BiggerNews June: Why “DIY Landlords” Will Win in a Recession

David:
This is the BiggerPockets Podcast, show 619.

Laurence:
I think we might, and this is another prediction and I’m not an economist, but this is just my own personal belief. I think there’s a decent chance we’d go through a period of stagflation. So normally you’d raise interest rates to stop inflation, but I think in this case inflation’s going to keep going up, which makes affordability and cost of living also go up, but it’s less affordable so we might hit a recession even though there’s tremendous growth in prices. And that could cause a period of stagflation. So you could see some spiraling out of control in this way.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the best real estate investing podcast bar none. Today, my co-host Dave Meyer and I will be interviewing Laurence Jankelow, the co-founder of Avail and the VP of Rentals at Realtor.com. Laurence is passionate about helping landlords do their jobs better and make more money in real estate. And Dave and I have a fascinating interview with him where he shares how he uses technology to help do a better job with investing in real estate, which areas he invests in, which asset classes he likes. We get into some really good stuff. Dave, what were some of your favorite parts of today’s show?

Dave:
I think Laurence provides some really practical, tactical advice on how to be a better property manager, particularly in an uncertain economy, which we’re seeing right now. But a lot of people talk about property management, whether you should sell [inaudible 00:01:30], or if you should hire a professional property management company. But don’t talk about the actual logistics, nuts and bolts of what you should be doing, particularly as a new property manager. I know I had a lot of very embarrassing and painful lessons when I was first self-managing and I think he gave some great advice on how to avoid some of those common pitfalls.

David:
Yeah, that’s a very good point. We got pretty deep into what to look for in a tenant, what to avoid, how important choosing the right tenant actually is. And it’s not talked about enough in real estate. Today’s quick tip – go to check out biggerpockets.com/podcasts. At BiggerPockets, we have now put together a landing page where you can see all of the podcasts that we offer on specific topics, as well as learn a little bit more about the host and what you can expect from every show. So head over to biggerpockets.com/podcast, click on The Real Estate Show to learn about me, click on the On the Market icon to learn more about Dave and see what BiggerPockets has to offer you that you might not be aware of.
Dave, my friend, so I got to admit, I have had my head completely zoomed in and focused on running the David Greene team, running The One Brokerage and in the middle of a 1031, trying to find replacement properties. And I’ve been so focused on the individual details of making this happen that I haven’t been able to pay as much attention to the market in general as I would like. But sometimes knowing what’s happening in the market in general is actually more helpful than paying attention to a specific property because the market tends to move as a whole. So would you be so kind as to kind of filling me in on what you’ve been seeing, what you’ve been noticing? What’s the talk in the real estate world today?

Dave:
Yeah, absolutely. I would love to. I think there are two topics that are really top of mind for me. And the first is inventory and just general inventory dynamic. I’m sure you’re saying this in all of your businesses, but to me it seems like the housing market is starting to have this sort of epic tug of war. And on one side we have demand and it’s just how many people want to buy homes. And that with rising interest rate is showing signs of softening. It’s definitely not tanking. But I follow things like the Mortgage Bankers Association survey and they track how many mortgage applications people are putting in every month. And those are down about 10% year over year. But so far there hasn’t been a decline in housing prices and housing prices are still going up double digits year over year because of the other side of this tug of war, which is inventory.
So even if demand starts to slip as it has been, if inventory remains as low as it has been for so long, housing prices really can’t go anywhere. You have to see inventory increase before the market can moderate. And so far, we just haven’t seen that yet. In fact, if you look at new listings on a seasonally adjusted basis, which is the way you have to look at these things, you can’t just say like, “Oh, listings went up from March to April.” Of course it does. That happens every single year. But if you look at this on a year over year basis, new listings are actually going down right now.
We just saw some new data came out that said construction permits were down 3%. Foreclosures, which a lot of people have been thinking are going to lead to a glut of inventory, they’re at record lows. They’ve been going down for seven consecutive quarters. So right now in the tug of war, I’m seeing demand, even though it’s down, is still far surpassing inventory. And that’s just how I’m reading it right now. That of course could change. And I think it will start to moderate and change. But to me, that’s the thing that I’m really focusing on to try and see where this market’s going. What do you think about all that?

David:
I think you’re spot on. You’re looking at the right things. One thought that I had when it comes to the, because really in a market where demand is steady or rising, it’s supply that’s the variable that controls the price. And that supply side perspective of economics will really help someone understand what’s happening with real estate. And I was thinking about how housing was something that used to be tied to how many people needed a place to live. That was the only reason that real estate existed. So you either owned a house or you rented a house from somebody that owned it. It was pretty simple to figure out how much supply was needed in a given market. And people didn’t move around the country nearly as much as they do now because they were tied to a location because of work and family support systems.
And it’s really technology that has created the ability for people to have like you, you’re living in Amsterdam right now and still doing your same job and still living your life. It’s just become easier to be a human with technological advances. So all of the things we used to need, like you needed a family member that could watch your kid or could help bring the cup of sugar over if you ran out of money. Well, it’s easier to connect with people when you move into new places. And obviously the work environment changing has played a role in this too. So people can leave areas much more quickly and easily than they could before, which makes it harder to regulate supply. How many houses do we need in Fargo, North Dakota once people realize I don’t have to live in Fargo anymore. And the other piece is that now housing is not just a place where people need to live. It has now become a business.
So with people traveling through short term rentals, one house, you could have a house that you don’t need as far as just how many people need a place to live in this city, but it makes a ton of money from people traveling to visit that city. And then you can start to get a hundred houses more than what you need that still make economic sense because people are traveling to use them. So now that the short term rental concept of vacationing and staying in someone’s home instead of a hotel, combined with how much more frequently people can move around easily has made it a lot trickier to figure out how much supply is actually needed. And I think that causes builders to be nervous about building homes because they don’t want to build and then there’s no one to buy.
It’s harder to tell. It makes it more difficult for the government to figure out what incentives to offer to get people to build homes. It makes it more nerve wracking for someone who isn’t familiar with real estate to go buy a house in the first place. And it gives an advantage to the big, the investor who has experience or institutional capital that’s playing the long game to sort of weather the storm of some of those risks that a normal person wouldn’t. And so it’s much more complicated to solve these problems than the last 200 years that we experienced.

