A World Without Airbnb & Why “Sinking” Could Cause Your Insurance to Skyrocket

Dave:

Imagine a world without Airbnb, would it really be the dream fix for the rental housing shortage? What’s happening with private equity firms? Are they swallowing up all that bargain commercial real estate out there? And how high are costs really gonna get for first time home buyers following the NAR settlement? Hey everyone, welcome to On the Market. This is your host, Dave Meyer, and today we’ve pulled some really juicy headlines for you that we’re gonna discuss and help make sense of so you can all make informed investing decisions to help me in that effort. Henry, how’s it going man? Thanks for being here. Hey, glad to be here as always, James, thank you for taking a, uh, break from your Hollywood glamorous lifestyle to join us today. It’s

James:

Very glamorous <laugh>, but I’m happy to be hanging out with my people.

Dave:

If y’all didn’t know, James is filming an A and e TV show, so he’s uh, gone big time, uh, but he still makes time for us. Thank you. And Kathy, thanks for being here with us. Glad to be here. Alright, so the four headlines I got for the three of you today are sort of spanning the whole world of real estate investing. First up, we’re gonna talk about private equity firms and what they’re doing in the commercial real estate space. Then we’re talking about a world without short term rentals. Next, we’ll talk about first time home buyers in a post NAR settlement world. And lastly, we’ll talk about American cities that are literally sinking into the ground and what that means for real estate investors. Before we get into those headlines, make sure to hit the follow button on Apple or Spotify to make sure you never miss an episode.

All right, you guys are ready. Let’s jump into this. Our first headline comes from James, your Neck of the Wood, this Seattle Times, and the headline reads the Commercial Real Estate Credit Crunch. There’s a tsunami coming. The key points from this article are that one office values fell by almost a quarter last year. That is an enormous amount, 25% in one year, and there is almost $1 trillion of debt linked to commercial real estate that will mature this year in the us. We’ve talked about that a lot, but I think one of the interesting parts of this article that we wanna discuss is that private equity firms are trying to take advantage of opportunities for distressed properties. About 64% of the $400 billion that’s sitting on the sidelines right now in private equity has been set aside for property investments in North America, which is the highest share in two decades. So I’m curious if you think this is gonna put a bottom to the market. Do we have more downside? Is this gonna shake up downtown areas? Kathy, let’s start with you. What do you make of private equity involvement in the office market?

Kathy:

There’s just so much money sitting on the sidelines waiting for waiting for deals, waiting for deals to happen. And we keep talking about real estate values, you know, all these foreclosures in real estate, but I don’t, it doesn’t look like it’s gonna get that far. It looks like deals are gonna be done before a foreclosure happens in the form of private equity. That’s what they do. They kind of come in, save the deal, but then they get priority, uh, to the other investors. So what I really think the headline should say is that the sharks are coming after the sea Lions <laugh> would be a better one. Not, not so much a tsunami just wiping things out, but rather, uh, more consolidation of banks. I was kind of looking at the stats and in 1920 there were over 30,000 banks in the us of course, after the, the, the depression that went down dramatically.

Then, um, then for 50 years there was about 13 to 15,000 banks. But after the SNL crisis, and then after the last recession of 2008, we kind of got down to, I don’t know, 5,000, we’re about 4,000 banks now. Ooh, wow. So it just kind of an example of the bigger banks are gonna be taking over some of the small banks that fail, and that is not a new story. So more consolidation in the banking industry and probably more investors losing as the private equity comes in and takes priority. Those who kind of came in early or invested early in some of these commercial projects are most likely gonna lose their, their equity unless somehow values rise dramatically over the next decade.

Dave:

And just for anyone who’s not familiar, private equity is a type of investment vehicle where usually wealthy individuals, pension funds, you know, retirement funds, pool their money and invest across a variety of asset classes. It’s not actually all that dissimilar from a real estate fund, but rather than just investing in commercial real estate, they invest in a lot of different things. And one of the main things about this story that’s so important and that Kathy was alluding to is that during the recession or during the pandemic, excuse me, there was a lot of cash. I think we all saw that in terms of cryptocurrency prices, real estate prices, stock market prices, these types of investment vehicles also were able to raise a ton of money because what private equity does is they go out and get money from wealthy individuals and pension funds, but with a lot of them, they weren’t able to actually make investments before interest rates started to go up and the investing climate started to change.

