Accidental Landlords Hit a High as Rising Interest Rates Freeze Buying

0:04The rollercoaster of the economy and the housing market keeps rolling on with each day seemingly exceedingly more confusing than the last. But today, James, Kathy, and I are here to help you understand what is going on in the housing market and the news, break it all down for you, and help you make sense of what you should be doing with your own portfolio. Kathy, how are you? Thanks for being here. I'm doing great. I'm here at a conference. So glad I could be at both, here with you and at this conference. Nice. What are you speaking about? This morning was on new construction. this afternoon will be how to squeeze cash flow out of properties today.

0:42And then also doing a syndication group, all kinds of things. Oh, you are the star of the show. Oh, maybe a little. I'm just glad to be here. Nice, James. How are you? I'm good. I just got back to Arizona. It's sunny and warm and I was in the mud all week. Here in Seattle? Yeah. I think I've ruined four pairs of shoes. And your shoes are expensive, man. I've seen those shoes. It's a lot of money. James also was the star of the show. I don't know if you all saw it, but we did a Seattle value add conference over the last weekend and you should have seen it. James talked for nine straight hours about value add.

1:17At one point, Kathy, you would appreciate this. He had an IV sticking out of his arm while he was standing in front of him. Are you kidding? I will send you the picture. Oh, of course he did. The funniest part is, for everyone who doesn't know, James likes doing these IVs. I don't know what's in them. Your vitamins. But you were speaking in front of the conference and you didn't even mention it. You just kind of thought it was a natural thing to do. I guess I didn't mention it, did I? It was so funny. Well, a lot of conferences right now, but a lot of fun. If you guys don't go to any real estate conferences, you should.

1:53They're great ways to network and learn. You obviously miss these two, but the BPCon tickets are going up for sale early bird stuff right now. If you want to join me, James, Kathy, and tons of other people in, I think it's the best event of the year. I'm biased, but I love going to it. It's so much fun. It's October 2nd through 4th in Orlando. Definitely check those out. You just can't miss it. And it's in Orlando. Come on. It's going to be fun. Oh yeah. All right. Well, let's turn to the headlines because so much is going on. Honestly, I woke up today. It's Friday, April 3rd. We're recording this.

2:26I woke up today and I was going to be like, I am really scared of stagflation. That was going to be my headline. I was going to make my own. And then all of a sudden, we had a great jobs report today. I'm like, maybe I'm overreacting, but just wanted to call out two sort of like major things that are going on and get your opinions on it. So the first is 180-ish thousand jobs added in March, which is a big rebound from February. We saw losses. So that's good news. But overall, if you just average together the last six months. We're seeing about 15 ,000 new jobs per month. Not great, but this is hopefully a good sign.

3:04So still somehow mixed signals on the labor market. We can't get a direction on it. On the other end of the spectrum, if we're talking about rates and where things are going, I'm particularly worried about inflation. I don't know about you guys, but we haven't seen a CPI print since the war in Iran started. But there are some leading indicators like there's this wonkier way to measure inflation called the producer price index. So not what consumers are paying, but what suppliers are paying. And that went up 0.7 percent in just a month, which is a lot. If you extrapolate that out for a year, that's over 8 percent inflation.

3:43It probably won't happen. I'm just saying like that was a lot for one month. So, you know, see oil prices continue to go up. I'm particularly worried about food prices. If you look at fertilizer costs, like I think inflation is going up and I am still worried about stagflation and just stagnation in the housing market and the economy in general. But maybe I'm being paranoid. What do you guys think? Well, it was it was really shocking to see the jobs report. And also retail sales came in stronger than expected, which says the consumer is still spending money, whether they have it or not. I'm not sure.

4:17What is happening? But it's also interesting, the ADP report that came out, a key takeaway was small businesses, which is under 20 companies, drove the majority of job gains. And that's really interesting. I see that. That's great news. It's really great news. It's a healthy sign that it used to be that small business owners really were the backbone of the economy. And maybe that's coming back. Maybe the tax cuts inspired that. That's true. But But that's really good news, right? I think so, yeah. So I don't know. Hopefully this war just ends soon and we can see prices come back, oil prices come back down.

4:53And how about some peace? That would be amazing. You know, we're a smaller business. And I will say we've been hiring more recently because you can get better quality applications now. Like the big businesses aren't sucking out the talent. Oh, interesting. And at the same time, you can get them at reasonable, like salary, like normal salaries, like for, I remember like 2021, 2022, it's like people come in right out of college and there's nothing wrong with this. We just can't afford it. And they'd have offers from all the big tech companies. So like, oh, what can you offer? I'm like, not that.