Dave:
That’s a really good point. I think that the migration that’s going on over the last two years, and it’s slowing down a little bit, but not that much, still up well above pre pandemic levels, is creating this like reshuffling of supply and demand. And no one exactly knows what’s going to happen. And if I can plug on the market, actually I think given when this recording comes out, the next one that will be coming out is going to be a conversation with an economist from Redfin who actually modeled out all of the migration from the coast to the Sunbelt and how that’s changing the dynamics of the housing market. If anyone here is interested in those migration patterns and how they might be impacting your market, you should definitely check that out.
The second thing that I’m looking at right now is a recession. I think you we’re hearing it across every media outlet right now that we’re heading towards a recession and the signals of recessions are sort of confusing right now. If you’ve heard of the yield curve, which is a really reliable predictor of recessions, that inverted slightly, which isn’t exactly a recession trigger, but it’s starting to point that way.
There’s something called the lead economic indicators, which tends to predict recessions six to eight months ahead of time and it’s basically been flat, but it’s starting to decline. And so there are some concerning signs, particularly with the Fed continuing to raise interest rates that we could be heading for a recession. I just want to say that recession, technically all that means is GDP contracting for two consecutive quarters. That doesn’t necessarily mean that there’s going to be crashes in the housing market or the stock market. Those are independent things. But just, I think it’s worth noting that there are a lot of red flags coming up for a recession right now and I’m curious to hear your thoughts on this.

David:
All right. So this is me having to get out a crystal ball, which I always want to give a disclaimer, don’t make your decisions just based on my crystal ball, which looks a lot like my head. But I will share what I’m thinking-

Dave:
Very shiny.

David:
Yes, exactly. I think, and I mentioned this before, that we are going to have a economy where at the upper end of wealthy people, they’re doing very well. Those that are owning assets, those assets are going to continue to increase in value because inflation’s going to push their value higher. Those at the lower end of the spectrum are actually going to lose wealth. They’re going to be squeezed. I don’t think it’s like a tide where everyone rises and everyone falls. You’re going to see a division where the people that are in a position of advantage, where they own assets are going to do very well. The people who don’t are going to get squeezed. And this is not uncommon to many things in the world. If you’re a basketball player right now in the NBA and you’re this really slow, seven foot tall kind of useless guy that used to be really valuable in the NBA when shot blocking and everyone is trying to get close to the rim and you could be strong and tough and get rebounds.
Those were the people everyone wanted. Well now it’s the little guys with high levels of skill that with the current rule set where you can’t touch people, you can’t knock them around. They’re doing better. This is just how life goes. There’s shifts in who is in a position of advantage and who’s not. I think we are likely going to see the people at the lower end of the scale, unfortunately, be squeezed very hard as food prices are going to continue to increase, as gas prices are going to continue to increase depending on what happens in the Eastern part of the world, where supply chains could be further disrupted, now we’d have to start making things in America, which makes them way more expensive than what we think is normal. So paying $14 for a t-shirt is something we got used to. If you’re making that in America, it’s going to be much more than $14.
That’s unfortunately going to affect the people that make the least amount of money. I would expect to see in some case, depending on, I don’t know when it’s going to happen, but I do think there will be a recession in that sense, but I don’t think it’s going to necessarily crush assets. I don’t think you’re going to see a ton of wealthy people being super affected by this. They’ll probably end up making more money, which is usually what happens with wealthy people when we head into recessions.
Now, the other thing I’ll say is I think that we have printed so much money that there’s actually a bunch of it sitting on the sidelines waiting to jump in. So cryptocurrencies are down, the stock market is down. There’s a lot of traditional measures of value that we look at and it’s like, “Oh, we’re going bad, Bitcoin dropped whatever.” That could change in a day. I think there’s so much money sitting on the sidelines that if it rushes in, all of a sudden it was down to Bitcoin has record highs, it’s so easy to see and many different kinds of crypto. So it’s not enough just to look at what’s happening right now, you have to understand how much money is playing in the market and how much is sitting on the sidelines to wait and see what’s going to happen.
And with talks of recession, wealthy people tend to withdraw their money out of the market, hold it in cash and wait to see where the opportunity is before they rush back in. I think that raising rates is a smart move if we’re trying to stop inflation. I think it’s too little too late. I think this is like a semi truck going down a hill and the brakes are out and it’s barreling down. That’s why we’re seeing asset prices continue to rise so quickly. I think that rising rates is like just stepping on the brake pedal and you’re barely making an impact.
It’s going to affect people, unfortunately that are least likely to be able to handle it. That’s the best description I can give is to don’t look at it like the entire economy is going to move up or down as a whole. There are segments of the economy that are going to behave differently, much like this type of player in this NBA is going to do better than a different type.

Dave:
That’s a very interesting take. And I think, unfortunately, you’re right that this is going to disproportionately impact those on the lower end of the socioeconomic spectrum. It just seems that we’re going to see layoffs. That’s basically usually happens with a recession, and you also see inflation causing a situation where money is stretched further and further, even if people do retain their jobs. I do just also want to stress that although there is a lot of fear, rightfully so around a recession, recessions are a normal part of the economic cycle. And as an investor or as someone who’s just trying to manage their personal finances, there are things that you can do to prepare yourself for a recession. Just as an example, if you’re an investor, keep a bigger cushion. There might be an increased chance that you lose your job. Hopefully you don’t.
But if you’re going to make an investment, maybe you keep 12 months of reserves where you used to keep six. Examples like that. And recently just actually I was talking to, you know Jay Scott, right? We just had him on, On the Market. He wrote the book on recession proof real estate investing, which is a great book. It’s filled with tons of practical tips for how to prepare for this type of thing. And you can also check out my conversation with him On the Market. It just came out yesterday about that. But I just think that it doesn’t necessarily, like you said, have to be all or nothing, but there are things to keep in mind and you want to operate a little bit differently with the increased market risk that we’re seeing right now. And it could be year away, could be two years away. No one really knows, but I think it’s prudent to at least inform yourself on what you can do as an investor to do as well as you can in a potential recession.