So they’re sitting on a lot of that money. A lot of these private equity firms raised billions and billions of dollars and they’re just sitting there waiting till market conditions change. And so the question then, and that what Kathy was alluding to is like, they might just come in and start scooping up some distressed assets before it actually gets to the point of a foreclosure, public auctions, all of that. So James, let me ask you, this is coming from the Seattle Times. Do you, do you see a tsunami coming and have you experienced any of that in Seattle? Because you know, your, your market is one of those high price downtown areas that often gets mentioned when they talk about sort of these negative loops that commercial real estate is in.

James:

We keep hearing about the Doom loops and the tsunami doom

Dave:

Loops and tsunamis. Man, if you had a dollar for everyone,

James:

<laugh>, I feel like every six months there’s an article that says tsunami of foreclosures somewhere coming, whether it’s commercial real estate or whether it’s regular foreclosures. Um, I don’t believe so. I mean, I, I think no matter what, we’re going through a transition period where there’s certain types of investments that are being liquidated right now and it’s not really good ones that are stable and it’s not ones that are rented. They’re properties that are vacant or that are under construction. Most of the sales that I see at least are half built, half permitted in the middle of adding value. Not that there isn’t other sales going on, but I i I just feel like it’s like these stats are always so pumped up. So in that article I talked about being down 25%, but it’s also because there’s just a smaller segment of sales. Like in two, from 2023, the commercial real estate transactions were at $647 billion in 2022 is 1.14 trillion. And when you have a slower amount of sales and more expensive debt, a lot of just the investments are getting traded around anyways, people dispositioning repositioning their investments and buying something different. I’m kind of sick of this, this, this headline. It’s like, if it’s gonna come, let’s get it on. But it never comes <laugh>.

Dave:

Yeah, it definitely doesn’t. Henry, I’m gonna ask you, if you were the head of a hedge fund and you had $400 billion <laugh>, what type of assets would

Henry:

You, what kind of island would I be on? Um,

Dave:

Yeah, exactly. <laugh>. Are you thinking Caribbean? Are you thinking South Pacific?

Henry:

Right, right, right. Some, some warm sandy beach somewhere. Um, here, here’s my thoughts on this. Like if you think about the last real estate crash, it was because of financial factors, right? Subprime mortgages, those kinds of things. But how you monetized the asset didn’t change, right? You still bought real estate that went up in value over time that you forced or added value to. But this is a little different. So if I was a hedge fund manager, like I obviously taking advantage of buying real estate at a cheap price is a good idea. But a lot of the factors playing into why commercial isn’t doing well aren’t just economic related. It’s more related to less people need to rent office space or want to rent office space. There’s not as many people in the market anymore. And so I would only be wanting to go and put my money into these assets if we had a plan for how we are going to increase that vacancy, maybe with a different tenant base or, or doing something else creative. But just buying a distressed asset and then trying to put the same tenants in it who don’t want to rent it right now, even though you got it cheap, doesn’t mean you’re gonna be able to monetize it. Like you have to have a plan for, for, for this situation.

Dave:

It’s, yeah, it’s just like all those people who are like buy the dip in the stock market where they’re just like, oh it went down. Buy it. Like, okay, maybe that will work for some assets that will work for some stocks that will work. But it’s not just like an automatic thing. Just be you buy when prices are low.

Henry:

If you buy an office complex that’s 80% vacant and it’s been 80% vacant for the past six months, just ’cause you got it at a steal doesn’t solve the problem of you being able to put tenants in it. It may be cheaper for you to hold that asset but still not making money.

