The BEST Places to Invest in Airbnbs in 2023... and Why They Might Not be the Best | Episode 20 | STR Data Lab™ by AirDNA

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Speaker 1

Looking forward to digging into the best places to invest today.

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Speaker 2

This is the big reveal for us of our 2023 best places to Invest report.

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Speaker 1

And what I find super interesting is it's actually played out with the trends on where we've seen the most new investment come in over the past two years.

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Speaker 2

So lots of different factors. Folks obviously play into your own individual strategy. It's never a one size fits all.

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Speaker 2

Hello, Favorite person? Jamie Layne. It's. It's me, Mariah. Hi.

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Speaker 1

Looking forward to digging into the best places to invest today.

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Speaker 2

The what? Not Not the not the okay places to invest. Not the just good enough places to invest. This is the best places to invest. Is that what I'm hearing correctly from you?

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Speaker 1

I'm there. Not the places that I'm going to invest. But theoretically, yes, they're the best places to invest.

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Speaker 2

Oh, gee, that is a record scratching moment. I love this. We're not even 30 seconds into this podcast and you've already pulled the record scratch editor at a record scratch. I'm just I'm just trying to make this matter. We know the editor's not going to add a record scratch sound of fact, but wouldn't it be cool? Maybe someday, maybe someday, when we get big enough, they'll do that kind of thing for us.

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Speaker 2

Okay. Okay, let's. Let's unpack. We have so much to unpack for our audience, I think. Right, Right off the jump. So the first thing is. Yes, folks. Drumroll, moment editor Adam, drumroll. This is the big reveal for us of our 2023 best places to Invest report Highly anticipated, dare I say, already garnering some controversy, which we should talk about.

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Speaker 2

Which talk about the controversy that it's already getting the feedback and now you're just adding on top of it, which I love. I love by saying this is these are not where you're going to invest. Let's let's just start with why there's been controversy. Jamie Lynn, I've seen some names of places on this on this report, and I am like, well, that isn't a mainstream location like Fairbanks, Alaska.

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Speaker 2

I believe is number one. Not to steal your thunder. Sheboygan somewhere. Sheboygan somewhere. So. So tell me, tell me how has this happened? Where where's all the mainstream places to invest?

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Speaker 1

Yeah. Now that you've given away our reveal, let's. Let's dive.

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Speaker 2

Oh, typical of me.

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Speaker 1

Yeah. So, yeah, it's really been the past two years. The main markets that have sort of come up on our list are not sort of the, the most popular destinations. They're not, they're not some of the locations that I'm going on vacation with my family or have been to in the past forever. But they are they are some some great maybe new and upcoming and and it's more I'm smaller cities throughout the country.

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Speaker 1

It plays off of a broad trend that we've seen and really play out throughout the pandemic of small town sort of rural destinations garnering outsized increases in demand. And really, I think the the factor playing into a lot of the markets that have sort of showed up on the top places, best places to invest this year is what's been going on in the best ability and specifically around home values, because the sort of factors driving home values have really pushed up the the prices in markets that have been some of the most popular short term rentals destinations.

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Speaker 1

It was almost like short term rental demand was able to predict future impact increases in home values, but many, if not most, of their traditional sort of investment markets, home values are very frothy, have not yet really become to go down. Investor demand has been strong and so that that sort of pushed the investor ability of those markets down and sort of brought some others up.

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Speaker 1

And what I find super interesting is it's actually played out with the trends on where we've seen the most new investment come in over the past two years.

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Speaker 2

Right, Right.

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Speaker 1

Big increases in supply is not happening in sort of the traditional mountain or coastal or large urban markets. It's happening in mid-sized city, is happening in small city, rural areas. And that's where investors are actually finding the best deals in and deploying their money.

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Speaker 2

I love that. And I think that is certainly representative. And again, I promise I won't I won't reveal anything else to people, but I think that is very representative of of the list that we've compiled. What we typically do for folks is we get to a list of 25. We consolidated down to 25 for the US, for instance.

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Speaker 2

And I think it's that's really, really interesting to just see like, yeah, maybe. And I think I can I kind of dare I say that some of these places are just tapped, right? Like the potential there for new investment. It's really hard to afford a place to buy. Right. As you mentioned. And also depending on what's happening with demand and more importantly with supply, you just might not be able to make that sort of revenue margin that you were looking for in order to justify dropping $1,000,000 on a big mountain lake destination home.

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Speaker 2

That's what I'm hearing you say jingling.