David:
Yeah. And that’s one of the reasons that I’ve been giving advice that this doesn’t apply to everyone, but when everything was going great, the whole dream of quit your job, just live off of your real estate income, it made more sense to a larger degree of people. With this much uncertainty with not knowing what’s going to happen, we have ample time to prepare. It doesn’t mean that nobody should be quitting their job and going full time in real estate, but less of the people that have that opportunity should be doing so. I think that if you’re worried about a layoff, which you should be if there’s a recession coming, because like you said, that typically happens, now is it time to be improving your skillset. Can you learn how to be good at different things? Now is when you should double down on the value that you bring as far as your work ethic to your employer, what you’re capable of doing.
Not what a lot of gurus have been telling people is, “Hey, take my course, learn how to do real estate and then you don’t need to worry about a skill set in life. Your real estate is going to take care of everything for you.” In essence, now is not the time to become less valuable or weaker. Now is the time to start preparing to become more valuable and stronger so that when that does come, you’re not knocked over. I look at it like there’s a huge wave that’s coming, I want to brace myself and be ready for it. I don’t want to be looking the other direction, thinking everything is fine.

Dave:
Yeah, I completely, completely agree. And I actually think if you look, the economy right now is a little confusing because there are these red flags, but there are opportunities right now. And I think the biggest opportunity is if you want to change industries and find a job that’s more personally fulfilling to you or has more income, this is one of the best times, at least in my lifetime and I think in American history to try and find a new job. Workers have a lot of leverage right now. And as David was saying, that can really set you up for the long term. You can improve your debt to income ratio. You can have more money with which to invest in a couple of months. And that could really set you up. Of course, it’s not the dream of financial freedom, but given where the market is right now, I do agree that can make a lot more sense.

David:
Well, on the topic of a recession coming and cutting expenses and pinching pennies a little bit, there are many investors that will find themselves managing their own properties to try to keep their profit margins higher because property management is going to become tougher to afford quite frankly, when asset prices continue to increase.
So today we are going to be interviewing expert on this topic, Laurence Jankelow who is passionate about using technology to help make real estate investors lives easier.

Dave:
Okay, let’s bring in Laurence.

David:
Lawrence Jankelow, welcome to the BiggerPockets Podcast.

Laurence:
Thanks David. It’s a pleasure being here.

David:
Yeah, so can you tell us a little bit about your resume, what your company Avail does and then how you got started in real estate?

Laurence:
Yeah, totally. Well, I’ll start with how I got started in real estate I think first. I’m a do it yourself landlord, got started in 2010, purchased a three unit residential brownstone walk up here in Chicago from a friend I used to work with at Goldman thinking, “Hey, passive income, who wouldn’t want it?” Took the dive. I think you quickly realize once you have one passive income’s not really all that passive. And so that was my entrance into real estate, but at that time trying to manage an investment banking job and this passive income proved to be a little too hard. And so decided along with a buddy, “Hey, this isn’t how it should be for landlords and armchair investors.”
So left Goldman to build a startup that really aimed at helping landlords manage their rental properties called Avail. And essentially it takes a lot of the operational pieces of running your business as a landlord and makes it all mostly automated. So finding and screening tenants, collecting rent online, submitting and collecting maintenance tickets online, all of those things, it just does it for you.

David:
So you basically solved your own problems and then said, “Hey, I fixed this, now I’m going to offer this to other people.”

Laurence:
Yeah. In some ways you have to. No one was catering to small landlords in 2010, 2012. 2012 is when we started the business. But I struggled for two years managing the rental property myself. And you’ll find that there’s really no software back then and still even today outside of a handful that is geared towards such a small landlord, mostly because the economics aren’t there, like it’s too risky of a business. It’s really hard to find us. We’re super fragmented. And so the only way to come about it is to solve your own problem and go from there.

David:
And then how did you get started investing in real estate yourself? What was it that pulled you in? Did you have a friend that told you about it? Did you just read an article and get interested?

Laurence:
Yeah. Maybe it’s embarrassing or cliche, but read Rich Dad, Poor Dad in college and always had aspired and you realizing, “Hey, you got to have a little bit of money.” So after about six years of working in the real world had enough to buy that first business. And that’s I think how most people kind of enter it is you have this dream of what it’s supposed to be and then you buy it and you start getting a little bit of income coming in, you’re like, “Wow, this is great.” And then you want to expand it. So today I’ve got just over 20 units that started with just the humble three units in a single building. And I wouldn’t change it for anything other than maybe trying to get it earlier.

Dave:
Laurence, you mentioned that one of the reasons for starting Avail is that you were struggling with your own rental property management. I think most of us have also been there, but I’m curious, what specific issues were you encountering that felt insurmountable or necessitated you to start your own business to solve?

Laurence:
Yeah, for me, it started with just posting the listing on Craigslist, which people still do today crazy enough. And the way Craigslist operated then is you’d post a listing and it would be at the top for about eight seconds and then it would drop to the bottom. And then the next day, 24 hours and one second later you could go and post the next one. And it didn’t make sense. And then you’d get these leads and you can’t tell if they’re quality or not, which, spoiler alert, on Craigslist they’re not. And then you try to figure out, “Well, how do I know if these are good or not?” And there’s no access for some person who only has one or two or three units to actually get a credit score, background check, there’s no capabilities for those things. So I find that access to information and data that a professional would have was impossible.
Those were really the two starting points for me that we said, “Hey, we’re going to go build this.” And that’s how we started. And in Chicago, it’s really tough finding VCs that want to invest in you, particularly in 2012. And it’s really tough finding engineering talent. So my co-founder actually rolled up our sleeves and taught ourselves to code. I wrote the first 600,000 plus lines of code. And when you’re doing that yourself, you really make it what it should be and what it should be for landlords like me. So that was the first two problems we solved was listing syndication and tenant screening.

