Ready to unlock the secrets of real estate diversification? Hold onto your seats as we navigate through the complexities of real estate investing with Ari Rubin, the dynamic founder and CEO of Flock Homes. Drawing from his personal journey from a child of landlords to the innovator of a successful real estate platform, Ari dissects the myth that diversification always equals lesser risk.
Dive under the surface of real estate taxation with us as Ari breaks down the 1031 exchange - a tax-deferred method that sprouts long-term wealth. Journey with us from Denver, where Flock Homes was born with just four landlords, to the 10 markets they have expanded to across the country. Get your pens ready as we also decode the 721 exchange, an underused tool for estate planning and asset diversification.
The real estate market is a dynamic beast - home prices, interest rates and even climate change influence investment decisions. Join us as we gaze into the crystal ball of real estate, discussing future trends and the impact of the 'golden handcuffs' phenomenon. We'll also explore the fascinating tension between the emotional pull of homeownership and the economic sensibility of renting, and how this could birth a new generation of 'accidental landlords.' Whether you're a seasoned investor or a curious novice, this episode is packed with insights to help you navigate the ever-changing real estate landscape.
1. The Intricacies of Real Estate Diversification: Ari Rubin's personal journey from being a child of landlords to becoming the CEO of Flock Homes uncovers the complexities of real estate diversification. His experience reveals that diversification doesn't always equate to lesser risk, debunking a common myth in the investment landscape.
2. Understanding Tax-Deferred Methods in Real Estate: Rubin dives deep into the 1031 and 721 exchanges, which are tax-deferred methods instrumental in sprouting long-term wealth and assisting in estate planning and asset diversification. These tools, though often underused, could prove invaluable to real estate investors.
3. Navigating Market Dynamics: The episode highlights the various factors, including home prices, interest rates, and climate change, that can significantly influence real estate investment decisions. The conversation provides insights into future trends and discusses the 'golden handcuffs' phenomenon, emphasizing the need for both seasoned investors and curious novices to understand and adapt to the dynamic real estate landscape.
0:00:00 - Vikas Gupta
This is the Hacking Real Estate Podcast, episode 25.
0:00:04 - Ari Rubin
You've got to find your edge. It's not just about solving a problem. It's why are you uniquely qualified to go out and solve this problem? And I think if you approach, whether you're opening a little restaurant or you know lemonade stand or you're starting real estate business, think about that. Whether that's you know in real estate the type of product you're providing to residents or to whoever it is that is using your real estate, or if you're launching a fund and you're giving investors exposure, whatever it is. Just really go out there, solve a problem and then, most importantly, find your edge in doing it.
0:00:36 - Brandon Hall
Welcome to the Hacking Real Estate Podcast, where we dive into the stories of seasoned, hands-on and tech-savvy real estate investors. We'll learn the strategies and tools they use to maximize returns and minimize hassle, all while navigating the rapidly changing real estate market. I'm your co-host, Brandon Hall, and managing partner of Hall CPA, and I'm sitting alongside my co-host, Vikas Gupta, ceo of Azibo. With our combined 15 years of experience in real estate investing and entrepreneurship, we're here to help you up your real estate game. Let's get hacking.
0:01:09 - Vikas Gupta
Hi everyone, welcome to this week's episode of the Hacking Real Estate Podcast. Our guest today is Ari Rubin. Ari is the founder and CEO of Flock Homes. Previously, Ari was a portfolio manager at eBex Investors, where he led a volatility derivatives fund from inception to $150 million in assets under management. Prior to eBex, ari volunteered to serve in the special forces of the Israeli defense forces. Ari also attended Stanford's Graduate School of Business and graduated from Harvard College with an A, b and Geospatial and Quantitative History. Ari, welcome to the show.
0:01:48 - Ari Rubin
Thanks so much for having me. I forgot a lot of those things in my bio until you just repeated it, but thanks for the reminder and all that stuff.
0:01:55 - Vikas Gupta
Well, one thing the bio didn't cover is a lot about your real estate journey, so why don't you kick us off by telling us more about that?