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Speaker 1

In and it sort of plays into the point I made at the beginning that and this maybe isn't my best places to invest list and it's not going to be in this list is not going to be any one else's best places to invest list. But what we try to do is create a framework for investors to build out their own list and and it starts with what are the regions you're interested in investing in?

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Speaker 1

Do you want to be within two or three hour distance of your home location? Do you want to focus on mountain or coastal markets sort of appealing to a traditional vacation, vacation or guest? Do you want to go after urban markets and maybe push into midterm or longer term stays? Do you want to go after more unique homes and rural destinations that are attracting a whole new sort of round of gas, sort of finding the short term rental industry?

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Speaker 1

What is your price point and price point is it's a big factor. How much do you have to invest? Can you get financing for that loan? What type of financing can you get right and how much ultimately can you invest in the sector? Do you want one home? Do you want five? Do you want ten? Do you want 50?

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Speaker 1

Do you want those all in the same market? Because I could tell you a lot of these sort of smaller towns, like if you're going into Ellsworth, Maine, and with the idea that you want to add 50 homes in there, that's there's going to be a lot of new units added into one market where you yourself could potentially oversaturate that.

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Speaker 1

So there's and one of my main themes in creating this is we wanted to create sort of a thought framework for our partners, our customers, to help them sort of think through when they're going after creating their list. What should they be thinking through when going on that journey.

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Speaker 2

I think that that's so, so important. So, yes, provocative statement, obviously, to hook our our listeners into this podcast, but we're making it worth your time listeners. I know we are. Yeah. You're not necessarily this isn't part of your particular investment strategy. Each one of those investment thesis is very unique to the person. Right? And it is has so much to do with, again, affordability, which I think we should unpack a little bit because the housing market has changed so much.

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Speaker 2

Right. And also with what you're looking for ultimately, right, Like are you looking to buy several properties? Are you looking to just get one or two? Is this sort of a place where you would like it to be a short term rental but also potentially have the opportunity to be a mid-term rental? Or another thing? Are you looking for something that's a little bit more diverse?

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Speaker 2

Are you looking for something that's really unique and probably only a short term rental? So lots of different factors. Folks obviously play into your own individual strategy is never a one size fits all, but directionally what our list is doing for folks is helping them understand what the, I would say, hallmarks and traits of some really good investment locations are for this year.

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Speaker 2

That sound right?

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Speaker 1

Yeah. So let's let's maybe dive into the metrics and what's our methodology.

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Speaker 2

Yes, that's where I thank you for the Segway. Let's because our methodology let's talk about what's different about our methodology too. But you yes, I think you've got four prime pillars here for your methodology. You give me let's talk about it. Let's walk the folks through.

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Speaker 1

Yeah. So so digging into the methodology, we start with our three main metrics and I'll talk about the fourth. So starting with demand. So we're looking at occupancy in in a market. So what percent of the nights available in that market are actually getting booked and then playing into that too, is this sort of year over year change on a trailing 12 month basis and number of listings getting booked?

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Speaker 1

So are you are you getting high occupancies in that market and are the number of listings actually getting booked going up on a year over year basis? So that's our domain. Over on the revenue pillar, it's all around sort of momentum on rev par growth. So looking at the total revenues earned over the past year for a host in this market, we're looking at the entire year over the prior year.

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Speaker 1

And then we're looking at what is that year over year change and in revenue per available listing for listings that have been available over that two year period. So our hosts are investors actually earning more money in this market in 2022 than they were earning in 2021? And this actually weeds out a whole lot of markets that are sort of on that negative trek trajectory where maybe they're a bit oversaturated in terms of of new investment and where we're seeing Rev first coming down the third pillar and the one that is sort of the highest weighted in terms of our scoring is investors ability.

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Speaker 1

And there's two main pieces of this. One, there's the revenue. So how much revenue is an average full time listing in this market, earning? And when we're creating this, we actually break out the revenue earned by bedroom counts. So one bedroom, two bedroom, three bedroom, four bedroom, five plus and then we're comparing that to the average cost of a home by those same bedroom counts and essentially getting the yield.

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Speaker 1

So what is the average revenue divided by the average home price? And then we're averaging the yields across those different bedroom categories. So we are sort of doing a 1 to 1 comparison on bedroom home values by bedroom count compared to how much they're going to earn. And that's a while. On average, an average isn't ideal. I think it gives us the best indicator at a high level sort of city and market level.

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Speaker 1

Are you going to find good investment opportunities in that city or not? So we really.