Dave:
How have you seen, starting and managing properties in 2010, I imagine was pretty different than how it is now. So what are some of the big changes that you’ve seen in the property management industry over the last 12 years?

Laurence:
Yeah, well, certainly the pandemic changed a lot. In 2010, if I’m remembering correctly, it just felt a little more even keeled between landlords and renters. I remember doing showings and it was a lot more of a barter and a trade, trying to make sure you landed those renters and, “Hey, here’s all these features and I’ll give you $200 towards moving” or whatever it is, you have to make some concessions a little bit then. And now it’s completely gone the other way around.
I get 20 or 30 visitors to a property and I can only take one. And so it’s completely changed and that’s forcing rents to go up. It’s forcing people to compete with each other. People are not getting places. It’s a lot more favorite towards the landlord now than it used to be. That’s maybe the biggest change, and the technology’s come about quite a bit. So back then it was common to find renters on Craigslist. It was common to receive a check in the mail and now it’s not that common to not have some technology behind you.

David:
So Laurence, obviously we are in very complicated market right now. There is a shortage of inventory, prices continue to go up, demand seems very strong, but now rates are going up at the same time that inflation is occurring. What I kind of see happening is that price of the assets is rising with inflation, but the ability for a tenant to pay the higher rents that are going up may not be in certain markets because their food, their gas, all the things they have to pay for are going up just proportionately to what they are able to make at work. We kind of have this stretch where I feel like the top of the market is getting hotter, but the downside is also growing in risk also because your tenant’s having a harder time paying their rent.
From your perspective on all of this, what do you think is the biggest challenge that real estate investors are facing with this very unique market we’re in right now?

Laurence:
The data’s going to show that renters pay their rent for the most part. I don’t know that getting your rent is going to be the biggest issue, but maybe it’s going to start coming in a little later than you normally would’ve as they try to make ends meet. I think the bigger issue is for those who are trying to grow their portfolio, they’re going to find it extremely difficult to find deals that they wanted because prices are going up still, even though inflation is going… It’s in line with inflation so it makes sense that it’s going up, but interest rates should have brought prices down and they’re not. It’s going to be hard to find those deals. And of course your cost now of ownership is tougher. And then you’ll find that if you want to liquidate or get out of your portfolio counter to everything, also prices because they’re up, you’re going to find it harder to liquidate and get out of what you want if you needed to.
We’ll find that I think transaction volume will come down a lot and that hasn’t happened yet. That’s more of a prediction. We’ll see if that comes out. At the same time for renters, I think we might, and this is another prediction and I’m not an economist but this is just my own personal belief. I think there’s a decent chance we’d go through a period of stagflation. So normally you’d raise interest rates to stop inflation, but I think in this case, inflation’s going to keep going up, which makes affordability and cost of living also go up, but it’s less affordable. So we might hit a recession, even though there is tremendous growth in prices and that could cause a period of stagflation. You could see some spiraling out of control in this way.

David:
I think that’s a really solid point to highlight because there’s errors that are made in real estate I think where people just make assumptions that they shouldn’t. I notice this happened with the phrase HELOC for a long time was just synonymous with bad business decision because HELOCs led to a lot of foreclosures. I’ll hear the phrase appreciation tied to speculation, which they’re not the same thing, but people will do that. There’s another concept that every recession will lead to a crash in home prices, that the two are tied together. And I don’t believe that’s the case. In fact, I think in three out of the last four recessions home prices continue to rise. Dave, you’re shaking your head. Am I wrong here?

Dave:
No, no, you’re exactly right. That’s exactly right. The last recession is obviously freshest on people’s mind and that was a dramatic decline in home prices, but there are plenty of examples over the last several decades where home prices did increase during recessions.

David:
And that’s because the last recession was caused by the market crashing. You almost can’t even tie them together because you’re you think recession leads to home prices. Well, the last time it was home prices crashing led to a recession. Those that are sitting there saying, “Hey, home prices are going to drop because we’re raising rates, that’s going to lead to a recession.” It doesn’t make logical sense if you understand the way that the economy works, because most people that own real estate already had a lot of money. They’re the ones that weather recessions. They’re in a position to do better.
Do you mind just sharing your opinion on that idea and what you are thinking when it comes to if we do head into recession, how you’re going to handle your finances?

Laurence:
Yeah. And I’ll admit it’s been a while since I’ve dusted off an economics textbook here, but in the most basic sense, it’s all driven by supply and demand. So I agree with both of you, it’s not necessarily a given that during a recession that housing prices come down. Historically there has been a correlation because when there’s a recession, people have less money than that makes demand come down.
I think what’s happening now is exactly what Dave said. People have a lot of money built up and it’s just sitting there. They have money that they want to do something with. And a lot of that’s just been accumulation over the pandemic because they haven’t gone on vacation or whatnot. And at the same time, supply is still at a low. And so when supply is low and demand is the same or even growing, you would expect that prices for housing is still going to increase and therefore not come down. And I think that’s what we’re seeing despite interest rates going up.

Dave:
Laurence, what are you seeing in the data about rent growth? Over the last year, it’s preceded at basically a breakneck unprecedented rate. Recently I’ve seen rates over 30% in certain markets, rent growing. It feels to me to be unsustainable, but I’m curious what you’re seeing with rent growth and if you think this could continue or perhaps even slide backwards on the other end of the spectrum.

Laurence:
Yeah. Nationwide we’re seeing rents are up 17% year over year, which is an astronomical number and over the last two years even higher. Most landlords, I think, Avails showing from our surveys that 75% of landlords are planning on raising the rent, tenants are telling us that on average their rent’s gone up $200 or more over the last year. Rents are going up. We’re seeing that. And I that’s going to cause, it could go one of two paths. It could cause renters to have turnover and start to look to move, look for cheaper alternatives; could be leaving some of those more expensive cities. We’re seeing a lot of folks move to more of the Sunbelt area, just because those are generally less expensive than some of the larger metros on the coasts. Or the alternative is you might find that renters don’t move.
Now I know these are complete opposites and it’s tough to move when you know your rent that the next place for an equivalent size unit is going to go up dramatically. What happens especially for DIY landlords or the smaller landlords is they don’t really raise rent on tenants who are renewing or they don’t raise it as much as they would for new renters. So you might see this bifurcation of renters who really stay to avoid those things. And then you’ll see the other side where they’re really trying to find a cheaper alternative and don’t know which way is going to push higher. But we’ll see over the next coming months. This summer will be a big telling point.

