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

24:31You talked about the interest rates 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 small businesses, which are a lot of work and may be inaccessible to a lot of folks. So in that context, obviously, 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've picked those markets. Kansas City, I like Kansas City.

25:02I 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 Sun Belt 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.

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29:44How do you go about or how would you recommend a person go about trying to figure out which city they should be investing in, right? As we discussed at the beginning at the top of the show, all real estate is local. All real estate is hyperlocal. So there is no such thing as a national market. There's only a bajillion mini markets or a bajillion 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, I'll again quote our VP of data analytics, Dave Meyer.

30:21I think he has a good handle on this. But 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 – if you're to plot out the appreciation and cash flow of the markets, this is a distinct trend line where there's a tradeoff. There are bubbles – this is over the last five to ten years. There are bubbles and a couple of markets that have done well with both. But you're really going to have to make a tradeoff decision there. Many investors choose cash flow.

30:52I think that's great. But I personally think that 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. 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?

31:23Dave 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. Or 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. Right? Mm-hmm. And the trade-off, if you're going for a high-dividend portfolio, the trade-off of a stock spits out high dividends because it's not reinvesting in growth.

32:05Absolutely. 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 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 is negative, I expect Denver to be more negative. If the country is positive, I expect it to be less positive over the next couple of years because of the supply dynamics that I was telling you about.

32:35But I also believe that over the next 10 to 15 years, holding onto this great low interest rate debt in my backyard operating well, I'm going to harvest cashflow 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. Obviously, I don't know what we do in the winter besides skiing and snowboarding. So I'm just bullish on that. 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.

33:12We'll find out at that point. Are you an advocate? So what you've also outlined is you're in just one metro market. But 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 advantage, 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.

33:48I 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 my 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 on a flight and go out of town for.

34:19So I always think that despite the differences, you know, regionally, if you're going to look for an out-of-town market, pick the best one. Pick the one that you think is going to be most conducive to your goals. But I'd also heavily bias you if you're looking to invest in real estate for the next 20 years, doing 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 I'm hearing success stories from New Jersey and pockets there.

34:49So 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. 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.

35:26And in the last couple of years, rent growth has exploded nationwide. But property taxes, a lot of that gets offset by higher property taxes because of higher home values. So net to the landlord, 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 with significant upward pressure on rents.

36:03Here we are in 2023 with, I think, negative rent growth by 1 % for the first time in a couple 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 for 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.

36:38And 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.

37:12And 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 gonna have to use that information to make a calculated guess if you wanna do like a 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 gonna be good there.

37:47Buy 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 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'm 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 at the end of 10 years, I'm going to have amortized the debt to a significant degree, produce some cash flow.

38:21And I'm also really liking the lending market right now. Because I'm less bullish on things like stocks or real estate, I like the fact that interest rates have risen and I can get a 7%, 10%, 12 % 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.

38:55Beyond that, are there any other reasons that you're bullish on this region? I guess I'm less bearish. I think I'm more neutral, neutral positive. I think the real estate market is going to be fine. It's not going to explode in the next couple of 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 in price. A lot of these markets, again, it's very regional Northeast.

39:25It's a broad category, tons of places in Northeast, but like take a town like Rochester, New York, right? Nothing exploded. Nothing came down with a high interest rate environment. 2022, 2023, the patterns for home price appreciation look almost remarkably similar the 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 happen 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.

40:07New York is its own beast where you can do pretty well with a consistent approach. Right. Exactly. Does that make sense? Yeah, absolutely. 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.

40:46Dave just did a really good, 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 in 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 into. 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 a – I think it's probably – it's easier to illustrate this concept when we talk about commercial real estate, right?

41:32So 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?

42:10You 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. 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.

42:46Maybe 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 smoking hot pile of garbage.

43:22What 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 in a lot of these syndications. And you need to get educated. You need to understand what the pricing is. Then you 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?

43:50And then what's your exit cap going to be? So the multifamily property is priced on a cap rate basis. So if it's a five-cap property 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, the syndication market is going to be an interesting eye-opener for a lot of investors.

44:26Why 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.

45:03And an interesting phenomenon happens. If a cap rate is 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 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.

45:47Because if you can drive$1 of income, you're driving$25 of wealth instead of$1 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 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. You're just negatively arbitraging that. You have to believe that rents are going to explode over the next couple of years for that to make any sense whatsoever.

46:26Or that interest rates are going to come cratering back down. And nobody's believing 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 or 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.

46:57Let 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$1 of income at a four cap would be a$25 property. Right. A property that generates$1 of income at a three cap would be a$33 property. So if I increase the dollar from one to two, I've increased the value from$33 to$66 million.

47:43Right. $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. 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 tenants utility fees. You can meet your every unit. Now the tenant pays utility fees.