0:02:03 - Ari Rubin
Yeah, so I think I started this business three years ago. I started actually working on the idea for Flock way before that, back to my days as a derivatives trader, and I really approached this problem. Well, I had some personal experience with it. My parents, as I talk about often my parents own rental property in Chicago, so I grew up around it, but I started working on the idea when I was living in Denver and the idea came to me when I was renting a house in Denver and my landlord was, like most landlords in this country, just individual investors.
The guy just happened to buy a bunch of homes in Denver over the years and had seen such appreciation in the Denver real estate market and was now sitting on this massive portfolio like millions and millions and millions of dollars of equity. And I approached it from like a risk management perspective and I was like this is crazy, this guy is so concentrated in one individual market. I really approached the real estate market, which I think is a good approach to solve whatever industry you're in. I approached it like I want to solve a problem for this guy and so the problem that I thought I was solving initially was like let's help this guy diversify his real estate holdings.
I later learned and I go back in the story more but that actually diversification was not like a big problem for him, which is why we ended up building. You know, the real problem was like I'm looking for a retirement solution and that's what we're doing with Block, which we can come back to more later. But so I got into this really because I saw this opportunity. The millions and millions of individual landlords out there not the ones who are starting the real estate careers I expect many of this podcast are folks who are really starting the real estate journey and hopefully in 30 years will be that guy, that landlord in Denver which focusing on folks in the later stages of their careers, and I wanted to build a solution for those folks and solve a problem and that's, you know, that's what we're doing.
0:03:54 - Vikas Gupta
Got it. Well, I'm really interested to hear about sort of like what you learned from your thesis about diversification and sort of how that ended up not necessarily being a problem. And I guess where I'm coming from is you know we've talked to a lot of folks on this podcast and we have people who have 250 homes or units in one city in Florida. We have people who have homes in multiple cities around the country. We have people who only invest in single family homes and two zip codes. We have people who are like I am in single family and multifamily and short-term rental and then commercial and sort of it's like there's. You know, one thing I've taken away from this is there's like no one right way to do real estate and people think about diversification specifically very differently than I think I did, coming from more of a like equities and traditional finance perspective. But curious, like what was your thesis going in? And like how did you discover it wasn't a problem and what did you learn?
0:04:53 - Ari Rubin
Going back a step, like you know there's in you. You have an equity background. I come from a Dora's background. You know there's a famous quote, I think it's Harry Markowitz. He said diversification. You know Nobel Prize winning economists, diversification is the only free lunch.
And investing, which you know the idea is diversification, is a way to lower your risk. If you put together, if you put all your eggs in one baskets, you know you have more risk. But if you buy a diversified index of stocks or bonds or cross-hesa classes, it's a freeway, you know. As opposed to like buying insurance, it's a freeway to lower your risk In real estate. That's actually not true because it's not free, because if you live in Denver and you're just trying to buy invest, it's actually quite hard. There's a lot of like really cool platforms out there that can help you buy turnkey properties or maybe, but it's not. It's definitely not free if you live in Denver to like go to a new market and invest. And so I think diversification is integral to any investment strategy, but it's oftentimes hard to do that right.
Like, if you're going to start with one, like, you know, unless you have scale, it's hard to diversify.
And again, there's a lot of platforms out there that helps you, like, invest in a lot of different syndications or specific properties, but there's a lot of fees associated with it, right?
And so, you know, when I approached this problem, again, we were focusing on, you know, folks who had owned for a long time. So, rather than saying to a young aspiring investor, you should diversify which, by the way, I don't even know if that's true Again, like, if you are boots on the ground, you know the Des Moines market or the Denver market better than anyone maybe you shouldn't diversify and buy halfway across the country like and pay the fees associated with it, you know. But so we focused on, like, the older retiring landlords and I approached it and this I think most folks would agree with which is like, okay, you have, you've built up like 20 million of equity into, like this one neighborhood in Denver which has, you know it's gone up so much in value because you just happen to be in this like fantastic place in Denver. Contrast that with Chicago, which is where I grew up and where my parents own a rental property and everyone I know owns rental properties there and they've had a very, very different fate.
