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Scaling Real Estate And Finding The Opportunity – Interview w/ J Scott

ILB 32 | Headed For Recession

J Scott is a former tech guy who accidentally fell into real estate. Starting with flipping 400+ houses, he focused his experience scaling businesses into scaling real estate. Now an operator of multifamily syndications, J shares where he sees the current opportunities in the market, how he’s navigating the unique circumstances in the market, and where he sees multifamily headed over the next few years.

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Scaling Real Estate And Finding The Opportunity – Interview W/ J Scott

We’re excited about this episode. This is with J Scott of Bar Down Investments. J shared his journey from his tech career and tech companies to real estate and got into it by accident, then ended up flipping 450 homes. He’s now syndicated multifamily. He’s part of the BiggerPockets community. He’s written four books on their publishing platform and host for their podcast.

He’s a wealth of knowledge. He’s zoned in on the multifamily space. It’s an asset class that we’re excited about in this economic environment. He shares a lot of the ins and outs of the things he’s seen as the tailwinds as well as the headwinds in the multifamily space. If you’re invested or looking to get into that space, check out this episode.

Welcome back to the show. I am your cohost Ben Fraser joined by fellow cohost Bob Fraser. We’re joined by J Scott. J, thanks for coming on the show.

I appreciate you guys having me. Thanks so much.

For those that aren’t familiar with J, he has been a real estate investor for a long time. He’s very tied into BiggerPockets and runs one of their podcasts. He’s written four bestselling books on real estate. He’s been investing in real estate for many years. We’re super excited to dive into your background and how you have positioned your portfolio and investing in this market now. Give a little bit of your background. I know you started in the tech world. Tell us a little bit about how you made that jump and what that was like in real estate.

My original career was in engineering and business. I started as an engineer and spent a long time in the tech world in Silicon Valley, working for some big companies like Microsoft and eBay. I went from engineering to the business route, which largely influenced a lot of what I’ve been doing over the last several years. I did some mergers and acquisitions work but was very much entrenched in technology and business for many years. 2008 rolled around and I met my soon-to-be wife. We decided that it didn’t make sense for us to be working 70 to 80 hours a week.

She was traveling four weeks a month and I was traveling a couple of weeks a month. It wasn’t a lifestyle that was conducive to starting a family. In 2008, we decided to get married. We quit our jobs. We moved from the West Coast to the East Coast. I won’t go into the long boring story but we fell into real estate by flipping a house. That flipping a house turned into a 2nd and a 3rd and a 10th and a 50th. Over the next several years, we’ve about 450 houses, which gets us to 2017, when I was starting to get the itch to do more business-related work again.

Real estate is fantastic. I enjoy real estate. I love scaling any type of business, including a real estate business but I missed the business and the team side of things, having partners and other people that I could work with to scale something large. In 2017, I started to think about other opportunities unrelated to real estate. After a few months of not finding anything that excited me, what I realized was I liked real estate. I was good at real estate. I knew real estate but still, I wasn’t happy doing the single-family flips and buying the single-family rentals. I wanted to do something larger and more scalable.

ILB 30 | Scaling Real Estate
Scaling Real Estate: There’s a lot of uncertainty in the market. Anybody that’s paying attention knows that. People can’t afford housing. Market rents are through the roof. That is good for us as real estate investors, but not good for the average lower middle-class family out there.

In 2018, I reached out to a friend of mine, Ashley Wilson, who ran a large multifamily investing company, and asked her to teach me the business. I offered to work for her for a year for free. She had access to my knowledge, efforts, network, cash, and whatever she needed if she would teach me the multifamily, the apartment business. She agreed.

Since 2018, we’ve been partners in Bar Down Investments, which is a business that buys repositions and resells large apartment complexes around the country. We have about $100 million in assets in that business and nearly 1,000 units. That’s mostly what I’m focused on these days. I still do a bit of tech consulting and advisory work as well.

That’s a cool story. You flip 450 homes for several years. You say it’s not scalable. It sounds pretty big scale to me.

It’s funny. One of the things I realized was I’m not good at real estate. I don’t particularly enjoy real estate but I love scaling and growing businesses. Real estate is no different than any other business. It’s a different inventory. Regardless of whether I’m selling shoes, food, or cars, a business is a business and the pieces are all the same. With real estate, I found a niche. Even though I didn’t enjoy the nitty-gritty day-to-day real estate pieces, I love the idea of still scaling a real estate business.

When did you get tied into the BiggerPockets community and the world?

I got tied in back in 2008. As soon as we decided to flip that first house, the first thing I did was I did what everybody does. I hopped on the internet and said, “Teach me about flipping houses. Where do I go?” I found the BiggerPockets forums and community and started posting questions. Within a couple of years, I had flipped a bunch of houses and I was answering questions. I then became good friends with the Founder of BiggerPockets, Joshua Dorkin. I did some consulting to him, for him, and with him to help grow BiggerPockets in the early years of 2008 to 2012. I’ve been tied into that community for a long time. It’s been a home to me. They’ve served me very well and I like to think that I provide some value there as well.

