Creativity -- helping or hurting the market?

Question

Hey there,

I will keep things short and simple, but I will introduce myself and pose an open-ended question with some color as I am genuinely interested in feedback.

My name is Richard, I am an owner/operator of a mostly multifamily portfolio and I am just in the process of handing my portfolio over to a property manager. I am the Director of Business Development for Trelora (modern discount brokerage). I am fairly young (37), still very engaged in R.E., and wanted to know what everyone's thoughts are on new found creativity as is relates to our world?

To elaborate, only slightly, I mean the explosion of SFR, short term rentals, motel conversions, micro units, iBuyers, prop-tech's involvement with creative solutions to our current landscape, etc. Without giving too much, I am torn between if it's helping or hurting the market, and as I have more time to dedicate to my next steps, I really want to hear others input on the current state of our industry!

To clarify, I am not asking about what the market will look like in the next 1-5 years...

Cheers,

Richard  Libutti

Bonnie Low · Answer

Who are you asking if it helps or hurts? I think that's probably core to the discussion. At a very high level, I would say the creativity is absolutely helping the investor. When our business model is limited or confined and the market turns, that limitation will in turn limit the opportunities and the number of investors able to make their business work. For example, if all we had available was long term rentals, single family or multi family, there would be far, far fewer investors in the market and competition for those limited assets would be even more intense than it is today. Conversely, because real estate is almost limitless in business model configurations (i.e all the examples you gave and more!) it creates room for more investors and eases the competition because there are more assets to work with or assets to create. So from an investor's standpoint, I think the creativity is a huge plus for all of us. I love it when I hear someone is investing in big multi-family or in building a tiny home community or self storage. None of those are my asset classes so I'm not competing with those investors. Is the creativity good for people trying to buy a primary home or a true second home that they don't intend to rent out or for renters? That depends. Arguably, people buying STRs in residential neighborhoods who are able to pay a premium are no doubt impacting the cost of home for the average person trying to buy their primary home. Then again, when we buy a severely distressed property that is a blight on the community and uninhabitable and remodel it into a beautiful home, we are adding inventory to our market which has a severe shortage of available properties - whether we sell it or rent it out. And when we convert an unused space to an ADU, we're creating even more livable space that can either offer affordable housing for renters or be a true accessory dwelling unit so extended family members can live together and save on expenses. The same could be said of house hacking. It's a way for buyers to get into a market they couldn't otherwise own in and it creates a livable space for someone else in what otherwise be occupied by fewer people. All that creativity ends up adding inventory. Further, look at all the local business real estate investors generate. We added up the money we pumped into our local economy via subs and trades and purchases at local businesses, Realtor commissions, title company fees, permits, etc. Last year alone we put over $250,000 into our local economy and we're just one small company. I think the OP is really asking if creativity is hurting the average home buyer buyer. You could probably make that argument. But it depends on your point of view and I see more good than bad.

Chris Davidson · Answer

@Richard Libutti I agree with @Matt Pursley, it is changing for better or for worse I think it depends on your viewpoint. I think from a non investor wage earner looking to buy their family home the STR explosion and IBuyers have definitely made it worse in price appreciation. For the seller of a their family home that hasn't been taken care of and in need of repair the IBuyers have provided a solution on a larger scale cutting down the margin of smaller investors. From the consumer stand point I am seeing more posh units both on STR and LTR so while rents are going up so is the standard of living. For the investors there are more and more options these days allowing deals to be made where 10 years ago it may have been impossible. However for newer investors the amount of capital to get started keeps growing.

In my opinion creativity/ change is for the better. Investors are finding more efficient ways to answer consumer's demands while having technology to allow small time investors to have similar tools to larger operators. I struggle to find how it is hurting consumers, the argument can be made that large IBuyers are manipulating the market and prices by buying near whole neighborhoods but each of those sellers benefited, and the remaining homeowners saw values increase. Which again makes me struggle to see how it could be hurting the market as a whole.