And so I think we can all agree in hindsight it would have been smart if you lived in Chicago to diversify. In hindsight it was a good like that, or it was a good play to be concentrated in Denver because you far out performed. But no one knows. And this goes back to no one knows what the next 10 years, five years or even two years are going to look like right, even go back to like pre COVID, or even like right when COVID hit and you saw what happened in certain markets and how you're seeing what's happening today. And so, going back to this, this notion of diversification, I think we can all agree at a certain point in your I think we all agree it is good at investing In real estate investing. There's a certain point in your career where it may make sense to take advantage of. Again, it's hard to do. Furthermore, I think moving forward like and I think this is what I tried to bring to folks is, you know, diverse. It's a sound way to own for the long term.
I think, going back to the original question of like, is this a problem? You know, when I started, I started doing a lot of discovery, so I'd go to landlord meetups. I was listening to a lot of podcasts like yours and just talking to individual investors and mom and pop landlords, and when I would pitch to them this problem of like you're so concentrated in Denver, people would look at me like I was nuts, like, like it's just like I like, like what, like it was like yeah, what else would I do? Or like, and so I fundamentally believe that a diversified approach is better for the long term, but I wasn't going to just I wasn't going to argue with these like they're right, you know, like you know, I have a cool idea, and so I very quickly started to do more discovery, and again this goes back to the point where I started, which is like I think it's really important to solve a problem. And so I would ask people is this a problem? And they were like no, it's, it's not a problem.
Like diversification, maybe you know, oh, I can push rents a little bit more if I have more scale, or I'm less worried about one individual property, you know something breaking or something, but I really quickly figured out diversification was not a real problem for most individual investors.
I will just add, though and this has been this is interesting to see I don't know how many where the listener base is, if there's folks in Colorado or in like Florida, for example, you know if you're a if we had a lot of folks come to flock and actually this diversification paypoint became very real after the fires right outside of Boulder in late 2020, we had a number of owners come to us literally because they lost homes in the fire and they're like I own, all of my real estate portfolio is in a fire area, or what you're seeing now in states like Florida or California, which is like I can't get insurance on my rentals anymore, right, and so I think stuff like that makes people realize like, oh, diversification is a problem, but for the vast majority of folks, we just go along with our normal lives. We collect rents, we look for the next deal and we just, you know, live the way that you know, invest the way that we've been investing.
0:10:06 - Vikas Gupta
Yeah, so. So three years ago you sort of did a bunch of discovery. You changed courses. Fast forward to today. You have 500 homes. Now take us through, like how'd you go from zero to 500 and what are you doing with those homes?
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0:11:03 - Ari Rubin
It's the traditional structures called like an upgrade or an exchange fund. And just quickly, if many, many of you are probably familiar with 1031 exchange, which is a tax-affirred way to roll the proceeds from one home, the roll the equity of a sale of one home into another real estate asset. It's kind of a real estate loophole. It is a real estate loophole. It used to exist in art and airplanes and a lot of other stuff, and now I think it's just real estate. So you can utilize something called a 721 exchange, which is actually not unique to real estate. You can do it in equities and the way it works is you own an asset let's say it's a million dollar property and let's just say, for easy sakes, you have no debt on it and so you could exchange that million dollar whatever it can be, real estate stocks, whatever it is for a million dollars worth of shares in a fund. You know REITs, for example, are in an operating partnership and by doing so you defer the taxes that would you would traditionally realize on a sale, which are capital gains tax and depreciation or capture, and you know so. So that's what our model is, we built. There's a number of exchange funds out there in equities, in real estates. There's also some other things in the 1031 world, something called the Delaware statutory trust, which can be good but is also a little bit complicated.
And so the way we scaled our platform, we started in Denver, started with a couple, just mom and pop landlords in Denver and we use the 721 exchange. We said, hey, you know our pitch to folks. By the way, the structure that we use was the same as day one. I just learned that when talking to folks, I shouldn't call and say, hey, do you want to diversify your portfolio or your home, and like, because people would be like what's? You know they're just hang up.
I learned, and you know, to sort of brand it as like you want to seem less cost efficient, exits, defer taxes, continue the retirement solution for landlords, which is what I'm building.