Dave:
It’s interesting what you said about smaller landlords not raising rent on existing tenants. I know that’s something I’ve always believed in is if you have a good relationship with a good tenant, why would you stretch that? Is that something that’s backed up with data that you’ve seen at Avail? Or is that just an observation of yours?

Laurence:
Yeah, both. Although I don’t have the data in front of me, so I can’t quite quote it, but we are seeing that change this year from the historical patterns too. Real estate taxes have been going up. I think everywhere in the United States costs of ownership for landlords are going up. So I think this year, and we’ll see it come out over the summer, might be maybe one of the first years where you see even DIY landlords or the smaller landlords skew towards raising rents on renewing tenants at a higher rate than we’ve seen in the past.

David:
Yeah, so that was part of my question is I’m wondering, do you see a future where it’s difficult to raise rents on tenants even though the asset price is going up because their ability to repay is being decreased by the money that they have left over at the end of the month because of inflation on your average daily things you have to pay for?

Laurence:
Yeah, it’s always… Frankly as a human being trying to work my own tenants and telling them, “Hey, I’m going to have to raise rents.” And then if you’re doing it in person, you can kind of see the looks on their faces of shock and it’s a scary proposition for them. So it makes it difficult on an emotional level to raise rent. It’s not like I want to. If I could keep making the same return I was before, then I wouldn’t raise rents. And I think a lot of folks, especially for the smaller landlords, they don’t realize how little landlords actually make. I think they all think we’re these super rich money makers who can just absorb it, but we actually don’t. I think on the average landlord might make a hundred bucks on a rental property a month.
It’s really not a lot. And any change in cost, now all of a sudden you’re losing money. So we have to stay in line and it’s difficult for renters, it’s difficult for us. Inflation causes problems for everybody. And those problems are felt in the shorter term more so than the longer term. Over periods of time, things kind of reach an equilibrium. You can adjust your own vendors that you’re using to find cheaper alternatives. But in the short term, you really don’t have a lot of options other than to raise rent.

David:
Do you see do it yourself landlording as far as managing your own properties and fixing some of the stuff yourself as sort of a path that many people are going to have to take to make the numbers work as they continue to get tighter and tighter?

Laurence:
Yeah, that’s an interesting, I don’t know if that’s a prediction on your end or not, or if you’re looking for me to make that prediction, but yeah, I could see that. We historically advocated for being a do it yourself landlord for our own audience. One, because you learn the business better. But two, because if you don’t, you’re paying those fees, you just don’t make money. For most landlords paying a property manager to find a tenant for you and collect rent for you puts you in the red and then it didn’t make sense to buy their rental property in the beginning. You should just get out of that business. I think you could see a change here where more and more landlords have to manage it themselves than previously.

David:
Yeah, I can see. I was just looking at short term rental property in Scottsdale this weekend. And even with the properties at best case scenario crushing it as far as revenue. Putting almost a million dollars down on some of these things, the numbers were barely breaking even. And part of that was because management fees at like 20%, they could be like $80,000 a year. And I was thinking the only way this works is if I don’t pay a manager 20%. That started my mind down to, “Well, what would this take?” And I quickly was like, “Oh, I don’t want anything to do with that. That’s that seems so much work to get this thing going, especially with a short term rental.”
But I’m sure if I thought that other people have got to be thinking the same thing. The margins are getting tighter. Where can I cut costs? There’s going to be people that are thinking property management is the place to cut. So what advice do you have if somebody is going down that road for how they can prepare themselves for how to do this well, what they’re really getting into some tools they could use, kind of speak to that person.

Laurence:
Yeah. If you’re going down this path and you’re, hey, all of these expenses are growing on you, you want to start paying attention to that. Most people in real estate will appeal their property taxes every chance they get, try to keep them lower. So if your audience is listening and haven’t done that, they should 100% do that. Sometimes whatever assessor’s office is looking at these things doesn’t really know the value, they just know it’s gone up and sometimes they just do it more than it should. And so you can appeal those. I would look if you have a property manager at renegotiating with that manager to reduce the fee or remove the manager. I think that’s a good avenue to go. If you just aren’t in state or you just can’t find a time to be on site, then maybe you have less option there.
So I would call and ask to go, if you’re paying 10% of rents, push it down to 5% or find a manager who’s willing to do that. I think not that managers are commodity, but in some ways you just don’t have a choice. I would also be thinking about how you’re buying all of the supplies you’re using for your rental. If you have just one unit, you can’t really get any kind of economies of scale, but if you’ve got a whole bunch of others, then try to keep it to be the same paint so that you can use the same paint in one place versus another, try to think about all of the tools that can just be shared across all of your properties and whatnot. Those things can help. And like I said, most landlords only make a couple hundred bucks so that can go a long way in getting you where you need to go.

Dave:
So Laurence, given this confusing environment we’re in, are you seeing a shift in the types of properties that people are renting or where rent is growing the fastest or just any of those dynamics?

Laurence:
Yeah. Two I think trends that are noticeable. One is folks are looking for slightly larger places, even though affordability has gotten tougher. So we’re seeing an increase proportionally for folks looking for two bedrooms over one bedrooms and three bedrooms over two bedrooms is increasing a little bit. Mostly driven by the pandemic and the idea of, hey, people are working from home a lot more, afraid of maybe another lockdown and you need the space and whatnot. So that’s one trend.
The other trend we’re seeing is a lot of folks moving towards the Sunbelt, a little more and away from the coasts, potentially away from some of the areas that might have some natural disasters or are super expensive. So we’re seeing those kinds of trends.

Dave:
That’s really interesting. I’m curious if the rental market is also mimicking the housing market in a shift towards the suburbs. Because after 2008, the suburbs got absolutely hammered in terms of housing prices, disproportionately to more urban areas. And then since the pandemic, suburb housing prices have been leading the way. Is the same thing happening with rents?