Matt Pursley · Answer

Interesting thoughts. It's quoted that the President of Michigan Saving's Bank told Henry Ford not to invest in the automobile because, "The Horse is here to stay, the automobile is just a fad".

Obviously he was wrong. Innovation changes things. For the better for some. For the worse for others. I hate to add a third option, but instead of it just helping or hurting the market, could it just be changing it?

If it's helps or hurts, then you'll have sides for either argument. But if it's changing then theres opportunity to join the change. See where you fit into the change and roll with it.

Richard Libutti · Answer

@Matt Pursley you're absolutely correct. I will let the cat out of the bag early...I intended for the subject to be a bit polarizing. The point of my post was to engage people here into an open discussion as to what their creative journey looks like in R.E.

I am really interested in the dialogue, and will expand more with a follow up post shortly!

I am really interested in the dialogue, and will expand more with a follow up post shortly!

Richard Libutti · Answer

Hey again, and thanks for all of the feedback thus far.

I am circling back on my previous post(s) to expand a bit more on the creativity facet, which was the subject of my initial post!

I think creativity is crucial and I think it has benefits and detriments. Most of them are obvious, more options, more ways to cash flow, etc. (benefits side) -- the market has an obvious demand and it's great to see so many creative approaches. Not only STR, but even creative finance pieces for investors.

I do think the detriments are worthy of mention too...they include higher prices as SF is being is being sold and turned into short term, which digs into an already inventory poor market. A huge jump in rent prices, etc.

The fundamentals are another area I'd like to dig into -- Am I / are we looking at them the wrong way? New OMs are now showing pro-forma with STR in Miami (albeit mostly by the wholesalers of the world), but the gang over at Marcus and Millichap are verbalizing the same sentiment. I've heard it all now, "returns are non-existent, if you're a full time investor, good luck!" and so on.

The reason for my posts is that I think there is a a big dialogue to be had among the BP community surrounding CREATIVITY as it relates to an investors goals & plans. The institutions and tech are coming for traditional agents, all the way down to SF now...the market is evolving / changing, and what worked in the past, won't necessarily work moving forward.

Example: I'm mainly a MF owner, but don't dabble in the short term market with my MF. My main focus has been value adds, in C class neighborhoods -- long term tenancy, section 8. I am now competing with Buyers that will operate MF as short term, illegally, which is allowing them to pay more per door.

Buying deals from brokers and hoping for appreciation and massive rent increases is a slippery slope. I am personally considering  getting back to the basics and starting cold call on MF. The idea is, speaking owner to owner will go a bit further than the typical cold callers muster up in general conversation. I also think getting real offers out to owners is another way to get their attention...but I digress.

In any event, hope everyone has enjoyed my caffeine fueled babbling. Time to adapt.

Lesley Resnick · Answer

As an industry or asset class there is very little creativity or innovation.  The physics don't change.  Wood, doors windows insulation, land mostly unchanged.  They may be better quality or efficient, but fundamentally the same.  There is a reason a 100+ year old house still have value.  People want to be warm when it's cold, cool when its hot and stay dry.

The economics have not changed.  It is a capital intensive long term asset.  There have been share croppers since the beginning of time.  I own the land and will rent it to you to farm and live on.  People have maintained generational wealth though handing down property.  Due to the size and long term nature purchasing property has always required third party financing. At its core lending is just a valuation of risk.  How much risk is acceptable and what is the cost.  The evaluation of, "will I get my money back if I lend it to you" has not.

People are excited about AIRBNB being a new thing.  Bed and Breakfast and hotels have always existed, people advertised in the newspaper or the yellow pages or left a single candle burning in the window.  It is not real-estate that has changed or innovated.  It is the technology around it.

Real estate is never going to equalize people.  Elon Musk sold a 30m house in Ca.  Regrettably I do not have a house like that.

However, we carry the I-phone he does and his calls are no clearer than mine on ATT.

Drew Sygit · Answer

Find your passion, so it's not work.

Delegate everything else:)

Creativity -- helping or hurting the market?

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