The Rental Housing Pyramid Scheme 🏚

What is real estate syndication and what can it tell us about the housing crisis?

As promised, we are back! And to celebrate, we’ll be discussing one of my favorite topics: slumlords losing everything. This weepy WSJ article¹ bemoaning losses suffered by “small investors” after the Federal Reserve raised interest rates provides an excellent case study of just how broken the private housing system is.

The article focuses on a company called Applesway Investment Group, one of Houston’s biggest landlords (the article states the company at one point owned more than 7,000 units worth over $500 million). Applesway, founded by enormous dickweed Jay Gajavelli, is what’s known as a syndicate, an appropriately sinister name for a type of company that pools resources from multiple small investors in order to purchase real estate. Applesway is in freefall, losing thousands of units in foreclosures, multi-million dollar lawsuits, and losses totaling nearly $300 million.

One bad Applesway spoils the bunch 🍎

How could a few interest rate hikes cause such a calamity? After all, the interest rate is currently sitting at 5%, hardly an eye-popping number, historically speaking. The answer is that Applesway, along with many other syndicators, is essentially a pyramid scheme that depends on minuscule interest rates and constant fundraising to remain viable. The short version is once the Federal Reserve raised interest rates in 2022, Applesway’s creditors demanded higher monthly payments. The company couldn’t keep up, defaulted on its floating interest rate loans, and lost properties in foreclosure. If this is ringing a bell for you, it’s because you may be remembering the subprime mortgage crisis from 2008.

Of course, this isn’t exactly like 2008, given we aren’t in a full-blown financial crisis, but I’d be remiss if I didn’t bring up the similarities. Namely, Applesway investors got greedy, didn’t do their homework, took a huckster at his word, and are now receiving just desserts.

As heartwarming as this story is, you may be wondering what it has to do with Housing Authority; surely we’re not so desperate for content that we’re resorting to dunking on landlords when they lose money. And while I hesitate to claim we’re entirely above that, it isn’t why I’m writing this piece.

A veritable buffet of financial bogeymen

Let’s examine a few lines from the WSJ article: “Everything changed when the Federal Reserve began raising rates last year, driving up monthly loan payments. Inflation contributed to higher expenses, and Applesway couldn’t raise rents fast enough to keep pace.” This seems like a rather innocuous statement at first, but it reveals a lot of the built-in assumptions of financial reporting, especially when it comes to housing.

The first sentence frames Fed rate hikes like Acts of God, as if historically-low interest rates are the birthright of every schmuck with a few dollars to throw at any harebrained investment. The article does point out that Applesway took out loans with monthly adjusted floating interest rates (a fantastically stupid idea), but spends only one sentence on it before moving on.

Speaking of moving on, let’s look at that second line. Blaming inflation AND Applesway’s inability to raise rents, what a doozy! The only thing that annoys me more than capitalists crying about interest rates is when they cry about inflation. Invoking inflation here is downright egregious. First, the article makes it clear just how badly Applesway neglected its properties, going so far as refusing to replace broken AC units (note: it is currently 106F in Houston). Gajavelli himself stated in an email to investors that Applesway was losing money due to increased property taxes, insurance, and mortgage payments from higher interest rates.

We need to take a step back to understand why the article’s discussion of inflation is so disingenuous. When people talk about inflation, they’re almost always referring to the Consumer Price Index or CPI, a measurement of average inflation provided by the US Bureau of Labor Statistics. When the article states “Inflation contributed to higher expenses,” we can only assume the inflation it refers to is the increase in CPI over the last two years. Material costs are part of CPI, but here’s the thing: material costs don’t seem to be a significant contributor to Applesway’s problems. We’ve established that Gajavelli refused to make crucial purchases when it came to maintaining units, and clearly, material costs weren’t important enough to mention in Gajavelli’s email to investors. What did bear mentioning were the costs of making and maintaining investments, something that CPI does not measure. Know what CPI does include? Rent increases.

Maybe the real inflation was the rents we raised along the way

Hopefully, you now understand why I find it so irritating when landlords, one of the biggest drivers of inflation, turn around and play the victim when the CPI goes up. And as annoying as this type of rhetoric is coming from landlords, WSJ taking it at face value is irresponsible nearly to the point of malfeasance.

So that brings us back to the last part of the quote I provided earlier, namely “Applesway couldn’t raise rents fast enough to keep pace.” This sentence begs the question, why couldn’t Applesway raise rents faster? Does the article answer it? Of course not, at least not until the very end. “And, as the company moved to raise rents, more tenants fell behind on their payments.” I am not exaggerating when I say these two lines are separated by about 90% of the article. Why? I won’t make any claims about quotable excerpts or cite any studies about how many people read entire articles, but I will say this structural decision seems suspicious at best.

The article referring to Applesway’s inability to raise rents—as opposed to Applesway’s tenants’ inability to pay those increased rents—speaks volumes. Rents don’t just go up as a result of little ol’ put-upon investors trying to survive after the big bad Fed raised their interest rates, and rent increases aren’t some unfortunate natural phenomenon whose only result is that a few investors lose out on profits. Real people, disproportionately minority women with children², lose their homes when rent goes up. And for what? So scumbags like Gajavelli don’t have to do anything useful?

And before you get mad at me for that last bit and try to tell me that being a landlord is real work, consider two things. One, I am perfect and never wrong and you’re obligated as a reader to be nice to me. Two, Gajavelli said himself “I’m sick and tired of working for my money.” Look, he said it, not me.

What does Applesway tell us about housing more generally?

I chose to write about Applesway because its collapse and subsequent coverage expose the fundamental brokenness of America’s for-profit housing system. A lazy jerk decided he didn’t want to work anymore, so he duped a bunch of gullible boobs into throwing money at his pyramid scheme until it blew up in their faces. In the meantime, hundreds if not thousands of normal people suffered through Houston summers with no AC only to have their rents raised and face eviction because Gajavelli and his grindset asshole investors fucked around and found out.

Ultimately, the investors in this situation will just lose some money. If there’s any justice in the world, Gajavelli will fare a lot worse, but I’ll believe it when I see it. Despite these relatively low stakes, coverage like the article we discussed here will make the investors out to be victims, whether of inflation, interest rate hikes, or pure circumstance, while systematically ignoring or downplaying the experience of Applesway’s tenants.

1. Will Parker for the Wall Street Journal, A Housing Bust Comes for Thousands of Small-Time Investors

2. Eric Gartland for the Center for Budget and Policy Priorities, Families With Children at Increased Risk of Eviction, With Renters of Color Facing Greatest Hardship