Talk a little bit about what you are seeing now and how you’re positioning going from the single-family world to now doing multifamily scaling that business. What do you see in the market now? It’s very competitive. It’s hard to find cashflow going in. Where are you finding opportunities?

2018 was a great year to get into multifamily. The market has radically shifted in four years. We’ve seen cap rates drop to incredible lows. Now, inflation is hitting big time, and debt is changing. Talk about some of where you are at and where the risks and opportunities are now in multifamily specifically.

There’s a lot of uncertainty in the market. Anybody that’s paying attention knows that. Things are still strong. Unemployment is down around under 4% again. Wage growth is pretty strong. Rent growth is strong for those of us in the real estate game. Everything is looking rosy if you don’t take the elephants in the room into account, which is a tremendous amount of debt for the country. It’s ridiculous inflation at this point.

Real estate gives you the opportunity to employ a long-term fixed-rate debt. It’s a great place to just park your cash. Click To Tweet

We can talk about whether that’s demand-side or supply-side inflation but regardless, there’s inflation. There’s the affordability of housing through the roof of how you think about it is very low. People can’t afford housing. Market rents are through the roof, which is good for us as real estate investors but not good for the average lower-middle-class family out there.

It’s a very mixed bag now. A lot of people believe and it’s hard to argue that, to some extent, we’re in a bubble. Maybe we’re in multiple asset bubbles. The question moving forward is, “Is that bubble going to pop? Is it going to deflate? Is the Fed going to figure out a way to slow things down? If they’re trying to slow things down, can they do that without popping the bubble and causing an economic crisis?” We don’t know.

What I’m seeing in my industry now is a whole lot of people who are circumspect, taking things slowly and trying to let the market play out before they make too many large moves. Being in multifamily now, being several commercial real estate asset classes is a good place to be. If for no other reason, then real estate is a great hedge against inflation. Even if all you want to do is wait out the market to see where things go or think there’s going to continue to be inflation over the next couple of years, real estate’s a great place to park your cash.

There are two reasons. One, real estate tends to track inflation. If inflation is at 3% to 4%, real estate tends to grow at 3% to 4% long-term. If inflation’s at 6% to 7%, as we saw back in the ’70s, real estate tended to track inflation at those rates. From that perspective, real estate is a great place to be. Secondarily, real estate gives you the opportunity to employ a long-term fixed-rate debt. That’s the single best hedge against inflation that there is.

By putting in place debt now, I get to pay off that debt while my wages, cost of food, or the cost of housing is going to go up. Everything’s going up in price. The one thing that doesn’t go up is my mortgage payment every month. We’re making more money at work and there’s more money out there. My mortgage payments are the same. Debts are a great hedge against inflation.

If I had to put my cash anywhere now, I’d rather be in real estate than in the bank, the stock market, and other non-cash flowing or non-leverageable assets. Do I know where the real estate market’s heading over the next couple of years? I don’t. Nobody knows. I don’t have a crystal ball but my money has to be anywhere. I’m more comfortable in real estate now than anywhere else.

In high inflation, the worst investment you can possibly have is cash, which is being lit on fire and burning up at 8.5% per year. You want to be short-cash and the way your short cash is, you’re borrowing. As you point out, you want to have good debt, which is fixed-rate debt. It’s affordable fixed-rate debt, meaning you can service the debt. When you get into trouble and can’t service and weather any storm that comes, that’s the only time you get creamed.

We are seeing huge prior to this inflation. The stretch we’re in now is where we’re seeing most of the big multifamily operators. We’re deploying bad debt, which is the bridge debt, high LTVs, and sometimes multiple debt stacks, equity stacks to reduce the amount of cash in and adjustable rates. That’s when it gets super risky. It’s one of their debt service covenants and how much equity they have in there. There’s going to be some fallout if there is any hiccup. You gave some worries but you gave a lot of reasons why you should be in real estate on balance.

We can’t control the macroeconomic landscape and the market. All we can do is make investments that allow us to weather whatever particular storm may be brewing then hope that the Fed does things correctly, get lucky, and doesn’t see a bubble pop or deflate. Maybe we could come in for a soft landing over the next years. I’m not necessarily confident of that but I’m hopeful.

ILB 30 | Scaling Real Estate
Scaling Real Estate: During a recession, most hard assets tend to go down in value, but market rents tend to stay flat.

It’s so hard to say, “Is unemployment going to suddenly spike up?” Now, the job market is hotter than blaze and huge pent-up demand. It’s hard to see certainly in the next year or 24 months, “Is inflation going to let up?” That’s pretty unlikely. If inflation doesn’t let up, then real estate is magic. It is the place to be. If you’re super worried and want to liquidate, please give us a call.

Certainly, where inflation is headed is a trillion-dollar question. I’m sure you’ve heard other people talk about this but we don’t know what’s driving inflation now. There’s demand-side inflation. There was a lot of money that’s been printed over the last several years. We print a lot of money and start putting a lot of money out there. It’s going to flow upwards. I’m not a big believer in the trickle-down of money.

The wealthy end up with a lot of this money and what do they do with it? They put it into hard assets. What happened? Do you see hard assets go up in value? Certainly, we’re seeing some demand-side inflation. We’re seeing a lot of big investors, institutional investors, and maybe even governments buying a lot of real estate in the US that’s driving prices up.