James:

What Henry just said is very important, and I’ve learned this lesson <laugh>, uh, in 2008 we bought a building and we thought we just ripped the deal of the century. You know, we bought this building, it was like 10,000 square feet. We paid 900 something thousand for it. It was a million dollars below appraisal. And we just thought we hit a home run and we bought well below replacement costs, all the metrics you’d want. But then what we found out is that no one wants to rent it and no one wants to lease it. It’s a major problem. And you could buy whatever commercial real estate you want, but if it’s not gonna pay you dollars, doesn’t matter. And we had to pack up our whole office, move into this building that was 35 minutes from Bellevue where we were moving and then we, we literally had to micro out these units. It was like, I swear it was like the first

Henry:

Coworking space.

James:

Yeah, <laugh>, yes. But it was definitely not as fancy. It was like, Hey, you could take this office for nine, nine bucks and we were just renting all these offices. But you know, I think the big thing about this commercial real estate is once someone figures out how to repurpose this real estate Yes. Into something more usable and more in demand, then it’s gonna really, you’re gonna see a tsunami, then they can use the word tsunami of purchasing <laugh>. But it’s, no one’s figured it out really yet.

Henry:

Yeah. I am telling you, whoever figures out how to turn vacant office into affordable housing is going to make a lot of money. ’cause those are the two big problems.

James:

Hammocks and mini fridges.

Henry:

<laugh>.

Dave:

Yeah. Well, I, I’ve, I I agree. I think personally it’s probably gonna take some like government subsidies ’cause it’s just not profitable in the way that is right now. But I just wanna say this like doom and gloom about private equity I think is like so overblown and is almost the opposite of what people should be thinking about. Investors play a very important role in setting the bottom of any market. This happened in 2009, 2010, 2011. No one wanted to buy homes, no consumers, no home buyers wanted to, it was investors who started to go in buying things off auctions, buying things that had been sitting on the market. And that that sets the bottom, that gets confidence, that gets transaction volume going again. And the same thing is going to have to happen in commercial real estate sooner or later. Like if you don’t want it to be private equity coming in to set the bottom, who else is gonna do it?

Like we need someone to come in and start buying these assets and making them profitable. That’s gonna start the next cycle for commercial real estate that I think we’ve all been sitting around and waiting for. So I’m all for it. I would love to start to see some of this dry powder come in off the sidelines. I think to me that would be a sign that maybe I want to get back into commercial real estate <laugh>. We’ve hit our first headline on commercial properties and private equity firms, but we have three more headlines after this quick break. Stick with us.

Welcome back to on the Market. Let’s get back into it. All right, let’s move on to our second headline here, which reads, what does a world without Airbnb look like? This comes from the BBC, this story follows Barcelona like a lot of other cities that announced a total ban on short-term rentals starting in November, 2028. So they’re not even really grandfathering people in, they’re just saying four years from now, it’s done. Currently there are about 10,000 short-term rentals in Barcelona. And by returning those to long-term rentals, the city is basically hoping to provide some relief to the housing shortage crisis. There are obviously larger questions here about tourism and who gets to benefit from a place, tourists, locals, both, all of this. But this is not something new. This has been really popular in major cities and although personally I’ll just give you my opinion on the headline. I don’t think Airbnb short-term rentals as a whole are going away. But I’m curious, James, let’s start with you. Do you see a world where Airbnbs are no longer welcome, let’s say major metro areas? ’cause that does seem to be the trend. Places like Dallas, New York, I know Denver now Barcelona, um, are starting to ban them. Do you think this could trend could continue from here?

James:

Um, I do. You know, we have a big housing crisis going on and a lot of times in politics they like to start placing blame on things and then moving legislation just to, you know, try to act like they’re getting something done when they’re not <laugh>. I did, it’s, i, it it is a big concern. Like I was, you know, in this article, one thing that jumped out to me was, you know, in British Columbia, uh, premier David Emby, uh, put the issue out and what he said, he goes, if you’re flipping homes, maybe that’s why I grabbed my attention. Uh, if you’re buying places to do short term rentals, if you’re buying a home, uh, to leave it vacant, then we consistently send the same message. Do not compete with families and individuals. And so politicians are now putting this into, into what they’re trying to do to get votes.