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Speaker 2

Like that one.

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Speaker 1

Yeah. So we start what we did this year is we started with 50 cities, the top 50 cities that came up on our list. We then shared that list with our friends at Revit who have a database of short term rental regulations and where they actually score every city around the country. In terms of what is the regulation.

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Speaker 1

And that with a key view on could a new investor come in and invest in that market So they're such stringent regulation where even if you wanted to invest in that market, you couldn't, then that would have gotten a really high regulation score and sort of dropped them down. And our best places to invest list. So we added those regulation scores in a re index the list, and got our sort of top 25 markets.

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Speaker 1

We actually are putting in the regulation scores in this report and any market I think greater than like a four or five was significant restrictions in the list. We're actually calling out. What are those restrictions in that market that would make it difficult for you to invest in that city?

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Speaker 2

Well, that sounds to me like a very smart methodology. Jamie Lane But I love that it's multifaceted. Of course, that investing ability seems so important, even though I know you said like maybe an average isn't always the ideal situation, at least from the perspective of understanding what the potential yield could be, it seems super helpful. So would it be fair to say then that our best places to invest report for 2023 is very it feels like it's a very pragmatic, measured approach to what, you know, potentially is out there right this year and especially adding in that regulation filter.

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Speaker 1

Yeah. So that's and then doing the write ups, we sort of highlight some of the things that you need to be taken into account when you're thinking about investing in that market. So what is the occupancy, What is the growth in rev par, How many listings in the market, how much of listings change? What are the main demand drivers in that city?

00:15:38:10 - 00:16:23:09

Speaker 1

So what's bringing to market all things important to investigate? The other thing I want to call out is 2023 is going to be a really interesting year in terms of the housing market. So who knows whether or not we're going to go through an overall economic recession in the US in 2023. What we do know is we're already in a housing recession and what that means is we're more than likely going to see some pretty dynamic shifts in housing prices and where housing prices are changing.

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Speaker 1

And it's important to know that when housing prices change and even homes that are sort of operating in the short term rental industry, those house prices are going to be based on comps and those comps are going to be based on pretty much what single family home buyers are willing and able to pay in that market. You're regardless of what the earning opportunity is for a short term rental.

00:16:49:25 - 00:17:10:14

Speaker 1

So what you see is pockets of opportunity evolve over the year. And I think there's going to be lots of emerging buying opportunity. These as in areas where we see housing prices falling and the revenue still maintaining very high for for short term rental units in those areas.

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Speaker 2

I love that. Thank you. I was I was going to make you come back to that, the sort of the affordability in the housing market and where we think we're going with that super, super helpful. Jamie Lane Per the usual, So how should, how should our audience and potential investors such as myself use this as a practical guide for potentially guiding their thesis for next year?

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Speaker 2

Right. I love what you said, by the way, about looking at factors outside of for demand, right? So, for instance, Fairbanks, Alaska. Right. What are what I imagine there are some really great recreational opportunities. I think we have a handful of college towns. Spoiler alert. So what are the drivers, right, that might increase like the need for lodging in different areas?

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Speaker 2

That's a great sort of anecdotal thing for folks to look at, But yeah, give me some advice. Jamie Lane How should I use this guide for my own thesis next year or this year? Yeah, whatever your it is.

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Speaker 1

I want to start with maybe a thought experiment with you Mariah, of ooh ooh. If you just going to buy a home anywhere in the country. Okay. And second home for use, I'm like, maybe I could rent it as a short term rental. Maybe I can use it on the weekends and, and but I one to make an investment, like, where would you buy?

00:18:39:18 - 00:18:42:09

Speaker 1

And with considering that money object.

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Speaker 2

Oh well, I like that last part that you added to my, my search. Okay. Okay. Well I so okay so I'm using this. This is not just like an a good investment. This is something that I want to potentially get more use out of. I So we're in Denver, Colorado. We obviously are outdoorsy people. You can't live in Colorado and not be an outdoorsy person.

00:19:05:15 - 00:19:29:05

Speaker 2

It's like not allowed like they don't let you in the state. I think it's a question they ask when you get to the airport. So like a customs and informal customs line. So we would want to go somewhere where we could enjoy the outdoors naturally. So from my perspective, we probably want to be in the mountains. If money is literally no object and I want to also take advantage of great food and just, you know, potentially live that live that life.

00:19:29:05 - 00:19:31:28

Speaker 2

I'm probably investing somewhere near Aspen, Colorado.

