talking about Phoenix and Scottsdale, supply is up 30% year over year. Demand is only up 20%, right? So it's great that demand is up, but so is supply. A big reason why supply is up so high is exactly what you just said. There are people that just see this amazing, shiny object and they say, let me go to this home on Airbnb. All that's doing is creating a price

war, right? Because now you just have so much that's in the market. And what will happen is there's going to be a bloodbath over the next six to 12 months, people not running it like a business, just setting their investments to rent, thinking they're going to cash flow. All these homes will become, go on the market and they'll be discounted because of that. So you must be very, you have to be so, so, so careful. If you go into a market like Phoenix and Scottsdale, it's so mature, make sure you can play on the same level as the big dogs from an amenities perspective, because if you can't, you will get squeezed out. That is what will happen. The regulation then kicks in. You talked about that. Huge fan of regulation, by the

way. Huge fan, because it gives you very clear rules about what you can and can do it shows you yes come into the market or no don't come into the market right what i like is very mature regulation mature markets uh because they typically have something that's already so thought out and and deliberate that when you get in there's no guessing game and it's typically so far along that it's not going to just get canceled one day. It'll get, maybe it'll get stricter. Maybe something will come up, but it's not going to just go away. So we're in a market where Scottsdale just introduced these regulations about a year ago now, where you've got to go through an application process and wait for your approval. It's not like you can just buy the home knowing that all you

have to do is fill out a, fill out an application and you're going to get the permit. Now, still in Scottsdale, it would take something really severe for you not to get permitted if you fill out the application. However, now there's a process that since there is an application, there's also a we can remove your permit kind of thing. So if you are somebody that's abusing, if your neighbors get loud enough with city council, city council has, has, has encouraged neighbors to come to the table, to come to the meetings and say, Hey, my neighbor is bad. My neighbor is bad. You've got to be a good host. You've got to set, you know, the conversations we have with our guests are very deliberate, very intentional, right? Hey, if you've got a Bluetooth speaker,

make sure it's up against our house. Don't put it up against the fence where our neighbors are going to hear it clearly keep it at a neighborly level do this do that here are some tips if the cops get called you will get the ticket not us i sir i just don't want your you know vacation to be tarnished by getting a noise ticket me having not given you a fair warning right so we're very intentional with. But if you're getting into a place, a lot of people like to get into markets where there's no regulation, no ordinances yet for shorts and rentals, they get really excited.

Those are the ones that get burned. Like it would just happen in Dallas a few months ago where they just totally, right? So I like regulation, find regulation, find very mature regulation. That's like a really good example is Sedona arizona they have they're so clear you go on their site in about a half hour you can literally understand everything you need tell you exactly which zones you're allowed to do it in which zones you're not allowed to

you know how many per square mile if there are those kinds of restrictions so um you know it's like anything you have ordinances, you have regulation, you have it in the restaurant industry, you have it in the healthcare industry, you have it in every industry, you just got to really understand it well and then go. But don't hit go until you really understand. Yeah. Would you, you know, the way I look at this is for someone that gets into short-term rental, I feel like it's more sex appeal than it is anything else, right? It's the hot flashiness. Don't get me wrong. You can make a lot of money if you do it right. To your point, oceans. You go and get an Airbnb here in

Miami and it's going to make money. I mean, I've literally been quoted my house. We're three minutes away from the ocean, 14, 17 grand, you know, for a weekend, right? Like all day long. Um, now that would probably be a little bit more corporate retreat ish or whatnot. Um, but again, you know, that sounds sexy. And I tell my wife, Hey, if you want to do that, great, but you're going to manage this thing. It's going to take time. Like there's effort put into this damn thing. And as much as people want to just have the sexy cash, quick cash, shiny object, I really advise most people to get into the game, creating income first, right? Because I think there's this push into the short-term rental that that hot craze is kind of over, if you will,

but there's still a lot of appeal. And it takes a lot of money to find these right properties, right? Just building a home somewhere in Miami, anywhere in Miami, that doesn't mean it's going to be a good Airbnb, right? I had people selling their Airbnbs because at one time it was that hot and now it's not. And they're like, I just want to get out of this because the management component, even though they have a property manager is just too much. Yeah, it was. COVID got everybody so freaking excited, right? I'm working at home. I'm never going to have to go to an office again. I can run this side business. I can do this. I can do that. People were also traveling differently. They couldn't fly where they wanted to, so they drove where they could rent a house. And so it just changed. So then people got into like, oh,

well, I can buy a house anywhere, put on Airbnb. Yeah, that works when nobody can fly. But when they can fly, time has told us for decades, for years, hundreds of years, people want oceans, people want water. That's where they're vacationing. They're not going to Broken Bow, Oklahoma. So right now, again, when everybody was not able to fly, people in Dallas, people in Texas, they were all driving to Broken Bow, Oklahoma, buying cabins, renting cabins, and vacationing there. There's no companies moving to Broken Bow, Oklahoma.

There's no population growth in Broken Bow, Oklahoma. You're not going to experience long-term growth on your asset or your income in Broken Bow, Oklahoma, because 80% of your clientele are going back to the ocean the second they're allowed to. Period. That's just what's happening. That's the same in long-term rentals. There's similarities to all this, right? Like, can you do a long-term rental in Shawnee, Oklahoma? Yes, because I have 10.