And it’s a message they’re, they’re trying to dump on which they should. Affordable housing is an issue. Cost housing is too much, and so how do we get it down? But then they start pointing the, they, they, they like to point fingers at the investors that are also trending that are easy to point the finger at, right? It’s like, this is not even gonna fix really much. But I do think this regulation gets worse and worse. And I always get surprised by like how much it gets tightened. And if I’m getting surprised today, that means it could be a very nasty surprise in three years. If you own short term rentals, you really wanna watch the, uh, the legislation because if there is major changes going on and it’s not gonna be grandfathered in, you wanna put that in your forecasting to sell and reposition it at a different type of asset class.

Dave:

Henry, do you think it’s gonna work?

Henry:

Do I think it will create housing? I mean,

Dave:

Yeah. Do you think it’ll actually improve affordability of rents in Barcelona?

Henry:

Here’s my, my general take is if you think about major metros like you were talking about, um, where I think, uh, the problem is, is in these major metros where you’re able to take smaller properties, right? Properties that would typically be rented to people who are probably struggling for housing and monetize them on short-term rentals. Yeah, I think that this could absolutely help alleviate some pressure in terms of housing. But if you look at places like Scottsdale, Arizona where it’s these multimillion dollar massive homes sometimes being used as Airbnbs, I don’t think that banning those are gonna have much, uh, are gonna have much implication on the affordable housing or the, or the, or people being able to buy homes within that, that part of the country. So, uh, maybe it’s that some of the legislation will have some sort of cap on or some sort of limit on the size of the house you’re able to do this on. Like, you can’t do it on, you know, a three bed, two bath, 59 square foot home, but you can do it on a, you know, eight bed, seven bath, you know, McMansion somewhere.

Kathy:

Yeah. So it’s, it’s sad in a way because bed and breakfast have been around for so long. VRBO has been around, you know, if you rent vacation homes, you know, that’s been around before Airbnb. It’s just that Airbnb made it so much more accessible to so many people. Uh, you know, it used to be that if you wanted to have a resort, it had to go through the whole permitting process and there had to be at a certain part of town. I live in a vacation town and there is talk about this all the time that they, they can’t get enough kids in the schools and there’s not enough families living here because so many homes have turned into rentals. So it’s really, for some cities it is hard. I kind of love what, uh, Southern California has done. At least Los Angeles. Los Angeles County has, um, not banded, which is amazing, <laugh> because it’s California.

Um, but they recognize that a lot of people need the income. So it’s too, it’s like a different story for people who just maybe wanna rent out an A DU on their property or a room in their house, or they’re gonna go on vacation and want, want to rent it out. So LA has a law where it has to be your primary residence, and I think that’s cool. You know, I think that allows people to be able to afford to live in one of the most expensive places in the country because they can rent little parts of it out. Uh, but to have a full on business where you own a bunch of Airbnbs and you’re a hotel operator, basically that’s running too much under the radar. That’s, that’s more new and, and that does need to be regulated because hotels get regulated, right? So, um, that again, that’s just a solution.

You can’t just buy a house and put it on the, and buy 10 of ’em and put ’em on the Airbnb market in la. So I don’t love banning it completely. I think it’s important to have it. I hope that all of these vacation areas will at least consider still the, the old model of having a a, a Airbnb, right? That’s my, my mother-in-law and her mother, uh, it, they had a b and B in, in upstate New York for a hundred years. <laugh> like guess this farm has been in the family and that’s how they were able to make those payments on the farm was renting out rooms and having, having a, b and b. So, you know, hopefully it’s not totally banned, but there’s just some regulation that you have to get, you know, you’ve got, there can only be a certain number in the city. Maybe that’s what Park City does, is you have to get a permit to have that Airbnb and there’s a limit to how many there can be.