Laurence:
Yeah, you’re seeing that a little bit in condos and in more congested places. The prices on those are coming down or at least not going up as much as you would see on a single family home in the suburbs. People are looking for a little more breathing room and so that’s happening at the same time. And then those condo buildings are still aging, so the assessments are still going up, they become less affordable for folks. So both in terms of wanting more space to live in and from an affordability perspective, we’re seeing single family homes just do better than condos.

Dave:
Yeah, I think that makes sense given all the other dynamics and shifts in buyer preferences right now and renter preferences.

David:
When it comes to what type of buyer you think is best to be getting into condos and who should be sticking to single families, what’s your avatar of where you think that the individual investors should, or what does that investor look like that should be getting into condos versus single family homes?

Laurence:
Oh, I don’t know. Maybe I have a very narrow mindset on investing. I’m the kind of investor that likes to see cash flow. I generally advocate for folks looking for deals that are going to make them cash, whether their metric is a cash on cash number or they’re looking at some sort of net operating income. I think you’re going to find it easier when you’re dealing with some sort of individual property, so a non condo, for instance, a three flat, a four flat, even a single family home.
I think you can make those numbers work better than you can in a condo and have a little more control. And then a lot of condos have bylaws and association rules that can prevent renters or the type of renting or how often they can come in and out. So there is a risk to your business in that way. So not that you shouldn’t ever be an investor in a condo, but if you’re looking for cash flow, that’s probably not the best investment. There is potentially always the case for appreciation on those, but with where we’re seeing trends and even with what Dave said around how folks are moving to the suburbs, maybe condos might not be the best investment right now.

David:
Well, I’ll also say if someone doesn’t have experience with condos, how do I want to put this? When you’re buying a single family home in general, in a specific market, you’re looking at mostly the same things for every house. What does the inspection look like? The rents are not too hard to find. There’s not as many variables when you’re looking at single family homes.
The second you get into condos, it becomes remarkably complicated. Those bylaws are different for every single one of them. Sometimes the property itself has a lot of deferred maintenance and you’re going to get hit with assessments. They do have restrictions on how many people can be renting out units in there. It becomes exponentially more likely that you are going to have something that you did not see coming up when you’re buying into a condo, which is mostly the people that invest in those are really, really good at investing. They know what to look for.
If you’re not a big fan of jumping asset classes, what do you look for in a specific market that you think is attractive when it comes to where investors can be putting their attention?

Laurence:
Yeah, well, no, I love having multiple asset classes, so between real estate and non-real estate. But again, I tend to focus on things that produce cash. There are certainly parts of the United States where investing in real estate’s going to get you more cash and is less about appreciation. I take Chicago for instance, I just know the most about Chicago. That’s where I live. You can invest in an area of Chicago, maybe for instance Andersonville, which is maybe less well known as like a neighborhood like Lincoln Park. And therefore you’re going to get a better cash on cash or a better cash flow, but maybe not a better long term appreciation of the asset class itself or asset value. Whereas Lincoln Park would be the exact opposites. It’s already very built out, your cap rate or cash on cash is going to be a lot lower, but because it’s such a sought after area, you might find that appreciation is higher.
If you’re the kind of investor who’s looking to build net worth over the long periods of time and don’t care about the cash coming in today, then maybe that kind of area is better for you as your wealth might grow faster. You just won’t see the cash from it as quickly. You could take that approach into any city and choose neighborhoods in that way, or you could take it more holistically based on cities themselves. You could say Chicago is kind of already that built up city and you might want to move to a less built up, move your money to a less built out city. But for most investors, especially if they’re getting started, the easiest path is to do it where they live, where they can see it, get a feel for it, be there in case they need to, and they can find parts of their neighborhood where it makes sense.

Dave:
I was going to say, Laurence, you seem to be suggesting a very simple and practical approach to getting started, which I always like which is investing close to where you live, managing the property yourself. That’s how I got started, I think how most people get started. If someone is able to do that successfully and find a small multi or single family, what are some of the common pitfalls you see with DIY landlords when they’re first getting started? And do you have any tips for trying to avoid those pitfalls?

Laurence:
Sure. This definitely goes into the realm of opinion for what it’s worth. There’s a couple, there’s this idea of, “Hey, am I going to be strict with how I have my budget? Am I not going to be strict? How strict should I be?” And I think some landlords will misinterpret that. I think you want to have a budget and you want to be strict with it. But a lot of landlords will take that as an excuse to be cheap or have deferred maintenance. And in the end, that’s going to hurt you in a big way. So yes to budget, but don’t interpret that budget means don’t pay for things when they need repair. Your best bet is normally going to be preventive maintenance. That’s going to be less costly. Even some of the simple things like changing air filters is preventive maintenance, but some landlords don’t want to spend the 20 bucks to replace an air filter.
They think it’s only breathing quality, which is so important. But it extends the lifetime of the HVAC system by years. You can’t be cheap, but you do have to be wise with where you’re spending money. I think that’s a big pitfall. I’d say another pitfall is not thinking of your tenants as customers. They are customers. They’re not just people that… Sometimes you get the sense of you feel like you’re better than them or not better than them because they’re renting from you. And that’s the worst possible approach to come in. They’re your customers. You have to be doing things that make them want to live there and make them treat the property well. For all my tenants, I’ll usually use some sort of welcome basket on the kitchen counter for them when they move in. It’s usually nothing more than toilet paper and maybe some cleaning supplies, stuff that they forget to have, but that sets us both off on that right path and how we work together.
And then they’ll take better care of the property because of that. And that translates over time. And so there’s those things there. I don’t know if there’s a question in there around how do you go from one, your first purchase to multiple because there’s a lot of pitfalls in there thinking around, “Hey, the second property is identical to the first and I’ll do all of the same things.” That can sometimes backfire. You do have to kind of make sure you’re really looking at your investments as two separate businesses in a way, and you have to individualize them in that way.