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Speaker 1

That's and that's I'm great in through sort of a few things. One is understanding how and why you want to use that that home.

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Speaker 2

Right. Right.

00:19:45:13 - 00:20:20:18

Speaker 1

Aspen is a market with and is actually seeing decent occupancy sort of expand and seasonality in that market. It's actually seen pretty good rev par growth. It's a market with pretty stringent regulations. So those operators that are in that market are actually seeing better performance because of listing available listings are actually coming down. So that's concentrating the demand in that area in the listings that are sort of license and able to continue to operate in that market.

00:20:21:07 - 00:20:22:26

Speaker 1

But there's sort of one.

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Speaker 2

Key that's going to be a but I knew it. I was like I was just I thought you were just congratulating me on how smart I am. Carry on, carry on.

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Speaker 1

Is the best ability in that market is just terrible. Like the average annual revenue potential is about like $150,000 on average, but the average home in that market is going to come in just under $3 million. So we've got roughly a 5% yield there. So when I'm starting my sort of filter of looking at markets, looking at potential homes, I'm starting with at least like a 15% yield there of the revenue divided by the home value.

00:21:10:27 - 00:21:51:26

Speaker 1

So not necessarily getting through the filter there, but it's also important is a key factor for a lot of investors out there is how much do you value your sort of own use of that property? Right. That's going to be nearby that you can use occasionally, that you can get up there to help fix issues? And and just on the factor of we built out our list and we're looking purely on invest ability as a on a just pure investment and not taking out any of the intrinsic value that you may derive from that property.

00:21:52:08 - 00:22:27:22

Speaker 1

And that's where everyone's own value of that property may be different. And I'm not saying that you should probably invest in Aspen and there may be a way that you could make the numbers work and at least cover part, if not all of your mortgage, just maybe not get the return that you'd want, right? As opposed to go into a market like like Fairbanks or up in the White Mountains, Northwoods came up on the list.

00:22:29:27 - 00:22:31:05

Speaker 2

A few other places.

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Speaker 1

And see.

00:22:33:26 - 00:22:55:07

Speaker 2

I love that. So thank you. That was a I loved that thought exercise. You bring up a really, really good point, right? Which is like again, like, why are you doing this and what are you valuing? Right. And just I'm hearing you clearly our report is very much based on your valuing the actual financial benefit, primarily into getting into these markets.

00:22:56:25 - 00:23:21:00

Speaker 2

You know, of course, you also bring up good points about proximity ability to sort of get their fixed problems all the nine. And I do think I think it's interesting right like our our founder has said before. Right. Like it is very potentially a not great investment strategy if you are just going for maximum revenue to invest in a place that you just love or you want to go to visit or you want to potentially have a home, a second home and right.

00:23:21:00 - 00:23:39:05

Speaker 2

So sometimes those two goals are competing with each other. The other thing that I think that you bring up that really is really interesting because I was having lunch with a friend the other day and he anecdotally was saying, Oh yeah, my friends have this place in Breckenridge, second home property manager convinced them like, Oh, you're going to make a killing on Airbnb.

00:23:39:06 - 00:24:01:20

Speaker 2

You know, like, let us help you list. It's going to be a great short term rental managing those types of expectations. From the property manager perspective, I think is really important to understanding what your customer. That's of course they didn't get that like 70% whatever margin they were expecting to get on their place. They've decided it's not worth it to have strangers there and they can just leave it for their own use.

00:24:02:18 - 00:24:21:17

Speaker 2

So certainly an important, I think part of whatever a property managers are doing in terms of managing expectations is to dig into data like this as well so that they can help folks understand and level expectations. I always say it's better just like when you manage expectations is fine, as long as you're saying you're not going to overdeliver.

00:24:21:18 - 00:24:23:27

Speaker 2

Usually people are fine with bad news, I would say.

00:24:24:21 - 00:24:49:07

Speaker 1

Yeah, and other key thing to sort of keep in mind when you're sort of investing, when you're sort of looking at the projections and what you think a home may earn and maybe even what the property manager estimates are giving you or even what our own rental eyes are. Tool Right. That for you is that we are in an environment where we expect occupancies to fall further.

00:24:50:05 - 00:25:21:05

Speaker 1

So overall expecting about a 3% decline next year. So when you're looking at a market and we and Marc Ambinder show five years of history for occupancy, ADR, far from all the key metrics, get comfortable. Yes. With what your property's sort of earned in terms of occupancy. ADR over the past year, but also get comfortable with what those occupancy levels were in 2018, 2018.