Dave:

Yeah, I, I think there are a lot of creative solutions. I do wanna call out that there has been some academic studies about this. Most recently in the Harvard Business Review, it was a study of New York, which did essentially ban, uh, short-term rentals in most cases. And what it found was that there was very, very little impact on affordability. It was like 1%, or I, I forget the exact number, but it was very, very low. And the impact on affordability really happened on higher end, very expensive, uh, apartments. So it wasn’t really even helping the lower income folks that it was intended to help. Now that’s just in New York. There is no knowing if that would work the same way in other markets. But I do think it’s worthwhile noting that the little bit of statistical analysis, data analysis has been done on this, shows that it doesn’t have a massive impact.

But I think, you know, I, I get why people are doing it and I sort of understand that even beyond the affordability thing, there’s sort of like a psychological thing here, uh, going on that people want housing for their friends and for their neighbors and their family, even if it doesn’t have as much of a dollar cent and cents thing. I, I do think that makes sense, at least in these big areas. Um, but I, I really doubt there’s gonna be like a holistic ban across the board. I think we’ll see a moderation just like there is in every industry, you know, every industry there’s a gold rush, there’s a crazy period and then there’s regulation and Airbnb. Short-term rentals had its day where it was going crazy and it was pretty unregulated. And now we’re gonna see a step back and that’s gonna be okay in the long run for investors and for communities.

But we’re sort of in this sort of like realignment period, which is always a bit awkward. All right, let’s move on to our third story, which comes from the Indiana Gazette. The headline reads, first time home buyers could face thousands in new costs following the NAR settlement. NAR is the National Association of Realtors. If you haven’t been following the story, we’ve put out a lot of shows both on the BiggerPockets podcast and on the market about what’s going on there. But basically the business model of real estate agents is very much up in the air. And at this point people are really kind of just guessing or making at least educated guesses about what’s going to happen. But this article talks about that the fact sort of assumes the worst case scenario, right? Which is that rather than sellers, I should say worst case scenario for home buyers. And that scenario is where rather than sellers paying the two to 3% commission to the buyer’s agent, the buyer’s just gonna have to come out of pocket for the exact same amount, which would come to somewhere between 80 $512,500. So James, I’ll ask you first your real estate agent. Do you think anything’s really gonna change, like this ruling is going to affect? How is your business gonna change from it?

James:

I don’t think it’s gonna change much at all. It’s just a matter of structure on a deal. I mean it, at the end of the day, a buyer’s willing to pay a certain price for a property and whether the commission’s added on top or paid separately or paid by the seller, paid by the buyer, doesn’t matter. It’s all the same price. You know, it’s, it’s, it, I mean it’s kind of like when you’re buying an assignment deal. When you’re buying an assignment deal, you’re paying a fee to a wholesaler and the commissions charge to the buyer as a closing cost. It’s not paid for by the seller, paid by anything else, but you’re still just paying the same price for the property. Like whether the seller’s paying it or I’m paying it, as long as I’m at that all in number, it really doesn’t matter.

And the biggest impact short term is that the housing market goes up 3% all of a sudden because it’s just now the cost of a house goes up 3% across the board, which I wouldn’t mind my units would go up in value, but we’re already seeing buyers starting to push back. Right now, nationwide, there’s more inventory coming online, things are getting absorbed for less. And I can tell you one way, shape, or form, depending on the con the, the market cycle, whether it’s a buyer’s market, seller’s market, someone’s gonna pay for it. And is it gonna cost the buyers more? Well, maybe today if we’re short on housing, but if it goes into a buyer’s market, they’re gonna pay less. It goes with the cycle of real estate, just like any other thing. When you’re purchasing

Dave:

Kathy, what does your crystal ball say about what’s gonna happen with commissions? Do you think that we’re gonna have this, uh, worst case scenario?