And so we started doing these exchanges and we started with just four landlords in Denver and just one by one these folks would come in, they would exchange their house, they'd get back shares in our funds and we just started scaling it up and now we're in about 10 markets across the country. You know we went from our first market was Denver and then, once we figured out how to price these things and how to operate these things and really built out like an ironclad system. We then the next market we launched was Kansas City Because, again, I really fundamentally believe in diversification and so we wanted to give folks you know, denver is historically seen more price appreciation, lower yielding markets, wanted to give folks more exposure to a market like Kansas City, which was a little bit higher yielding, and have continued to construct a portfolio in that way which is both high yield assets and then also lower yielding assets and markets like Denver.
0:13:59 - Vikas Gupta
Got it. That's really cool. I mean, I think a lot of our listeners are familiar with the sort of like 1031, 1031, 1031, die, step up, defer taxes forever strategy. This seems like I guess, go a little bit deeper. Like how, how is this similar, how is this different? Like what do I need to know if I'm just very used to thinking about a 1031 mindset about this model?
0:14:24 - Ari Rubin
Yeah. So 1031 is an extremely effective mechanism to generate long-term wealth. Let's just like, call it what it is and, just for those who don't know, like what it is and like why it exists and why it's effective. In very simple, when you own something and you sell it, if you sell it at a higher price, you owe taxes and you owe what's called and, by the way, none of this should be team-disk tax advice, but this is just standard kind of overview of tax. So anything you own when you sell it at a higher price, you owe what's called capital gains tax right In real estate. In addition, and that's just on the gain. So from the purchase price to whatever you sold it for, you know you pay capital gains on that gain. You also pay what's called depreciation or capture right.
Depreciation is great when you own real estate. It's a way to, you know, to effectively increase your cash flow and lower your tax base, and it's required by law to take depreciation. But then when you sell, it catches up to you right, and so you have to trigger that. It's not. You don't get away. You know depreciation. You sell and you later have to, you know, pay that.
So what's powerful about a 1031 exchange is you can say, hey, I own these three homes, or I own this one home, I can sell it and then use what's called a qualified intermediary, which means you never touch the cash, the cash goes through a qualified intermediary and then within you know there's a couple of different rules of 180 days and 90 days, and then 180 days you have to roll your proceeds into the purchase of another property.
So that's great because it's a great way for you who just bought this, who's owned this property for a long time, to continue to build equity without taking this big tax hit, to continue to invest in real estate and get that compounding source of wealth.
Because, of course, if you took a big tax hit then then it's like, well, now you're starting at a lower base and you can buy less and see you lose that compounding effect. So the problem with 1031, it's great if you want to continue being a landlord, but the challenge, the problem, is like, well, if you want to be, if you want to get out of being a landlord, like you still own real estate, right, and so if your whole goal was to sort of, so you can 1031, you see a lot of folks like they own a portfolio of single families and they want a portfolio into, like a triple net or into multi-family, and that's that's a great solution for many folks. What we hear from a lot of you're still liable, like it's still your name on title, you still got to deal with it, you're still concentrated, so on and so forth.
And so what the 721 allows you to do and again, there's a lot of other large private equity firms that do 721 exchanges. What a 721 allows you to do is exchange that asset that you own for shares in a fund. And if you own shares in a fund, you could think of it like owning, you know, interest in a syndication or shares in a REIT. There's some that are publicly traded, that are some that are privately, you know, and so that now you're fully passive. And the beauty of that. Now, let's say, you have a $1 million account, you can say, hey, next year I want to take 50K off the table and I had a big loss the following year and so I want to, like, redeem or sell a couple hundred K and tax plan, so it's. Or you say, hey, I want to gift 50K or 30K to each of my heirs every single year for the next 20 years, right? So there's, this mechanism is really. It's a really powerful like a state planning tool, which is why, yeah, it's, it's why folks do it.
I heard I don't know if this is true, so disclaimer again, I don't know, but I heard from some professors at Stanford that one of the first exchange funds, or like the largest exchange funds transactions, was actually for Phil Knight at Nike. He owned a lot of Nike stock that he had owned for a long time. You wanted to diversify, obviously, because he had so much of his wealth concentrated in Nike and so he used an exchange fund. I don't know if that's just a story, that Stanford professor, but it's a, you know it's. It's an extremely powerful and popular mechanism.
