3 Housing Market Trends That Will Shape 2025

Which real estate trendsToday we’re diving into the housing market trends that are shaping 2025. And to do that, I have the full panel. Finally, it feels like we are already all back together. Henry Washington, Kathy Fettke, James Dainard all joining us today. It’s good to have you all back. I don’t actually think it’s been that long. It just kind of feels like a while since we’ve all been back together. So it’s fun to be doing this. And today we’re going with one of our tried and true old school formats here where we’re talking about some of the trends and news stories that are shaping the housing market right now. So let’s just jump into this thing. We each brought our own headline, and James, I’m going to pick on you first. What do you got for a trend for us?Alright, trends. I hear this trend, especially in Seattle, but you’re seeing it all over message boards. People are talking about it. It’s all about that density in the dadoos, the A DU density investing where people are building cottages in their backyard. All I hear is people talking about it because now you have lots of different states starting to pass regulations on this. Washington has been very aggressive and then we have California changing the rules around where they’re allowing people to invest. And then there’s I think eight or nine other states that are pushing this through. And even some areas, I think in Connecticut where it’s a little bit more rural, they’re starting to look at this.I was going to say that James too, because I’ve seen it in the Midwest too. Places that you wouldn’t assume are trying to change zoning codes, but it seems like universally cities and towns are now allowing increased density.Yeah, there’s a long list of ’em. California, Washington, Connecticut, Maine, New York, and then you have Jersey, Vermont. They’re all looking at doing this and what’s happening is all the states are starting to fall in line and that’s getting everyone’s attention, but there’s always that question is, is it worth doing or not? Just because you can do it doesn’t mean that you should. And I thought it was definitely the hottest topic up here in the Pacific Northwest. I know California’s all over at San Diego, those markets, but you’re hearing it in other states. I want to know what you guys thought about this. Do you think this is a craze? There’s always that the asset class, everyone’s chasing for the year, right? Short-term rentals, right? 18 months. Everyone’s pounding out short-term rentals. Now I kind of feel like it’s the next tidal wave where everyone’s looking for an A DU Dadoo deal when maybe they should just look at the whole picture because there’s a lot of other good deals out there.Well, I’ll probably come from a perspective that’s not so much from an investor perspective, but with these ADUs or dads, what you don’t do is a traffic study or a parking study or anything that a normal developer would have to do. And my daughter’s neighborhood just over the hill, some people put the ADUs in and the neighbors are really upset. There’s just not enough parking. They don’t like the way it looks. So that’s interesting to me is you don’t have to do the traffic study. Where are people going to park? Maybe they’ll just do the driverless cars. I don’t know.Kathy, would you mind letting the audience know where exactly you’re recording this from right now?Yeah, why don’t you tell us more about that?Well, I am actually in a guest house. This is bigger than I think what a, we would be allowed in a DU, but I’m not sure. But on our property, we were one of the last homes that was allowed to have a guest house on it at the time. And California has pushed hard to allow these ADUs because it could potentially solve the housing issue. It doesn’t solve, like I said, parking or traffic or pollution. It’s just more people. And it’s also super risky to have more homes in an area that’s already fire risk prone. Because what we know is that the higher the density in the area, the faster those homes go up in flames because we get ridiculous winds here that it was like 80 to a hundred mile winds, it turns into a firestorm. So with every great idea, there’s also the reality of things. But yes, I’m sitting in one. So who am I to talk?I like how in rich communities they’re called guest homes who are carriage houses instead of ADUs or suite. Every neighborhood’s got its own word for it, but it’s just the same thing. Well, I’ll just say that in addition, James, to what you were saying about states, a lot of municipalities are doing this in Colorado. They started doing this in Denver years ago. Even though the state didn’t take the initiative, a lot of individual cities are doing it. So even if the state you live in or invest in is not one that James mentioned, you should check out what’s happening at the super local level. But James, you sort of introduced this topic saying, if we think it’s worth it, I would turn to you do a lot of development and you do a lot of this type of investing. So does it pencil out for you in Seattle and Seattle? I’m particularly curious if you could give us numbers like cost per square foot to build. How does it compare to other types of development or other types of rehab work you do?Yeah, and I think that’s the important question. Does it make sense in your market? And I do build D ADUs and we sell them. We do not keep any for rentals right now. We actually are going to build our first rental one. We’re going to build one in the back of a rooming house that we have right next to University of Washington. We can build six additional rooms and we can maximize rents that way. And it comes down to what is the market though, because I think a lot of deals you should not do ’em on too. I was actually debating with an investor, a friend of mine, and he’s like, why aren’t you putting a dad in the back of that yard? I’m like, why would I? He’s like, but you can. And I’m like, well, just because I can doesn’t mean you should because the thing that you want to think about is you got to look at the core numbers every time.