Dave:
That’s great advice. I think that is probably the most common one is learning that you really get what you pay for. And if you go with cheap contractors, you’re going to hire two contractors and you’ll just hire the expensive one second after you already hired the first one. And I love what you said about treating your tenants as customers. That’s exactly right. The property that you’re offering is a product and this is a business and it’s your job to make your customer happy. And I think a lot of people don’t view it that way. I definitely respect that opinion. Before we get out of here, I also wanted to ask since you have so much knowledge about this, do you have any best practices or pitfalls with tenant screening that you can share with our listeners?

Laurence:
Yeah. When we started, we had seen, started Avail, we had seen an article, I think it was in USA Today that said, “Hey, 60% of landlords don’t screen their tenants.” That’s the number one pitfall, I would say. You should screen your tenants in some manner or the other. I think what happens is a lot of landlords get scared that they won’t fill a vacancy and they’ll just take the first renter that they see or they won’t dig in a little deeper thinking that, “Hey, the renter’s going to bounce and go to another place.” But I think in the end, you’d rather have a vacancy than a bad tenant because a bad tenant is going to have all of the negatives of the vacancy. You’re not going to be making your money or you’re collecting your rent, but they’re also going to just trash the place or have the potential to trash the place.
And although a bad renter can sometimes be seeded because you’re a bad landlord and you don’t know how to build a relationship with them. Oftentimes there are things that you would find in doing whatever screening reports. So checking with prior landlords, did they pay their rent on time? How did they treat the place? Looking at their credit score. How they treat other creditors is likely how they might treat you, just even looking to see how much debt they have. Can they afford the rental? Sometimes landlords will look at income to rent, but they won’t look at how much debt that income is taking up to. And so you might miss that and you might think, “Hey, they have three times the income to rent,” but when you factor in debt, they don’t. And so that’s something to look at. Depending on where you live and what laws there are in your state, I would suggest also criminal and eviction checks.
I think eviction being the most serious. Once someone’s been evicted a couple times, it’s probably a trend that’s going to continue to happen. And then of course you want to make sure you feel comfortable approaching the renter should something happen. I tend to try to avoid super violent criminal history and be flexible with things that aren’t. I’m not going to balk at someone having a speeding ticket necessarily. It’s got nothing to do with them and their capability of paying their rent. There’s lots of things in that realm where you first screen them and then just be flexible in your approach and thinking.

David:
I think choosing tenants is an extremely underrated element of successful real estate investing. If you think about the advice that you’re often given, invest in a good area, what you’re really saying is put yourself in a position where you’re likely to find a better tenant. It’s not the area, it’s the person who’s going to be renting from you. You could rent in any neighborhood anywhere. If you have a good tenant, it’s going to work out for you.
In fact, that’s often how people start or why they start looking into markets with lower price points because the price to rent ratio is higher. It just becomes more difficult to find the tenant that’s going to pay consistently and not ruin your house. If you’re going to be self-managing, the ability, the skill to choose the right tenant will absolutely have a huge impact on the success that you have with real estate investing. When it comes to technology within real estate, can you just share your opinion on where you think that’s going, what different technological advances will have an impact on the way that we manage rental property?

Laurence:
Yeah. Not to plug Avail, which is my company, but some sort of landlord platform is pretty critical in running your business. And there are others out there other than Avail, but you need to have something. That’s the one I recommend. And I think we’re going down the path where everybody will have one of those. Right now, it’s pretty uncommon for a landlord to use technology. So there’s this wide gap to bridge because the folks who don’t use technology aren’t going to do as well and they’re going to start doing worse than the folks who do use technology. If you’re one of those listening and you’re not using some sort of landlord platform, just go out and Google landlord tools or landlord software or Avail and start using something. I think there’s also technology around making showings a lot easier, better.
Those are still typically done in person, even if you’re using something like Avail. And with the pandemic, there’s been a lot of new technology that’s come around for virtual showings, for 3D tours, for floor plans. Some of those things the price has been outside of the realm for someone who’s got three units or something like that. But there are a bunch of providers who are bringing very affordable tools that allow you to do a 3D tour or something like that virtually that are coming about. And I think that’s a trend that we’ll continue to see.
I think we’re also starting to see software tools that are also geared towards helping renters more than they have in the past. So whether it’s helping renters report their on time rent payments, or helping renters better manage how they save for a down payment or how they become first time home buyers, all of those things are coming out. And I know at both Avail and Realtor, we’re focused on trying to figure out, “Hey, how do we bridge that gap between renters becoming first time home buyers? How do we help them communicate better with their landlords?” All of those things. And so I think that’s going to be a huge change in how real estate’s going to be done.

Dave:
Laurence, one last question, particularly on the technology side before we go, I’m assuming you’re familiar with the idea of Web3 and hearing about a lot of the direction that real estate is going with NFTs and crypto. Do you have any thoughts on where that side of things is heading right now?

Laurence:
Yeah, to be Frank, I don’t have as much of a background on some of those areas as I should. But the advice I would give for most landlords is what we talked about earlier, which is try to keep it simple for now. I think if you’re wanting to participate in some of those NFTs or think about blockchain or those things, it may still be too early for most people to consider. And I would follow the path of what’s going to get me the metrics I need to be successful and focus on finding good deals, finding good renters and being a responsible landlord. And then as you get experience, if you start to say, “Hey, I need this deeper technology to make my process better, or out eke this little last bit of return somehow” then maybe incorporate that into how you’re doing things. But for most folks, I think it’s probably a little still premature.

Dave:
I’m with you for the record. I think there is some really interesting things going on there, but is it actually at a point where it helps your business? I haven’t seen any examples of how it’s truly adding value to a small landlord’s ability to generate a solid return and to provide a good product.

Laurence:
Yeah, I have one renter who pays in Bitcoin every month, which is fine. It’s more of a nuisance than anything else for me as a landlord. I acquiesce because it makes it easier for them. It’s a pretty expensive rental. It’s nearly $5,000 a month, which is… In the scheme of it, it’s pretty pricey rental. And so I kind of allow it, but for me, it means I get it into Coinbase, I’ve got to immediately convert it to US dollars and I don’t want to take the risk. I don’t want to conflate my investment in real estate and the cash flow it generates with the speculative investment of Bitcoin or digital currency valuations. And so I always have to separate those two and treat them as two separate investments. It’s more of a pain for me than an opportunity.