Kathy:

Yeah, I can’t, I can’t say I don’t have a crystal ball anymore. ’cause Rich bought me one. Now I have one <laugh>, uh, dunno how to use it. But I think if anything came out of this, it’s that people now realize that they can negotiate and for some reason buyers didn’t realize they could, but they always could. You know, you, it’s just, it all depends on supply and demand. Like James just said, if it’s a buyer’s market, which means that there’s a lot more inventory on the market and it’s hard to sell your home, you’re gonna pay your agent whatever you need to pay to get that home sold. If you’re somebody trying to buy a home in a seller’s market, which means there’s not a lot of inventory and you gotta work hard and you need an agent that can fight for you, you’re gonna pay whatever you need to to that agent.

But maybe the, the listing broker doesn’t need as much because there’s so many buyers. So again, it’s just all up for negotiation. And that’s, to me, the good thing that came out of this is now people are like, oh, I just thought it was set. It never was set. You could always, always negotiate. Um, and they may or may not accept that negotiation, right? It’s gonna be up to the agents. I really don’t think anything’s gonna change much in the structure of it. Uh, I’m seeing it all around of people saying, yeah, I, you know, just put it in the price of, of the home so that I don’t have to come out of pocket. And I think again, more and more buyers are gonna learn that there’s different ways to pay that fee. It can be in, you know, in the price of the home so that it’s, you get to have the loan on it and you don’t have to come out of pocket. Or maybe you just say, I’m gonna come out of pocket and I’m paying you half of what you want. And, and if it’s gonna close quickly, you know, maybe they’ll accept that. So I have not seen prices come down and I think a lot of areas have not seen prices come down. Some areas have, but that’s because of supply and demand, not because of this.

Dave:

Henry, I know you have a very good and longstanding relationship with your agent. You gonna start, uh, negotiating with him about every deal. <laugh>

Henry:

Absolutely not, man. So key to my business, pay that man what he needs.

Dave:

Yeah, absolutely. Well, do you, do you think, uh, have you, I mean I know we, he’s been on the show a few times. Do you think, uh, he’s changing his approach at all? Or what do you see happening here?

Henry:

I don’t know. I’m, I’m kind of with Kathy. I don’t think much is gonna change here. Um, I think it’s, they’re making a big deal about, uh, just too much unknown. Um, and there’s, there’s multiple ways to get things paid for. And we also talk about like there’s, there’s, there’s potentially, you know, incentives that can come in and, and programs that people could sign up for that might include some of these commissions so that they can, housing can be more affordable. Like we have no idea what’s coming. But right now, uh, there I just haven’t seen much of a change. People are still paying the 3% because they feel like the agents are helping them do what they need to do in order to get into a home. So I don’t, I don’t think it’s a, I don’t think it’s a big deal. There’s ways to move that money around. There’s, it’s just, it’s, I think good agents who provide a good quality of service aren’t gonna have a problem getting paid or making money. And I think agents who don’t work hard, now you’ve got people that are gonna be able to pull your card and say, Hey man, like why am I paying you 3%? Totally because you’re not doing what I need you to do. Like I, this is what this is. Business should be, right? <laugh>, yeah, this is absolutely what business should be.

Dave:

Absolutely. I obviously dunno what’s going to happen and, and no one really does. But, uh, i, I agree. I think it’s gonna be less impactful than people think. The one thing I do feel like quite certain is that people are not gonna be coming out of pocket this amount. It’s either like Kathy second be baked in or if it does wind up that people start paying out of pocket, I can almost guarantee it’s not gonna be 3% because that’s just not a, an amount people are gonna come out of pocket for. There’s gonna be agents offering cut rate services or just trying to put, do the volume play where they do a lot more houses at a cheaper price. But I feel quite confident that you’re not gonna start seeing people writing checks to their agent for 3% of the purchase price. That seems like probably the least likely outcome. So Indiana Gazette, I don’t buy it. I’m sorry, <laugh>, we do have to take a quick break, but we have one more headline for you when we’re back.