A what’s the availability of product in your market and is it even needed? I was talking to some investors in Arizona, they’re like, we want to get this going. Hopefully it goes through. I’m like, but you guys have so much land down here and if there’s a lot of sprawling land around you, you can always buy another single family lot. So you want to look at what’s the density, is there demand for it? And then what is the core math? And the core math comes to what is it going to cost you to build it? How much debt can you put on it and what’s your monthly payment? And typically in Seattle it costs us about 350 to 400,000 for plans, permits, everything dropped in, finished out the door, which is going to be roughly about 350 to $375 a foot.
Now for townhome developing, it’s about the same. So it’s very similar in pricing. And typically with townhomes you actually get scale because building like four to eight at a time. But because the dads are so value engineered, they can put ’em up very quickly. But it doesn’t mean as a dad investor that I’m going to do it in all different cities. They can Seattle, it can make sense because the rents for those can be around $4,000 a month. And if I’m spending 400 grand on the building, I can get the lot for free. That gets close to cashflow it. But if I go 30 minutes south into Tacoma, I can’t really rent it for that price. It’s going to be renting for 2200 and the core cost is still the same. And so the one thing I think about this DAU investing, it depends on the market you’re in, might be better just to invest and buy a spotlight and build a house than it would to put it in your backyard.
Because when you do put it in your backyard, you are diminishing the value of the house that it has. When you take away a piece like a backyard or part of your land, you’re going to reduce the value down. And so those are things you want to think about. What does it do to the value of your current asset? What can you build it for? What is it worth? Is there an equity position? I will build one if I can make a 30% equity position. I will also build one if I can break even and have a new warranty construction. And so you have to move the numbers around and you have to be very careful about the math. I am, even though I’m a developer, I’m also a flipper. And sometimes I think less density is actually a lot better and you can make more money by not building the units.Well, yeah, because a lot of times now because it’s becoming so popular in certain areas, does it make the single families that don’t have them even more valuable?I think it does because you get big backyards. People want, one thing we learned in the pandemic is they want space and sometimes you have to sacrifice a garage and your backyard to get this unit in. And the city of Seattle, that can be an effect of 250 to $500,000 off your value because you’re taking away some core aspects. And so you always want to think about what is the impact, but does the math make sense? The cool thing about DAD investing is you can create cashflow. Right now I’m looking at a property, I’m paying 600 grand for it. I can put A-D-A-D-U in the back. 600 grand in this neighborhood is cheap. It is a great price. But if I bought that as a rental, I would lose a thousand dollars a month.Wow.If I build the DADU in the back, sell the front, I now can have a brand new warrantied construction in the back that will break even warrantied and will have $250,000 in equity. So you just have to be careful about what the cause and effect is of developing. Just because you can touch the dirt doesn’t mean you should touch it.And this is why I think it’s important that you truly do understand what the A DU rules, restrictions, laws are in your market. Because not every market will allow you to build an A DU and then sell the houses separately.TheyMake you maintain them on one lot. So you’d have to either sell them all together or you’d have to rent them all, but you wouldn’t be able to split them. And so that can drastically impact your exit plan and your profitability with that exit plan.And then you also got to pay attention to what’s coming down the pipeline because right now people that are coning off their backyards in Seattle could be missing out on a gold mine in nine monthsWith the zoning plan.The zoning plan might