Bought these homes for $25,000, put $70,000 into it. It rents all day for $1,500. It's incredible, right? That home's not going to be 400 grand one day. We're not going to get there ever. But in terms of good asset classes, you just want to be in good appreciating viability potential markets. And it's true for wholesaling, flipping and rentals, short-term rentals included. What do you see yourself moving into? How do you see yourself pivoting over the next 12 to 24 months with, you know, listen, I'm going to get a commercial loan right now as an example. This lender promises if I can show strength financially, we're going to

get an interest rate under seven. I said, all right, Paul, are you better? He said, no, because I just don't believe it. But it has definitely changed my ability to go buy some assets because of the lending space. How do you see that affecting you and your model over the next 12 to 18 months, maybe 24 months? Two primary ways. One, we were buying turnkey before. That won't happen anymore. Now we will have to buy them where we can add the value, get a bunch of our equity back out up front. Even if it's not, you know, people got so addicted over COVID. The other part is with BRRRRs, right? I mean, oh, BRRRR is a good thing if I can do it and then have zero money left in

the, of course, that's a great thing. You know, it's also great is if you burn and get 50% of your money back out, having very little investment in the deal, it's still okay to have a little investment in there, not going to kill you, right? So we're just going to change our acquisition strategy. That's part one. And then part two, where I think is the biggest shift for us because of the lending is we're going to go and launch a fund. And this has been on my mind for a long time, really, really wanted to do it. And it was just something that I, I, I just, I don't know if I wasn't meant me, you know, probably the inner bitch, right? Excuse the language, but you know, we all have our own, you know, but this and, but, you know, there's been no doubt since the day it was introduced to me, the fund was the best model. I just had to get really comfortable mentally. And I'm there. I've. I've learned enough about it. And then at our boardroom mastermind last week

where we got to see Bridger Pennington come in and kind of give us even more backside and the interest level just continues to say that's the route to go. Yeah. What I do like about you is you do pull the trigger, but you do it in a way that is, I don't want to say methodical because you're an action taker, but there's this fine line between people who like paralysis analysis. They want to make sure everything's perfect before they move. And then there's the little bit more my side where it's ready, fire, aim. I just go regardless without necessarily figuring everything out. I pack the parachute on the way down, as they say, right? You seem to have a good combination of both. You are methodical and think through some things, but you also kind of just say, let's go. I think there's a secret talent to that. That's not something that I could coach too. It's more of a personality trait. But if anything, do you think you're going to be on an expansion growth phase for the next 12 to 18 months? Or it's just slow and steady, let things rectify, let the economy try to settle down if we can. Where do you see that happening for your business? So both kind of, I mean, we're definitely

in growth mode, but I'm, you know, we're not acquiring at a fast pace because I'm being really, really stingy with my offers. And so that's where we're just looking for the right properties. We're looking, I'd still love to buy turnkey because it's still my skillset, right? Like deep, not wide. I know I'm not the best GC. I'm not the best project manager when it comes to all of that. So I'd really really love to if we can buy turnkey and again going back to my my rich my rich market kind of philosophy you know who can afford to sell their finance their their turnkey properties is rich people um i mean it's it's they don't want they don't want they don't need more tax hits they don't need the cash flow they don't need to get rid of their property they don't need more tax hits. They don't need the cash flow.

They don't need to get rid of their property. They don't need, they don't need, they don't need. So there's a win-win in that scenario, right? Because, you know, if you buy a house for a million bucks, you and I both know over a 30 year mortgage, it's about, that's costing you about 200,000 bucks. Right. And, and so, or I say, I said a million million it would cost you about two million double and so if i can go in and get that thing at a very low interest rate even at 1.2 million so he's really happy and guess what i'm gonna i'm gonna dictate the terms and we're gonna do so that's what we're focused on right now is finding properties like this we found we're working at a 43 acre parcel up north in in northern michigan which is a very it's it – it is a local place where, sure, it does have population growth.

It doesn't have a bunch of industry and economy or businesses moving up there. But this is – northern Michigan is bar none one of the best vacation spots for all Michiganders, Illinoisers, Wisconsin people, upper peninsula. You've got ski mountains, you've got lakes. So you've got 12 month tourism there, not just four or five months. And the weather is always great for every one of their seasons. So if we can get up there and build really well, and 43 acres is limitless what we can do with that. And so, you know, it'd be a lot of fun, but we were in touch already with the seller. The seller is a CEO of a company. He got relocated to Columbus, Ohio.

That was probably a property he was using. He and his family, they're probably not using it anymore. I kind of did all this research and learned that. And I said, let me get this guy on a Zoom call. So I got the agent, got him on a Zoom call. He knew exactly what I was talking about. So, so seller finance is scary for people that don't know what you're talking about, but people, people that are in these markets that I'm telling you about, they know what seller finance is. The minute you bring it up to them, you're not scared with the concept. They had totally understand it. Can you make the terms and the money work?

That's where the conversation goes every time with them. So, um, so that's what we're focused on. We're focused on acquiring properties that way now. I love that. Well, Fawad, Bazzi, I appreciate you coming on. I know this is a hot topic for a lot of people, short-term rentals. You knocked it out of the park at the mastermind. Everyone was like, dude, tell me more. So I knew my audience needed to hear more of what you got um where do they find you if they want to ask you questions instagram's the best place it's my name fawad bazzy underscore airbnb easiest way there you go and fawad is f-o-u-a-d uh for you guys that don't know the spelling so appreciate you my brother i look forward to staying extremely connected and doing

some cool stuff here in the future likewise thank. Thank you so much, my man. Have a great weekend. Later, guys. Talk soon, guys.