Welcome back to the show. All right, well let’s move on to our last story, which is definitely a topic that we haven’t covered before. It comes from CNBC and it says US cities are sinking, like literally sinking. Here’s what this means for homeowners. This story says that lamb subsidence, which is a term I’ve never heard of, but it’s fun to say <laugh> lamb subside land subsidence, there we go. Is when the lamb below a city is sinking because of natural and manmade causes. This is happening in cities like New York, Miami, new Orleans, San Francisco, so a lot of coastal places. And this is saying that the cost of home ownership can be driven up 8% because of this happening. I also actually, just to add to the story, I saw this article about Nantucket, which is obviously super high priced area, but this home had lost like, I don’t know, it’s like 60% of its beachfront and dunes because of erosion. So these types of, you know, na nature induced costs I think are on the rise and people are starting to pay more attention to ’em. I’m gonna ask you, Kathy, you live in Malibu near the beach, <laugh> in a, in an expensive area that’s hard to get insurance. Do these types of things worry you on a personal level about your personal home?

Kathy:

Our house is on a hill and it’s on bedrock, so I feel, I feel fine, but our PCH the road that I need to take to get anywhere might get wiped out. So yeah, I actually do worry a little bit about it. I sold a condo on the beach. We lived in a, in a condo when we first moved to Malibu and I sold it because of the issues that that building is constantly having. Plus it’s old and it’s hard to have beachfront properties. They, they have more issues ’cause there’s so much wetness there and water is one of the worst things for, for, for property. And when you’ve got fog and, and ocean spray on your property, those, there have been homes in Malibu that just got swept off into the ocean. So it’s, it’s always a little bit riskier to be ocean front.

I’d rather rent and own there. Um, we actually have seen buildings sink. There’s, there’s the millennium, which was one of the biggest high rises in San Francisco that has been shrinking and people have lost a lot of their equity there. It’s, it’s just maybe the way it was built, um, that is having issues. If I were a gambling person, I would say your bigger issue in California for sure is earthquakes. And no one seems to worry about that. Nobody’s got insurance for it. Uh, <laugh> they know it’s coming, you know, we know it’s coming. Most of us live on the fault. So, you know, people take risks. They live where they wanna live. If I’m guessing this sinking, it’s a slow sink, you know, it’s gonna be years if not decades. Um, but if you’re, if you’re owning in those areas, you’re taking a risk. I would, I would not want to own in Miami personally, that is ground zero for a lot of the climate change issues you got, we know hurricanes are, are headed there on a regular basis. I can’t handle that kind of stress <laugh>, so I’m not into it and I’m always a little bit shocked at how many people are moving there and what they’re paying for being in a kind of high risk area. But then I look at me and I’m like, here I am on a fault line. So guilty <laugh>.

Dave:

Yeah, but this isn’t like, I guess this is a fun word to say land subsidence, but it’s not really different from any other natural hazards, right? Like I have invested in Houston for example, and I made very sure to look at flood maps to make sure that I wasn’t investing in a floodplain. I have own a property in the Colorado Mountains and I made sure to invest in an HOA that does proper fire mitigation. So like I, I guess this is something to think about, but it’s no different from any other concern about maintaining your property and making sure it’s in a safe space.

Henry:

It’s a new scary thing to be aware of when you are considering investing somewhere. But I don’t think it’s anything like, I don’t think you’re building is here today, gone tomorrow, right? Like, it’s not that kind of a thing. What concerns me about it is what are insurance companies going to do or not do about this new risk that people may be aware of. I think they’re gonna see it as an opportunity, a, to have extra coverage or increase coverage or not cover these kinds of things. And then, so that’s what you need to be aware of. Like how is that going to affect your overall return on investment? Um, or are you going to be able to be covered and can you take on that risk? Um, but I mean I, it it, it makes sense if you think we’re extracting groundwater in places and building very tall, heavy buildings on top of the land at some point, yeah, you’re going to think the, the earth is consistently eating buildings. That’s what happens. Like that’s not new. Like, that’s not new. That’s why we get depreciation from the government on our, on our assets because the physical building deteriorates over time. But my biggest concern is what happens with insurance. And can you predict that? I just don’t know that you

James:

Can. And that’s just something that everyone has to watch out for is like, I’m trying to get insurance on my house in Newport Beach that we’re flipping right now. It is a nightmare. We got a policy, I got canceled in 60 days, then I’ve been on force place insurance, then I’ve shopped out. I can’t even get enough insurance to cover the whole building then to get insurance. They want me to gate off the whole property. And I’m like, what is going, like I got countertops going in and you want me to gate this whole thing. I’m like this, it’s, it’s nuts. I hired five different insurance brokers to go find me a policy one got me one done. It is unreal. The cost and just having basic coverage, right? Like that’s why I’m leaving. I’m like, this doesn’t make sense. If you can’t get normal basic coverage for your investments to make sure that you’re getting insurance or just basic needs that you need. I don’t know it it for, I don’t wanna invest there anymore. That’s just how I look at it. ’cause it, that doesn’t really make sense and I think there’s always gonna be something sinking. Mega earthquake is gonna come not, I mean I’ve heard about this mega earthquake in Seattle since I was a little kid that the earthquake’s coming, all of Seattle’s gonna fall into the Puget Sound and then mate, Mount Rainier is gonna explode and cover us all with Ash. I’m like, well, okay, that doesn’t sound good, <laugh>, but it

Dave:

<laugh>. Yeah, it doesn’t, it doesn’t. So

Henry:

No, that does definitely does not sound good.

James:

<laugh> these things are going to happen, but as long as you have the coverage and if you can’t get coverage and insurance for like even what Dave, Dave made a really good point about just researching your market. Like what are, what’s going on? Is it flood pains? Is there fires? Is there, whatever the environmental is, make sure you can get coverage and if not, don’t deal with it. That’s my opinion. ’cause it’s just like if you can’t get it today or it’s really hard to get it today, it’s gonna get harder tomorrow. And if it’s really expensive today, it’s gonna get even more expensive tomorrow.

Dave:

Yeah, absolutely. It’s a great point on insurance. I just wanna call out too that like the cost associated with this sinking and other issues are not just insurance, but they also do get reflected in local and municipal taxes because whether you’re paying for them as a homeowner or the government is going to pay for them to create resiliency or to repair things that are broken. Like the money’s gotta come from somewhere and so they’re gonna either raise taxes or pass it on to homeowners in terms of property taxes. So one way or another, when you have these types of expenses in an area, it’s going to impact you, but you obviously want, if you are still comfortable with that and wanna invest in the area, you wanna make sure that your property is as well positioned as possible within that larger

Kathy:

Market. And so important to understand the local regulations. Like in California, the Coastal commission kind of rules <laugh>, everybody. Um, and one of the things that they’ve decided is they want the ocean to run freely and to do her thing. And so they, you can’t actually put up a new sea wall. You just, if your sea wall falls apart, you don’t get to build a new one so that the ocean can, can, can thrive. And so there’s multimillion dollar properties right on the beach who now can’t really protect themselves. And there’s this famous story about this guy in Laguna Beach who did it anyway. And uh, <laugh>, the coastal Commission came in and said, you need to tear that down and red tagged it and so forth. So the coastal commission, not elected officials, but they really call the shots and make the rules that you just gotta know what your local area is, who, who’s in charge? <laugh> of making laws

James:

In Newport Beach. Two homes slid in our neighborhood, slid off the hill. It’s like all of a sudden they went from a $5 million property to work nothing. And the coastal commission won’t even let them build a house back there. Now there’s houses all over the street, but they’re going, no, now that’s a park. I mean, what do you do if you can’t get proper insurance? You can’t rebuild a house there. You’re toast. Yeah, don’t, don’t mess around with with, uh, with people that can make those kind of calls.

Dave:

All right, well that’s it for our headline show. Thank you all so much for being here, Henry, Kathy, James, we greatly appreciate your time and your insight. And if you wanna connect with these fine investors and talking heads, we will put their contact information in the show notes below. Thank you all so much for listening to this episode of the BiggerPockets Network. I’m Dave Meyer and we’ll see you next time.

On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we wanna extend a big thank you to everyone at BiggerPockets for making this show possible.