0:18:22 - Vikas Gupta
for that reason, Well, phil Knight's a big Stanford guy, right, so that would make sense.
0:18:27 - Ari Rubin
Oh yeah, he's got the you know the night management center and he's done a lot of good things for the store.
0:18:32 - Vikas Gupta
So that's really cool. So so you're running this fund, which means you're buying houses, so you have to be able to price houses, and then you're giving up shares in exchange for those houses, which means you're basically having to have like a real time private market valuation of your entire portfolio.
0:18:50 - Ari Rubin
Yeah, so we, we basically. So we acquire homes, we do these exchanges, but yeah, we're buying them like there's literally a, there's a settlement statement and you know it's just instead of issuing cash which triggers taxes. We issue shares in our partnership. Sometimes we also buy with cash, depending on where we're at but and then on an ongoing basis and exchange funds. They all have different valuation methodologies. What we do, we've sort of emulated a lot of like the largest private single family REITs and how they in their evaluation policies. So we, we value all the homes in our portfolio on a quarterly basis, based off of third party what's called ABMs, like automated valuation models, and then we also do a random sampling of appraisals every quarter and then appraise the entire book every two years, and so that's how we value our book.
There are some folks who use cap rate approach. You know and you can. There's lots of valuation providers. Obviously, we get audit. You know we use a one of the big four audit firms every year. But, yeah, valuations are something that can be.
I think the trickiest part about valuations is is even convincing the seller. So, like, part of our model is like we will never negotiate on evaluation and when we underwrite. You know we, we want you to put your house in, but we also we have a duty to all the other owners who have put their house in, and then we show you as an owner and flock. And I think this is where, at scale, running these funds are complicated and, by the way, if you ever want to launch one, call us, we'll help you do it. We want more folks doing this. It's a really powerful mechanism to to aggregate assets. Seriously, call me.
But when we underwrite an assets, we never negotiate on that Because, again, we have a duty to our all the existing landlords right and to just. And also, if we negotiate and we're like, ah, you know, we'll just, we really like you, then you would be like wait a second, I don't want shares in this fund, they're just over, you know. So it's, it creates this and I think that's it creates a very like what we call like a very healthy tension, where you have the acquisitions guys like fighting with the asset management team of like, no, we got to, and again, that's, it's a, it's a very good way to build a business because we're all working towards the same goal. But you create this healthy tension which just breeds creativity and then, if you can be transparent about that with your various stakeholders within the business and also with with the rest of the market and our you know, our owners, our contributors, it's, it's, it's really positive. It's a really positive force.
0:21:16 - Vikas Gupta
Yeah, I mean I can see that being like a really interesting way to hold the line to a seller of listen like I could overpay, but then you are then overpaying for every other house that I'd buy.
0:21:28 - Ari Rubin
And it's like it creates this really, like in a traditional real estate trend. It's pretty wild. It's really interesting dynamic, because in a typical real estate transaction it's kind of a zero-sum game, right, like, not always, like, maybe you want to do business with the guy, the gal you know somewhere else, you might see him in the local supermarkets. You don't want to totally screw him over, but, like it's, there's a buyer and that person's goal is to buy at the lowest price, and there's a seller and that person's goal is to sell at the highest price. With us, you're not only selling your real estate to us, you're also buying shares in a fund, and it's the same thing. And so it creates this like and you're going to be with us for a while, and so it creates this like.
It's a more partnership and I think that's, by the way, that's not that's. You know what I laid out, not just 721 exchange. Can you create that dynamic, right? There's a lot of creative ways to buy and sell real estate, seller financing being one of them, like a joint equity partnership. There's a lot of ways that you can, that you can structure deals where there's a lot more alignment of incentives, and I think that's just like a. It's a. It's a much more fun way to work than just a transaction. You know, it's nice to meet you. We never even met, you just sold it to me and then I walked off, or whatever it is.
0:22:41 - Vikas Gupta
So you've been doing this for three years and, as we talked about, like, valuation is a big part of how you make your model work. It's been an eventful three years in real estate and in the macro economy in general. I mean from your position. Like, what have you seen change the most over the past three years? How have interest rates affected the way that you think about your business? Like what, what are you seeing? I mean, you're, you're valuing 500 homes every quarter. You're buying homes. So you're, you're in this much more than sort of your typical five, 10, 15 year investor who may do one transaction every couple of years.