5:27And now there's definitely a lot more talent looking for jobs. And so I think it's made it a lot easier as small business owners to higher. It's getting a little bit more balanced out. That's super interesting. I actually saw that in the data. They track this stuff, like how much of a pay increase you get by switching jobs. And during COVID, I forget the exact number. It was like average 10%, super high. Now it's flat. And so obviously for people who want higher wages, that's not great, but it's interesting to hear some of the benefits for smaller businesses because you're right, James. Google, Amazon, all these people overhired, essentially.

6:04They were just trying to hoard talent, labor talent for a really long time. And now maybe that means for anyone out there looking to build a business, you're going to be able to hire better quality people for the first time in a while. It's almost like real estate, right? You're getting better deals now because there's less competition. And maybe we're seeing that in the labor market too. Yeah, we're definitely seeing it. And I've noticed a lot of like people coming in to apply for positions. They were kind of still in that COVID freelance mode. We're like, oh no, I'm just going to pick up a contract here, pick up a contract here, double dip.

6:34And now all of a sudden there's not as many contracts available and they're like no no i just want full-time employment you know which is good i mean because as a small business owner you don't want turnover and you don't want people jumping around and like we always say at our office like you stay with us a short amount of time or you're with us for life and you know a lot of our employees have been with us over 10 years and that's been a lot more refreshing so i think we're i mean i've been hired for a job that i didn't really need dean but the person was so good they were qualified And I was like, OK, we can build around this because we need it down here.

7:06And so that's been very refreshing as a business owner because it was brutal for years. That's good news. I mean, I guess for the housing market and industry, at this point, I'm more worried about inflation than the labor market. It switches every day. So ask me next week and I'll change my mind. But I think we're, even if the war ended tomorrow, I don't think oil prices are going down anytime soon. And a lot of these things just ripple through the economy for a while. The uncertainty that's created here is pushed up bond yields. The fear of inflation. I just want to sort of explain what I said earlier.

7:44Oil prices up, what, 60, 70 percent over, you know, just a month ago. People look at that and they see what they're driving and the gas prices. But oil goes into everything, shipping, everything that we import, diesel costs to ship things. It goes into plastic. We actually just saw that Dow, the company that makes a lot of plastics, just said that they were doubling their expected increase in input costs. So we're going to see this ripple through the economy. Does that mean we're going to see 5%, 6 % inflation? Probably not. No. But it is going to put upward pressure on inflation, which keeps mortgage rates high.

8:19We also see 30 % increase in fertilizer costs. I know this seems totally obscure, but this really matters a lot for food prices. We're probably going to see grocery bills start to go up. And these are the things that ordinary Americans have been struggling with, right? Gas prices, electricity prices, food prices. And I just think it's going to decrease demand. Like people are going to get stretched out on other parts of their life and mortgage rates are higher. And I didn't think we could go much lower in terms of transaction volume than we were in January. But actually, now the way I'm looking at it, I think we're just, I don't know if the spring selling season is going to materialize this year.

8:57It was. And then I feel like this is like the tariffs all over again. Like the market, I remember last year, it was so red hot. They announced the tariffs and it was like the curtain just dropped. I haven't felt that yet though. And April could, the curtain could drop. And so it's like push your properties to market. Typically, like in our market, end of May was usually when it slowed down. Last year came in April, about halfway through. We're still seeing a little bit of push through. We're still selling houses. But I will say the velocity of buyers showing houses is slowing down a little bit right now.

9:31Buyers looking at houses? You'd like foot traffic? Yeah. Yeah, that's the thing I gauge most. Every Monday, I go through every listing that we have. And we have them on all different price points. How many bodies are coming through? because that tells you the activity in that. I mean, that's the blood that's pumping through your market right there. And I would say that has slowed down a little bit. But the people that are coming are pretty serious about writing an offer, maybe because also their rate locks are expiring. So, you know, once those rate locks expire, then you feel the curtain close.

10:00This is obviously, if you're an agent or a loan officer, like this is not good news. Personally, like I wouldn't be mad if we saw prices come down a little bit. I think it would make buying a little bit easier. So I don't know if this is going to force a little bit more reality for some sellers, but I would imagine that this is going to create both some frustration because, you know, it's not good long term. But it's what we keep talking about. The flip side of a more slower, more difficult market is better negotiating leverage and better deal flow. And I think that's kind of the trade-off that I'm looking for.