allow you to put four cottages on a single family lot and now you’ve your lot your toast when you’re developing. You got to pay attention to all the aspects, what’s going on with the building code, what’s going on with your building costs, what’s going on with rates. There’s so many more pieces in there and sometimes simple is better. You can absolutely crush it by condo in and selling ’em off. And I know California that’s coming right up the pipe. And so you want to watch what’s on the forecast because there is a strategy behind if you can’t too, because in California you could buy those a DU lots a little bit cheaper. It was cashflow. But now that you know can condo, that’s where pricing can skyrocket. It’s all about checking the market, what’s on the forecast and then checking those core numbers. Don’t just build it because you can build it. Sometimes the math doesn’t make sense.Yeah, I’m glad you were reading that zoning document too, James. I started reading it. It’s like 250 pages long, but I’ll get my way through it. All right. Well we are going to move on to our next trend, but first we got to take a quick break. Welcome back to On the Market. We’re here with Kathy, James and Henry talking about trends for 2025. We heard about James’s trend, which was about a DU and increased density. Kathy, what trend are you watching?Well, it’s one I don’t love actually. Basically that this idea that cashflow is declining because expenses are increasing. We know that mortgage rates are up. We know that home prices are up. So right off the bat, if you’re buying an investment property, you’ve got higher costs, but then if you already own it, you’ve got higher insurance rates, maybe higher property taxes and higher repair costs. I just spoke with an investor yesterday, actually interviewed an investor who was so excited because they followed my plan that I’d given them years ago and were able to be job optional by a couple of years ago. So I interviewed him and he goes, my plan has changed. I was job optional and now I’m not because the cashflow from my properties, and he has, I think 40 nowIsDown by a third. He’s not upset at all about being in real estate, it’s just that his plan has now changed and he’s looking at repositioning certain properties that just the expenses are too high into ones that will cashflow and get ’em back on track. So this is real world from an investor experiencing it today and his turns when a tenant moves out. For those of you who don’t know what that means when a tenant moves out and you’ve got to get it all cleaned up for the next tenant, in some cases he said it was $10,000.No,That’s super high.That’s crazy. WhereIt was Detroit. It was Detroit IThink. What grant?Yeah, so I think what he was saying, and I’m trying to get the interview back in my mind, but that these older properties that were cheap, they were a hundred, a hundred. I think he paid 60,000 for them at the time. When they need a turnover, it’s more expensive to get them up to speed old. So that was part of the idea is kind of getting rid of these older properties that are just costing more for their value. Now they maybe doubled in value. Maybe they’re worth a hundred thousand now today, but the expenses are just too high compared to the value of the property. So he asked me what should I do? And I gave some ideas, but I’m really curious what you guys think.Yeah, this is a question that I think a lot of investors face whether they plan to face it or not, but it’s something that I typically try to look at every year. We actually probably don’t take action on it every year, but we probably take action on it every couple of years, which is trimming the fat in your portfolio. So you have to be able to evaluate your cashflow. And it sounds like he has a good handle on how much cashflow he has versus what he’s losing in cashflow. But you also need to look at your portfolio as a whole and then break it down to the individual properties because you probably have a good subset of properties that aren’t making the cashflow you underwrote them to make. And maybe that’s because of maintenance. Maybe I have one in particular that doesn’t have a lot of maintenance, but the taxes on that particular property just happened to go through the roof, whereas some of my other properties, it didn’t.