48:13That 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 NOI 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. One property might have 400 units, one property might have 300 units, but they'll both trade at 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.

48:44If 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. You know, 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 another will be worth$75 million because one is bigger than the other. But the cap rate, you're buying the income, so 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.

49:23Yes. 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 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 3 % cash flow yield. Right. Right. That's insane. Exactly. When I can go to my bank and get a 4.5 % 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.

49:54And the returns piled and 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 low 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.

50:22Right. Interesting. And the model of holding cap rates steady, right? So holding cap rates 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, 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. Yeah, it's a comp. Comparable properties, exactly. And even multifamily residential, the cap rates tend to fluctuate.

50:53You 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 basis. But once you get into the larger multifamily, typically folks are looking for, okay, what's the best cap rate? And the cap rate can confuse people with this, but it's really just, I'm going to pay a higher cap rate. I'm going to pay less money for a multifamily property that's dilapidated and needs a lot of work and a big rehab than I am for one that's brand spanking new and everything's in great condition and it's fully renovated.

51:25Well, yeah, and that makes sense because 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 five. That's not happening. Not only are rents not going up, right?

51:56They're going down this year. Right. But the cap rate is increasing from 4 % to 5%. If I have a$5 million NOI,$100 million property at a 5 cap, and then next year it's a 6, everything's trading at a 6 cap, but I didn't increase the net operating income. Now all of a sudden that property is worth what, like 20 % less? Less. Yeah, significantly less. But that's a disaster, right? I mean, you leverage this thing at 30%,$30 million in equity,$70 million in debt to buy a$100 million asset. Now you've got$12 million 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.

52:34That's the reality that's 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 five, seven or 10 years. I'm not going to value my property at$12 million,$18 million lower. No one's forcing me to do that. There's no reason to do it. I'm just going to hold on.

52:59We'll return to the show in just a moment.

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56:12within real estate asset classes are you relatively more bearish on large multifamily oh yeah i don't yeah i don't think single family is going that like going anywhere what's going to be the shock right like everyone's locked in their long-term debt everyone's got good credit nobody's got crazy mortgages right right there's a higher percentage of uh 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 I think there's a reasonable chance it stays pretty flat, maybe even continues appreciating a few points.

56:43I think multifamily is going to have a correction, a pretty big one. What about residential multi, duplex, 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. At least I hope, because that's what I own. How many units do you have? I have 13 units. Oh, nice. Plus a small piece of a couple hundred units in one of those syndications. Oh, cool. Very cool. I've got seven. Yeah.

57:12Yeah. So this is actually quite validating because what I'm hearing, 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 multifamily. 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 least bad asset to invest in.

57:50So I waffle between those with a long time horizon. My personal view, of course, that's like the fox counting the chickens in terms of promoting real estate. I work at BiggerPockets. 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'm not trying to pump up the real estate market here. I'm trying to get to the most realistic assessment I can get to. And that sometimes angers some of the syndicators in our platform. And I think there's really good, smart people who disagree with me. So don't just take my analysis here.

58:30I could be completely wrong on all this stuff. This is just what I'm seeing and how I'm feeling about it right now. But yeah, I think that 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's 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 bust cycle. So yeah, I'll be back in two years telling you how it's time.

59:04Excellent. 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.

59:35Index 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 weight 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 internalized yet.

1:00:09It'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 BiggerPockets, 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.

1:00:42Once 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 Mindy 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 Harmony lender.

1:01:13So looking to slowly get into a couple more of those. All right. Well, thank you for spending this time with us. You 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 co-host the BiggerPockets Money Show podcast with Minnie Jensen. That's a great way to find me. And my email is scottatbiggerpockets.com if you want to beat me up for any of my bad analysis today. Well, thank you. Thank you for taking the time. It's good to see you again. Great to see you. Thank you so much. Really exciting to be here and had a really good conversation.

1:01:46Thank 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 3%, 4 % 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 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.

1:02:24So 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.

1:03:03When 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.

1:03:48You 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. Right. 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. So Boston, for example, this came up in a forum post in BiggerPockets, 85 % of the land in Boston is zoned single family.

1:04:28So 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'd predict a similar type of story here, where tons of new construction happening in 2004, 2006, 2005, 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.

1:05:08Right. 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 bust 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.

1:05:44And 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.

1:06:40You 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.

1:07:20Do 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 – if you're to plot out the appreciation and cash flow of the market, so it's a distinct trend line where there's a tradeoff. There are bubbles over the last five to 10 years. There are bubbles and a couple of markets that have done well with both, but you're really going to have to make a tradeoff decision there. Many investors choose cash flow. I think that's great. But I personally think that 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 10 years.

1:07:55So 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, so 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 on 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 BiggerPockets, Scott Trench.

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