0:23:18 - Ari Rubin
Yeah, I mean I see, look, we see it across like we I've we've got a whole team dedicated to this and data scientists and outside providers. But I think everyone probably on this also knows their markets, cause they're watching Zillow or MLS like so regularly. And I think most people here would agree with this statement. Like for the, there's a couple of markets where home prices have gone down right and some markets where they've gone down, you know, quite substantially. But for the vast majority of markets, like and and you know K-Shelor confirms this and or would support this Like, home prices are really not down all that much and in many in, in many GEOs they're actually up over the course of last year. Right, and, by the way, we have no idea what the next two years will look like. I happen to personally be very bullish on home prices. We're not going to I don't believe we're going to see the same types of appreciation we've seen for the last three years, because that was insanity and that's what happens.
When you there's a lot of money in the system and there's a lot, you know there's a lot of reason for that. I think one of the things that we see in what kind of worries me in many ways. For a lot of transaction based businesses is, you know this, the the impacts of the golden handcuffs. Right, like if you bought, or if you bought a piece of you know some real estate in the last three years with fixed rate mortgage which, by the way, 90% of owner occupiers have fixed rate mortgages like you, you won't sell that right. I mean, maybe you know death, divorce, like there's a couple of things.
But for the vast majority of people, you know I bought a primary residence in Denver that I locked in a 2.6% mortgage on it and, like you, could pay me 15% above what I would deem like fair market value, like what comps would support for that valuation, and I still wouldn't sell it. Because if you run the discounted cash flow analysis on like what that thing is going to be worth over the next 30 years, it's just like it doesn't make sense to sell that. And so you see such a wide disparity between like, oh, I own this house, I'm not a four seller, I've got a rent, you know there's a resident in there, so I'm covering my mortgage with it. I'm not going to sell this thing. And so, as a result of that, I think like what we're seeing in the market, both in pricing, as we see prices like largely to be flat, to like marginally up in certain markets. You know San Francisco and we don't know.
I'm San Francisco but you know I live out here now in the Bay Area and, like you're seeing prices come down a little bit, markets that you know Seattle and Austin are also down but also they're coming from such like these markets went up. You know Austin was going up like 15, 20% a year, right, and so there's still so much appreciation that many folks, many owners who have owned for a long time, have seen. And so you know, in many ways I think a lot of the pressure that's going on markets, you know is quite not only natural but it's like very healthy for those markets to sort of stabilize back to, you know, kind of real world. So that's my quick view on pricing, about where we've been and I think, where we're going.
0:26:15 - Vikas Gupta
Yeah, fortunately too bad Brandon couldn't join us today. He is not a big believer in the Golden Handcuffs theory, so that would have been an interesting debate, yeah.
0:26:25 - Ari Rubin
Oh, I would love to. I would love to. We'll have to do that another time, because what's? Well, I'll talk to him about it later.
0:26:32 - Vikas Gupta
Yeah, I mean I can give you the quick sort of my understanding of his position which I think has some merit. I don't think there's, I don't think it's like binary per se, but sort of, at least from his perspective, like if you're a primary home buyer, setting aside investment property but primary home that it's such an emotional decision and there's so many other factors that go into needing to move or wanting to move, or what are you buying, what are you selling, that, like relative to an investment decision, the interest rate is not nearly as big of a determining factor as to you know whether or not you're going to move or sell or buy a house, which I think there's some merit to, I would, sort of my perspective, my thinking is that, like on the margin, it has to be affecting people, but you know that's. That's sort of where he's coming from.
0:27:17 - Ari Rubin
Yeah, I think it's an interesting view. I think it's. I agree with him on a high level of like it is so on your primary residence. It's so emotional, or like life happens like we had to move out to Palo Alto, right, I think, where the impact of those, so we moved like maybe in an interest rate environment where it's sub 3% we'd buy, but now in like most markets it's just like we should rent right, like we should be, and then the other, so like we're just going to rent now because it's way cheaper in most markets to rent, whereas that that was different a couple of years ago in many markets it was so still cheaper to buy.