And it’s crushing the cashflow. Companies do this all the time too. They do it with their workforce. They look at their bottom performing employees and they trim the fat and they get rid of those and they bring in new ones, right? New employees, you have to do the same thing with your portfolio because if you’re consistently looking at what are the properties where I’m bleeding money and is it worth it for me to put more cash into that property or is it worth it for me to go and get another asset? And then I think that’s the part where you really have to pay attention to. Is it truly going to be worth it to go and buy another asset where your cash flow is probably not going to come in year one? It’s probably going to come in year three, four or five, the real cash flow that you’re looking for. And so it really is going to require you to do the math and figure out, should I spend 10, $15,000 on this asset now because it’s a great cash flowing asset, it’s just expensive to maintain. Or should I take that 10 to $20,000 and go and buy another asset that maybe I break even on, but the maintenance is deferred?I’m going through that exact thing right now. I have this house I’ve owned for 10, 11 years. It’s old, like 1920s and it’s just bleeding money right now. But in good years, which is most years, it’s putting off four grand in cashflow a month. It’s pretty, pretty good. But it’s like now I got to re-plumb a 1920 house, but it’s worth it. You just kind have to do it. It’s a pain in the butt. But if I sold that property and repositioned, I’m not getting that cashflow anywhere else, and it’s like this amazing place. I don’t think I’ve had a vacancy in 11 years. It’s like this great house. It’s super cool. So don’t just get rid of ’em if they’re not having a bad year or two. In this case of this property, it’s worth reinvesting into it. It’s going to eat my cashflow for a year or two, but that’s fine. I want to hold this for another 10, 20 years.I think it comes down to return on equity. A lot of people own rentals that leak. They bleed money out because they’re older and they opted to not improve it and get a better basis for their cashflow. For me, we take ’em all the way down to studs. A lot of times it makes sense, we can leverage ’em correctly, but also we don’t want the amount of doors in Seattle that we have that are constant problems. And those things make huge impacts against your p and l and your cashflow randomly and unexpectedly. But I would still run with the return on equity. If I can put, like Dave said, money into the building and still do really good return on my equity where I’m dividing the annual cashflow by the equity I have, then I might keep it if not 10 31 into something newer. The good thing about today’s market, the cheap stuff sells in the clean stuff that’s priced a little higher does not sell, and you can get a better deal on it. So then if you 10 31 it, you’re taking your equity gain, you’re buying something that’s not leaking and you still get the same amount of cashflow out of it.That’s exactly the conversation we had. If the property you own is an area where the values just don’t go up very much, and this is the case in Detroit and this particular neighborhood, I should take that back, he paid 50,000. It’s a hundred something thousand now. So it did go up in value, but it’s probably capped. So when you have these big capital expenditures, it really hurts. It wipes out cashflow for years and you’re not recapturing that through appreciation so that after owning long enough, he’d said exactly what you said, I want to sell these. I told him, you’ll probably sell pretty quickly because you’re right at the price point that’s so needed today. Affordable housing is desperately needed. People will be able to afford it, you’ll be able to sell it. And he said, yep, I want newer and growth areas that maybe don’t cashflow as much today, but will in the future. Like Henry said in three or so years. So he’s got a great job. They don’t need the cashflow right now. And that was another thing he learned is he jumped into, we’ve talked about this a lot, but he jumped into cashflow properties when he didn’t need the cashflow.That’s what everyone does. I did,Yeah. He’s a tech guy, makes tons of money. His wife is too. So they just went to the cashflow game too soon when they could have been enjoying all the appreciation over the past seven years.Took me a couple of years before I realized that we, wealth is in equity and appreciation.I think it’s this natural thing, right? It’s like a U shape. I think I’ve talked about this before, right? It’s like everyone goes into it. They want to get cashflow just to prove that it’s a sustainable business model to themselves. I can hold onto this, I can sustain it. Then you realize equity’s the best, and then as you’re sort of actually ready to retire, then you refocus on cashflow. Again. I’m not saying that’s the right way to do it. I just feel like that’s the normal trajectory of people who invest over a long time.Yes,James and I did a podcast the other day talking about how to create upside in your deals, and I think it’s true that cashflow just in day one is hard to