Dave:
Just logistically, is the price fixed? Is there a floating exchange rate between USDs and Bitcoin and he adjusts the amount of Bitcoin based on the dollar price or the other way around?

Laurence:
Yeah, I’m not sure what it looks like when you go into Coinbase to schedule your payments or whatnot, whether you’re scheduling it in dollars and it converts in real time to Bitcoin, or if he’s doing the conversion on his own. But when it comes to me, it’s Bitcoin and then I have it automatically converted to US dollars right away. I think it’s important for landlords to do that, or for any investor to do that. I’m not suggesting people don’t invest and I’ll use air quotes on invest in crypto. It’s just, you should separate the two investments. They have two separate thesises. They have two separate metrics and how you want to analyze them. I don’t think we should conflate the investment of rentals with the investment of cryptocurrencies. I would take the cash in dollars and then if I find, “Hey, I think crypto’s a good investment,” I would then do a separate transaction for those things.

David:
There’s something I find very interesting about every single investment asset class opportunity that I don’t hear people talking about, just sort of the BiggerPockets audience. I’m going to let you guys in on a concept to think about, and then Laurence, I want to get your opinion on it. When we talk about Bitcoin, cryptocurrency, real estate, art, NFTs, stocks, everything, the value of it is expressed in terms of the dollar. So when something goes up or down, we have to take its value, convert it into a dollar and express how well it did in relation to a dollar. So it’s all tied to this central currency.
You can’t say this house is worth this many Bitcoin or this many shares of Apple stock or whatever. We have to have a baseline that we compare it to. But as we printed so much money, the value of the dollar has gone down. And now it’s very difficult to know how much value, and I’m using the word value as opposed to worth or money because I’m trying to separate it from the dollar because we typically express value in terms of dollars. What’s your thoughts on how confusing this is to leading people to believe they’re actually building wealth when they may not be, or some asset classes appearing like they’re doing better than they really are?

Laurence:
There’s almost a like a history lesson of going off like the gold standard but I’ll spare us. I tend to think of investments as something different than speculation. I don’t believe an investment is gambling and some people will. They’ll say, “Hey, investing in the stock market is gambling or buying a rental property is gambling.” But I don’t believe that to be the case.
I think investing is something about taking earnings or cash flow, figuring out what that cash over a period of time is worth to you today. And you can’t do that with something like cryptocurrency because there is no cash flow that’s occurring. There’s no inputs and outputs happening there. So for that reason alone, you can’t necessarily consider it an investment. I would consider it to be speculation and that’s fine.
Maybe in a good allocation strategy, maybe you leave 5% of your portfolio for some crazy thing like that. I think of art as the same way, as speculation because it doesn’t produce income, I can’t really discount that cash flow to what it’s worth today. But stocks and income properties are investments. And I think even though the dollar can fluctuate in value, relative to those investments, you have a sense of, are you making money? Is it appreciating or not? The value of your rental is nothing more than some multiple on the rents. And depending on what area you’re in, the multiple is a little different, but you can broadly think about it as like a 12 times multiple on rent is how much the property’s worth 12 times annual rent.
And you can look at that and say, “Hey, my investments improving over time or not improving over time.” And it all comes down to you increasing rents over time. And the same thing is true of stocks. You hope that the earnings increase each year so that the multiple on earnings has an impact and now what your investment was, which goes up. And that all of that should be irrelevant to what happens with the dollar because those earnings change in lockstep with the dollar as it changes.

David:
All right. Well, thank you, Laurence. This has been a fascinating interview where we’ve gotten actually some really good nuanced detail about many different types of real estate investing. I want to thank you for taking some time to do this with us. Before we get out of here, David, do you have any last words or any last questions that you’d like to address?

Dave:
No. Thank you, Laurence. This has been really enlightening. I appreciate your deep knowledge and data driven approach to providing answers to our listeners here.

Laurence:
Well, David, Dave, thank you so much for having me. Don’t fact check me too hard. If you find anything inaccurate in there, we’ll talk about in a separate time. Appreciate being on this show.

David:
All right, Laurence, last question for you, where can people find out more about you?

Laurence:
I love interacting with people on a one-on-one basis so they can certainly learn more about Avail or Realtor.com on our website. So Avail.co or Realtor.com. But if people want to talk with me, I love receiving emails. I respond to them. They can reach me at [email protected]. Would love to engage with folks.

David:
Awesome. Dave Meyer, where can people find out more about you?

Dave:
You can find me on Instagram where I am @thedatadeli.

David:
Yeah, and if you have not been following Dave, please go do so. His page is blowing up. On YouTube your videos are crushing it. I don’t know if it’s your handsome face, if it’s your well articulated delivery, but you’re like that sandwich that someone put together and everyone is addicted to it and you’re selling like hot cakes.

Dave:
Comparing me to a sandwich is the best compliment I’ve ever gotten, David. You’re going to make me blush.

David:
In fact, we might even have to stop calling it hot cakes. We’re going to have to say you’re selling like Dave cakes, because that’s how fast you’re actually selling.

Dave:
Well, thank you. I appreciate that. And hopefully people do come check out the new YouTube channel because I am on the main BiggerPockets channel, but also I’m going to be transitioning more to the, On the Market YouTube channel where we’re going to be doing a lot more data news, current event type shows. We have all sorts of great content coming out there. So make sure to check that out.

David:
There you go. And Laurence, thank you for fighting the good fight of trying to make landlord’s jobs easier and make it more successful to invest in this awesome asset class. We are sort of under fire from hedge funds and institutional capital and municipalities that don’t like real estate investors and politicians that don’t like real estate investors. There’s a lot of different people that are making it more difficult to do what we love doing. So anytime we get somebody on our side helping to push the ball forward, I really appreciate that.

Laurence:
Well, thanks again for having me.

David:
All right, I’ll get us out of here. This is David Greene for Dave “Dave Cakes” Meyer, signing off.