And there is this like pride of home ownership thing, but also like I think our generation sort of or the next generation certainly views that differently. I think the other part of it, part of it which I'll give a plug to sort of your company and like, there's a lot of tools out there that makes it a lot easier to be a landlord now, right and like, and there's a lot of podcasts that are educating people about real estate, investing right, and so I think it's a lot as a result of that, you'll see a lot of folks, which I think long term is very good for our business, because now, like you're going to see a rise of the accidental landlords and like, oh, I bought my house in Denver, we had to move to another place and we'll just rent for a number of years, right, because it's 2x more expensive to buy or 3x more expensive to buy.
0:28:34 - Vikas Gupta
Yeah, I mean, I think I think we'll see right how it all plays out. Like it's sort of like unprecedented what happened over the last few years. Unprecedented to have what is it? 50, 60% of homeowners at like some 4% interest rates and how it's all going to shake out. We'll see.
And I guess it's like everything real estate, it's all going to be super local market related and so generalized statements you can probably find proof points for and against any given market. One thing I want to come back to, sort of at the top of the pod you had said you know, diversification is starting to, could start to be more of a factor for folks in high climate risk areas where they're having insurance problems, and then sort of you know, a few segments ago we talked about how you have this tension between you know, if you're buying a home from someone, well then that home is in your portfolio and you have also a commitment to all your existing homeowners or partners. So so I guess, like, if I'm in Florida and the reason I want to trade in my home is because it's uninsurable, like why do you want it? To be blunt?
0:29:44 - Ari Rubin
Yeah, yeah, so we can't take one. That's uninsurable, so that person's out. But I think what a better way to sort of reframe. That same question is like why would someone who owns an 8-cap exchange like we don't own a portfolio of 8-caps, we own some 8-caps and like 8-caps are awesome, right, because you get a lot of income. And so the question is like why would I, if I'm making, you know, 8% in current, like net yields? And, by the way people use cap rate, they define it differently. Let's just say like, just for common definitions, the net operating income divided by the current price. Okay, so just the net yield on the asset. So if you own an 8% net yield home which, by the way, is very hard to find in this country because that's not where cap rates are why would you want to exchange it for a lower yielding portfolio? And we hear this all the time from owners who own in high yield areas. And then, and the answer, of course, is because an 8% net yielding home again, current net operating income divided by the current price looks very different than a 4% net yielding home. That neighborhood looks different, the appreciation forecast looked different.
A joke that we've heard from many landlords is when that 8% net yielding home goes vacant. There's a high chance that the fridge is not going to be there. What during the slope? When you went during the term? You're going to lose all your stuff, right? It's a very different asset and I would make this so an 8 cap is not better than a 4 cap, it's just different. The corollary we make is like is buying a high yields corporate bonds, is that like better than buying the US Treasury? No, they're just different. Right, like, who's the counterparty? What kind of asset is that? At the end of the day, one of them is a company that may not exist in several years and you may not get your principal investment back.
And the other one is the US government, which hopefully exists in a couple of years, and hopefully get your principal back. And so, again, when we think about that diversification element, it all goes back to like what are you optimizing for? And our goal, like at Falk and the investment strategy and the portfolio that we've put together with and I'm very upfront about this I like our goal is to provide folks with diversified, low cost exposure to the US housing markets. And so, like we don't see 8 caps as better than 4 caps we don't see I mean it's hard to like take a 1 cap like in Palo Alto, we don't take any of those. But, like we don't view the assets as like better or worse, we view them as over the next 10, 20, 30 years, we want to construct this diversified portfolio with exposure to markets like a Kansas City or a Baton Rouge, those types of markets, and then also markets like a Denver and Seattle, for example.
0:32:40 - Vikas Gupta
Baton Rouge is an interesting one. That's got to be a tough insurance market.
0:32:44 - Ari Rubin
It is New Orleans or, excuse me, louisiana is very hard, we haven't seen it kind of. You know it all depends, and this is like we're so much. There's the national level of how you price and then there's like the nitty gritty of like literally, where does that home sit in what sub market? And you know you got to be really good on that. That's why, when we started, we were really focused on Denver because, like, I know the Denver sub market, I know it so well. But then it was like when we expand to these new markets we have to be thoughtful about our underwriting, about, obviously, the boots on the ground in the place and so on and so forth. So we're not in every market yet, but you know, we've established what I think is a pretty good edge in a handful of them. Very nice.