find right now. That doesn’t mean it’s going to be hard two or three years from now if you can find ways to grow rent, I think there’s a strong macroeconomic reason why rents are going to grow. We’ll talk about that another time, but I still think if you’re, like Kathy said, getting great assets in good areas, they’re going to cashflow. It’s just probably not today, and I still have a lot of questions about what else you would do with your money if you’re not buying real estate right now, but I digress. Alright, so we’ve gone through our first two trends talking about density in a DU and cashflow unfortunately declining in most places. We have all more trend to cover right after this. We’re back with on the market talking trends. We’ve gone through James and Kathy’s trends that they’re watching. Henry, what do you got?Well, my trend is one I’ve talked about before, but one I am really into, and that is the trend of turning single family homes into residential assisted living facilities. This trend is becoming more and more popular due to a lot of the reasons that we’ve talked about with Kathy and with James is that it’s hard to find cashflow and this method will allow you to get phenomenal cashflow, but it is a business, right? It’s real estate and a business. And so I think that it’s kind of on a slower trend because true hardcore real estate investors don’t see this as truly real estate because you do have to operate a business, you have to have a staff, you’ve got to provide quality care for seniors. But if you can get the processes and procedures in place, I mean the numbers we were underwriting for the facility we were looking to open, we were talking between 10 and $15,000 in cashflow per monthOn what kind of investment?Well, I mean your total investment’s going to be right around a million or so, maybe a little more. Wow. Not out of pocket, just your total investment. Right?I’d spend a million for 10 grand a month in cashflow.Yeah, the numbers are ridiculous. The numbers are crazy ridiculous. And so that makes it attractive for investors and business owners or business operators. There is a subset of people who actually go in and they partner with somebody where they own the real estate and then the partner owns the business. So there’s models where you can do that.What I would do, Kathy and I, the passive people give me that,Yeah, there’s some people who buy the homes and then rent the homes essentially to the assisted living business, and they operate the business out of the home, which is one of the models that you can go for. But the demand for this is drastically increasing very rapidly. The estimation right now is that we have about 30,600 assisted living communities nationwide, and the number of beds available is 1.2 million. That’s an average facility size of 39 beds by 2030. The estimate is that we will need almost about 775,000 new assisted living units. So that’s 775,000 new beds on top of what’s already needed. And so right now we’re not opening facilities or creating beds at a pace fast enough to keep up with the aging community that we have and part of the barrier to entry to this strategy, it’s different in every state. The process to do it is different in every state. The time it takes to go from purchasing an asset to when you can open the doors can be vastly different in every state. And at some point, I think all of the states are going to have to loosen up on some of those regulations in order to allow people to open up enough facilities to take care of the aging population.I mean, it makes sense. We’re finally here, there was some headline stories probably 10 years ago where a lot of Wall Street investors invested in these care homes and they did it too soon. The demand wasn’t there yet, but now the boomers are between the age of 1680, so the oldest are 80, and so all you’ve got is the tsunami ahead of these people that are going to need it. It is a business and would, like Dave said, I would want to just own the property and lease it, but for somebody looking for a business, this is a huge opportunity.It’s a good one. Yeah. I invested in a syndication, it’s not assisted living, but I did a 55 plus community and it’s crushing.Yeah,It’s doing, so it’s just demographics, just win everything.Just follow the demographics.Yeah, it’s just demographics are destiny. That’s it.The numbers are there. Again, I think the barriers to entry can be challenging, but there are a lot of loan products that are meant to help with this. You can use an SBA loan, put as little as 10% down.Oh, interesting.And that will fund the purchase of the real estate, the purchase of the furnishers fixtures and the equipment. It will fund money that you need to renovate that property and it will fund the money, the startup money you need in order to hire the staff to get you started before you’re actually fully ramped up. There are great loan products for this. It is something that is not as challenging to get started as it seems on the front side once you dive into it. But I think in order for this to work, you’ve got to a, want to run a business and want to have the real estate aspect. But if you’re looking at it from