10:35And I think that's my recommendation is to keep looking because I think the discounts are going to be easier to come by if the market stays the way it is right now. Oh, yeah. I mean, on the buy side, it's strong. This is your time. This is the time, right? There's this blip. The curtain did come down a little, like James was saying. So there's more properties on the market, more opportunity to negotiate, a little harder to sell in certain markets. We have our subdivision in Florida that has been actually selling pretty steadily. But the Utah one, just screeching halt. But that also has to do with the fact that there was no winter in Utah this year.

11:10There was no snow. And it's in a mountain town, right? It's a mountain town, yeah. Mountain towns got hit hard, yeah, because you don't have buyers. You don't have, as James said, the blood circulating. There was no one there. You know what the one thing I'm seeing on our side, though, is there's not as many opportunities. The deals aren't there, especially because I know we're going to be dispo-ling kind of in the summer months. It's still really competitive right now. The deal flow has really shrunk over the last 60 days. And so it's always weird. Seattle just defies expectations, whatever it does.

11:44It's always weird. It's its own little universe, just kind of like San Francisco. It is. It's like San Francisco and New York. They kind of just defy gravity. Not always in a good way. They're just like they do their own thing. But I was looking at a deal this morning in the Midwest for a renovated four-unit at a seven cap. I was like, all right, that's a little bit better. Things are starting to get a little bit better. It's not everywhere, but those deals are sneaking through on market. My guess is that trend is going to continue in the majority of markets, maybe not Seattle and some other places.

12:18But I think for most mid-level affordability kind of markets, we're going to start seeing more and more of that. And it's why I've sold some properties recently, because I think I'm trying to reload, buy new stuff, because I think definitely better assets are on sale, like higher quality properties. Still asking a lot, but it's still better inventory to look through in the markets I'm looking in. All right. Well, I guess that's sort of our outlook. I don't know. Summarize it. I think slow is what we're going to see until we get clarity. Yeah. But hopefully that means better deals. We've got to take a quick break, but we'll be back with more headlines right after this.

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15:31Welcome back to On The Market. I'm here with James and Kathy going through the most recent headlines. Before the break, we talked about jobs and inflation numbers. James, what do you got for us today. The article I brought in was accidental landlords rise to three year high as the market shifts. And this is actually published by Zillow. I found this actually really interesting because I see this a lot over the different markets I've been in is when people force the rental and they're like, sellers, they're not getting their price. They're digging in their heels. I'm just going to rent it. Yep.

16:04And they pull it off. They go fill it up. And then, And, you know, they're sitting there. And is that the right strategy or not? Because a lot of times, mathematically, it makes no sense. And so, you know, I wanted to kind of chat about that. But the article is very interesting, because it talks about that we are on some of the highest levels we've ever seen where people cancel their listings, they put it back in the rental pool. And I'm thinking part of this is because there is a lot of short term rental operators that just want to see if they can get rid of a property or not. But the cities that we're seeing the most in And Denver actually ranks number one at 4.9%, where roughly 5 % of homes just don't sell.

16:43They don't want to cut price, and they take them as rentals. And so your top five are Denver, Houston, Austin, San Antonio, and Portland, which I don't know why anyone wants to be a landlord in Portland, to be perfectly honest. But I would much rather take a low price. But we're seeing this as a trend, and I'm seeing it in especially the investment community, where people are into a flip or they're into a dev and they're like, you know what? I'm just going to keep it because they're too afraid to take a loss. And I'm a person that if I got to take a loss on a property, which happens, it's just, I mean, you buy enough homes, you're going to get the bad deal or the wheels come off on a deal or it just, you hit the wrong market.

17:23Just the way it goes. You know, for us, if we're planning on selling it, you know, there's kind of two things that come components. Like right now I am going to be one of these sellers where I'm pulling something off the market and I'm going to keep it as a rental and mathematically it doesn't make any sense but the reason I'm keeping this as a rental is because I can build two townhomes in the back of this yard and so what I'm going to do is plan permit and get the townhomes ready to sell and see what I can sell the lots off for then sell the house because it takes about a year to get that permit through in Seattle and so I'm doing that because there's upside and it's a strategy change.