00:25:21:21 - 00:25:38:19

Speaker 1

A lot of that do go into a recession that could or even just and with the supply trends that we're seeing now with and just supply continually to outpace demand, we saw that I think it was the.

00:25:38:26 - 00:25:39:08

Speaker 2

Rate.

00:25:40:14 - 00:26:14:16

Speaker 1

Of occupancy declines in the U.S. So that's a factor here. And then the other key factor when looking sort of forward is what do we expect to further happen in terms of home values, but also on the demand side. So I expect housing 23 is going to be still a year of recovery for international demand. And there's sort of some major urban centers that we expect demand to continue to recover on the backs of sort of the international recovery.

00:26:14:25 - 00:26:51:25

Speaker 1

We have a pack continually open up Chinese travelers coming back. There's still some tailwinds to some of these large cities, and that overlaps really closely with the a lot a lot of the areas where we expect to see falling home values. So going forward and get their forecast for home values over the next 1 to 5 years, and there's markets like San Francisco, Phenix, Las Vegas and high markets and California and Nevada, Arizona, Florida, where we are.

00:26:51:26 - 00:27:18:01

Speaker 1

And they expect to see significant declines in home values. So you marry that up with sort of rising occupancies, I think might be a lot of emerging opportunities over this next year that maybe aren't showing up today in the data, but will continue to evolve. And and it's going to be so important to have sort of a finger on the pulse of what's happening.

00:27:19:04 - 00:27:56:13

Speaker 1

And I know and we're putting out now data every week on all these markets. So updating market minder much more frequently. So all of our customers can stay up to date. And then also and the monthly reviews, the sort of regular monthly videos and podcasts that we do sort of keeping everyone up to date. I think this year more than ever, it's going to be really important to have your finger on the pulse of sort of what are the trends that are happening and knowing what markets there may be evolving opportunities to invest them.

00:27:57:15 - 00:28:15:21

Speaker 2

Oh my gosh, I love that. Yeah, it does seem so absolutely more so than ever that like data is this is your silver bullet for investment strategy, right? Because it is ever evolving and our tools are staying up to date with all of that. And certainly this concept, I'd say, of like the riches are in the niches, right.

00:28:15:21 - 00:28:35:11

Speaker 2

And so if you you've got the gumption and the ability and of course the tools. Shameless plug to get into the data. Right. Lots of opportunity, especially in. Exactly. Jamie I think what, what you're saying right with these markets that housing prices are going to fall in occupancy is still going to stay high. Still lots of demand there.

00:28:35:16 - 00:29:01:18

Speaker 2

And yes, spoiler alert, it's not going to necessarily be in places like Aspen, Colorado. Oh, where that's going to be the case. I'm so, so excited to dig into all 25 of the places I think we did. Firstly, I just want to pat ourselves on the back for the write ups because I think we do talk a lot about sort of what is driving demand, what the appeal of these locations are for a traveler as well as for an investor.

00:29:02:11 - 00:29:21:20

Speaker 2

Absolutely love, of course, that we've added in a shout out to remedy. Thank you guys for your help there. Added in an element of regulation. And because it is of course one of the most important things that you should be factoring into your investment thesis and lots and lots of good opportunities out there for folks. I don't know.

00:29:21:20 - 00:29:27:25

Speaker 2

I think you I think you summarize it perfectly, Jamie. I think we got to end on this high note. I think we did it. What do you think?

00:29:28:17 - 00:30:03:10

Speaker 1

I'll give a shout out to Blake Mullin doing all those write ups for us, digging out all these cities. Shout out to Matt Landers for holding our feet to the fire during the regulation scores added in to here this year. And then a shout out to all the investors this year. Let us know the markets. Yeah, and where you're finding opportunities and if there's any way that we can help out, we've got and maybe spoiler alert, a lot of new tools coming out to help you find and build your own best places to invest.

00:30:03:10 - 00:30:27:27

Speaker 1

Report for those larger investors. If you want a demo of our PD dashboard tool, that sort of has and the future of investing in it and and and giving us really a peek of what some of the new and best ability tools we're going to be rolling out our please reach out and we'd be happy to walk you through.

00:30:28:10 - 00:30:41:21

Speaker 2

I love that that was an even better ending. Yes please please let us know where you are investing in 2023, because I know a lot of you are out there taking advantage of this market. All right. Well, happy listening and happy investing, folks.