a numbers perspective, one residential assisted living community with 10 to 15 beds will perform financially like a hundred unit apartment complex would, right? It is that kind of cash flowing asset with far less maintenance responsibility and with huge demand upside, which you don’t have inMultifamily. It’s also just a good thing to add. It just seems like a meaningful thing to contribute. I personally can’t take care of myself enough, so I don’t even know how I would operate business taking care of other people, but I would vest in one.Yeah, my wife would co-sign the same thing. I can’t take care of myself, so I don’t know if I could, but I could definitely partner with someone on it.You can’t be responsible for overseeing someone else’s wellbeing.Go to the doctor. I’m like, wait, what? I need to go to the doctor. The thing that you want to think about too, had clients buy a lot of these and they do great. There’s the business side, which Henry’s talking about, which yes, there’s loan products for that. SBA, you got to go through the regulation. Sometimes the licenses you have to buyAndPartner because they’re so limited and they can be expensive and it’s not an automatic, you’re going to get approval. So you want to go through that whole underwriting process before you actually go buy it. But then you got to figure out how to pay for that property because when you buy that property, it’s not as simple as a bur, right? Where you can buy something under market, fix it, appraise it, you’re constructing a different type of house, which isn’t used to what appraisers are comping for, and you have to watch the values on your debt because sometimes you have to leave 20, 30% in that building because the cost of construction is higher. You got to add more bathrooms. The more bathrooms you add, the more you reconfiguring you do. It costs more in your construction. Then you have a product that’s not sellable to anything but rooming houses or adult family homes, which is fine, and those will trade, but your money can get trapped in that deal. So you want to be careful about how you’re setting that up and how you leverage, because it could require a lot of cash on the real estate and the business side. I think it’s a great business. I think it’s where you want to be, but you got to set it up correctly.To give everyone an example, I had a house under contract that we were pretty far down the road in terms of getting this process going, and we had to stop because the state wouldn’t allow us to continue. That’s a story for another day. But the numbers were we were buying a house for $400,000. We were going to have to spend almost $400,000 on the renovation.Wow. Oh my goodness. AndThis was a four bed, three bath house that we were turning into a eight bed, six bath house.It costs 400 grand.Wow. Yes, because you have to have a commercial kitchen, you have to have fire suppression. There’s a lot of things that tend to add up. Plus you’re moving structural walls. You’re creating a lot of bedrooms. A lot of bathrooms. It’s a hefty renovation. So we had 400,000 for the renovation, about 400,000 for the house. You had another a hundred thousand in furniture fixtures and equipment, and we had another a hundred thousand for startup costs before we were actually going to be able to have the property full and functional. And so all of that, we were going to finance through an SBA loan. And even after all of that, we were still looking at cash. One about 10 to $12,000 per month if the property was full.And one avenue for leverage that people should dig into is your local community banks that do business loans and real estate loans.Absolutely.Because if you’ve been approved and you’ve been underwriting that way, instead of putting the money down and cash out of pocket plus the money for the business, they will look at financing you like 80% of the total complete project on a construction loan and give you an interest reserve and setting up your debt’s. A really important thing on these projects.I got to tell you guys, if you’re in it just for the money and not for the goodwill of helping people, the big thing in Southern California where I am is rehab centers for the same reason. Because they can get a hundred thousand dollars a month paid by insurance. What? Oh, yeah. Yeah. So it’s like big, bigMoney. But you’re helping people there too. Maybe I’m just naive and I’m trying to think that people are helping. I dunno.Yeah. So that’s a big one too. But obviously senior housing is going to be an issue.Well, as far as trends go, this definitely seems like a very strong trend, the right way to monetize it, take advantage of it, add value here. It seems like there’s a lot of different ways, but like you said to Henry, the trend here is very strong. It’s something if you have the appetite for it, you should consider. Thank you so much for bringing the trends. This is a great discussion. Enjoyed a lot. Hopefully all of you listening, learn something about what’s going on here in 2025. Henry, James, Kathy, thanks so much for being here.Thank you.Thank youYouGuys. And thank you all for listening. We’ll see you soon for another episode on the market.