17:57But if I just decided to keep that house with no upside, I'd probably be losing $1 ,500 a month at best case scenario. And I see a lot of people forcing rentals right now, and it's not the best strategy. I agree. Unless you can just afford to pay that big negative on numerous properties. It's better to take the loss and relocate the money and reposition the money than to just let it kind of bleed. Man, I'm talking about a lot of blood this show. But it's very morbid. This is like a horror show. It is. It's a little morbid today. But these things can bleed you out. And I remember seeing this and I did this in 2008, right?

18:35Like the market crash was like, I'm keeping all my properties. And it just slowly eroded my bank account. Now we're not in 2008 again, but it was like I had savings and the savings got wiped out. And it would have been much better for me just to take it on the chin, sell those properties and got better buys. But the properties you're talking about, and the reason you wouldn't recommend it is because they didn't work as rentals, right? They weren't profitable as rentals. Yes, they were not profitable as rentals. But that's what I'm seeing a lot in that DSCR space where people are kind of refinancing, getting the biggest loan they can.

19:07And then they're getting their income and it's a little bit less because, you know, it's also talking about how rental inventory is now rising right now because of these sellers pulling things back in the market. And I've seen this happen, especially like in like the east side of Washington, which like Bellevue, Redmond, Kirkland, where they're more expensive houses, they pull them off. The rents are terrible there. Like your rent math never works well. That's another weird pocket where it's like rents are less than much lesser neighborhoods. Yeah, you're like getting like a 0.3 rent to price ratio there.

19:37Maybe less. Yeah, it might be less. It's that bad. But then people trap up their money, they can't move them and you're just paying for it. And so, you know, I think the steps are you have to look at, okay, can I break even? Is there upside? Is this a short term down and why you can't sell it, then maybe take a look at running it. But if not, I'd rather instead of lose$1 ,500 a month in some potential equity that's not real, is sell it, take the loss, take that cash and go buy a better deal. Yeah, but that's because you know how. If you're an accidental landlord, you don't know how to do that.

20:10You have probably another job that you're good at and it's not real estate. And so for for people who have regular income jobs, to lose money is a big deal. You know, it's not like, like we throw around money because we're so used to making it and losing it. I don't know about you, James and me. I don't like losing it. I hate losing money. I absolutely hate it. But, but it's like, you know, like with James, he's like, okay, I lost 300 ,000. I mean, I've heard him say this. I lost 300 ,000 on this deal. I'm just going to go make it on the next. That's not normal. That's not how most people think.

20:42Now, if somebody was like, okay, if I sell this, I'm going to lose money, but I still have some money. I could go put it in this deal and I'm going to make it back. They would do that if they knew how. That's fair. And that's why hopefully you're listening to this show so you can learn how, but I can see why someone would say, you know what, I'm just going to lose a little money, even$1 ,500 a month, because I believe in a few, I would never, I would never recommend that, but that's what I heard James saying with the idea that, you know, in a few years it's coming back. I guess to me, it's just still a math problem.

21:15Does it work as a rental? Yes or no? Is it as good as another rental you could go buy? Yes or no? If the answer is no, sell it. Lose money. But I bet a lot of these people who are accidental, I bet they're on 2 % or 3 % interest rates and maybe it does work. Yeah, exactly. That's the thing. Did you inherit a home? A lot of times, by the way, accidental landlord sometimes either refers to people who maybe inherit something that they didn't intend to be a landlord or they're moving and they don't know if they should sell or rent out their home. If you're inheriting a property, you're probably at a really good cost basis.

21:48You probably have lower taxes. You probably have a low mortgage rate. It can work a lot of the time. And if the numbers make sense, you should. I think for people who are moving, though, it's a lot harder a lot of the times. or for flippers, it's harder a lot of the times. And so I just encourage people, analyze it just the way you would do a regular rental property. And if it works, do it. The other thing I'll say is that I was speaking at this conference this week too. And someone was asking me this question. She said, I flipped a house. It's been sitting on the market. Should I just rent it out?

22:20And I was like, how long has it been sitting? It was like a really long time. I was like, all right, send me the listing. I'll help you analyze it. He sends me the listing. It's been sitting on the market for 40 days. And I was like, okay, 40 days, not that bad. So maybe don't overreact to how long it might take. And the other thing I learned from James, this was a really good lesson for me. We did a flip together this year. We wound up eking out a tiny bit of profit, but it was a great learning experience. And what I learned was that you just have to be aggressive in selling right now. Like you have to be very proactive about it.