0:33:22 - Vikas Gupta
Yeah, we had an episode actually I'm not sure if it's out yet, I think maybe it dropped a week or two ago with Sean O'Dowd. I don't know if you know him, but he's launching a fund to buy single family homes in 10 out of 10 school districts and he focuses solely on the upper Midwest, and he sort of like walked us through his reasoning and he said he talked to a bunch of SFR, larger SFR institutional funds, and they all said that you know their exposure on the coasts and in the Gulf is getting crushed by insurance costs and so they're only looking at the upper Midwest because they think that's the most stable. So that's really where that line of questioning came from. I was super curious. All right, well, I wanna make sure we get you out of here on time, and this has been a great episode so far. So I'm looking forward to our three standard closing questions. So if you're ready, we'll wind things down, all right. Question number one what is your favorite book? And it doesn't have to be real estate related.
0:34:14 - Ari Rubin
Yeah, my favorite book is Let my People Go Surfing, which is the biography from Yvonne Shenard. He's the founder of Patagonia. I think it's called like stories of like the reluctant businessman and I think just the way he's not only built his the business but also lived his life is just he has a lot of fun and I think that's so important. And he's built and I say the word sustainable and a lot of folks can say takes sustainable in a lot of different ways.
But like sustainable also, like let's live a really long life and let's be healthy and let's have fun and let's you know and I think he's done that and it shows and it comes out in the product he's built and he has a true passion for what he's doing, and I do also, and so hopefully it shows.
0:34:53 - Vikas Gupta
Cool, I like it. I have not read that one, but I'll put it on the list. Question number two in real estate investing what is more important to you cash flow or appreciation?
0:35:03 - Ari Rubin
Yeah, so I think you know my answer, which is like it all depends on your goals, and I'll answer in a different way, which is even more important than that is diversification and so. But actually like it depends if you're young, you know, maybe appreciation and later cash flow, but my answer is diversification.
0:35:23 - Vikas Gupta
Thank you very much. Final question any last piece of advice or insight that you would like to leave the audience with that we didn't get a chance to cover.
0:35:32 - Ari Rubin
I think the biggest one. I started this conversation around solving a problem. You know I told the story about how I, you know, went out to go solve a problem and I think the extension of that is you got to find your edge. It's not just about solving a problem, it's why are you uniquely qualified to go out and solve this problem? And I think if you approach, whether you're opening a little restaurants or you know a lemonade stand, or you're starting real estate business, think about that. Whether that's you know in real estate, the type of product you're providing to residents or to whoever it is that is using your real estate, or if you're launching a fund and you're giving investors exposure, whatever it is, just really go out there, solve a problem and then, most importantly, find your edge in doing it.
0:36:15 - Vikas Gupta
Great. Well, this has been a fantastic episode. Thank you so much. Before we let you go, give us a plug for Flock and let our listeners know where they can find you.
0:36:24 - Ari Rubin
Yeah, so at Flock we're building a retirement solution for landlords. So we work with what we call retiring and accidental landlords, who are looking for passive income, appreciation, tax, deferral, estate planning and just like total peace of mind, all the benefits of ownership, without any of the burdens. A lot of folks out here are probably younger investors and they're starting to build their careers. We work a lot with brokers.
If you know, folks in your area who you've bought rental properties for along the way and they've owned for 30 years. They're not even thinking about selling. Those are the exact types of folks that we work with at Flock, so give us a call. You can come to our website and put in a property address or, yeah, that's the best way is put in a property address and or find me on LinkedIn and would love to chat.
0:37:09 - Vikas Gupta
All right, and what is that URL?
0:37:11 - Ari Rubin
Flockhomes.com www.Flockhomes.com. Put in your property address. We'll give you a valuation, hopefully within 24 hours. If not, someone's gonna hear about it, yeah.
0:37:23 - Vikas Gupta
All right well, thanks again, Ari.
0:37:25 - Ari Rubin
Great to see you. Thank you so much for having me on.
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