We’re seeing a lot of large companies and institutional investors buying stock. Now we’re seeing them buy crypto. We’re seeing inflation and all of these asset classes. We’re also seeing inflation across commodities as well but that makes you think, “Maybe it’s not all demand-side inflation. Maybe there’s some supply-side inflation as well.” With COVID, we’ve seen supply chain issues. We’ve seen a lot of small mom-and-pop businesses going out of business. We’ve seen a lot of larger businesses that are generating record profits.

There are very well some supply-side constraints here that are contributing to inflation as well. The Fed can raise interest rates. Interest rates will certainly fix the demand side when it becomes too expensive to borrow money to buy stuff. It becomes more attractive to put your money in a savings account than it was in 2021. People are going to spend less money. That’s going to fix the demand side but that doesn’t necessarily fix the supply side. A lot of what we’re seeing on the supply side would still fall out from COVID. Is that going to take six years? We don’t know.

If you look at the last inflation print, the largest component of inflation increase was oil and gasoline.

That’s the supply-side issue.

It’s a wild card. It could go down assuming we have peace in Russia and Ukraine. Maybe It could not and keep going up. Long-term, oil is an interesting commodity because the world’s largest producer of oil now is America. People don’t realize it. What happened is the magic of technology and horizontal drilling has completely changed the industry. When we saw oil prices rose a few years ago, all the producers in America ramped up their production only to be creamed when the prices went back down.

This time they’re not ramping up their production. They’re saying, “We’re going to wait,” because they were punished by the markets. They’re being a little slow. There’s a ceiling on prices. There’s a huge amount of idling capacity still in America.

If you’re going to put your money somewhere during a recession, the most compelling place to do so would be multifamily. Click To Tweet

The second-largest increase in the latest CPI was oil and then it was cars. That’s been a big supply chain issue with the car manufacturers.

My view is that we’re going to continue to see inflation but it’s going to be not much higher than this. We’re probably at the peak. We’ll see it start to ease a little bit but it’s not going back to 2% in the next months. It’s a safe bet to bet on it.

There are a whole lot of things that contribute to inflation but if you want to see where inflation is going, you look at the prices because that’s a big component of what we spend money on. We have to heat our houses and fuel our cars but it’s also a huge component of everything else we do in the world. If you travel, where are your travel costs coming from? A lot of it is transportation and transportation gets more expensive when oil prices go up. We’re an importing country. Our trade deficit is close to $1 trillion now. It takes a lot of oil to get those widgets from China or wherever over to our ports.

When the cost of oil goes up, it costs a lot more to get those things imported, and the price of our stuff goes up. Looking at oil prices is going to be a good indication of where inflation is headed. At the same time, you look over the last couple of weeks. Gas prices haven’t come down but crude oil prices have come down about 20%. That’s a good indication that oil companies are taking some profits.

We can’t fault them for that. That’s how our economy works. At the same time, part of what we’re seeing in this inflationary environment is a lot of the big companies showing record profits. They’re leveraging the fact that they match prices and not take a lot of flack for it because everybody’s talking about this generalized inflation. Coca-Cola doesn’t have to worry about them saying, “Coke is raising their prices.” Everybody’s raising their prices. There are a lot of things going on here and nobody knows how it’s going to shake out.

If inflation is a fairly safe bet and it is whether or not it continues at this rate or not or moderately high, I don’t see a better place to be the multifamily as primary and every other real estate class to a lesser degree. Multifamily not only is inflation-indexed, as you point out. It’s short the dollar, short cash. My prediction is we’re not going to see a recession but let’s say we do. You still have all this pent-up demand for places to live and all this household formation that’s systemic. It seems like it’s the perfect investment now for this environment.

What I like to tell people is if you think we’re headed toward an economic downturn, the most telling piece of data over the last hundred years is that during a recession, asset prices tend to fall. Housing prices and the market falls. Gold and silver go up. Most hard assets go down in value but market rents don’t. Market rents tend to stay flat.

Likewise, you don’t tend to see a bump in market rents, excluding the last few years. Over the last hundred years, we don’t see big bumps in market rents during boom periods. We also don’t see a decrease in market rents during bust periods. You look back at 2008 and everybody wasn’t directly impacted that didn’t own cashflowing real estate probably assumes that market rents dropped considerably back in 2008, 2009, and 2010. That’s not the case. In most markets, market rents were either stable or up a little bit. In the worst-hit markets, they were down maybe 1% or 2%.

It seems like it’s the place to be. Where do you see the most compelling place to put your money now if it’s not multifamily?

ILB 30 | Scaling Real Estate
Scaling Real Estate: During an economic downturn, self-storage tends to boom.

I got into multifamily back in 2018. The single biggest reason I chose multifamily syndication was that I had started investing with other real estate investors and other people’s syndications. I was investing in multifamily through other people. I’m a control freak. I don’t sleep well at night when other people are controlling my money. I like to control my money.

The single biggest reason when I came back to real estate that I decided to go into multifamily was that it allowed me to place my own cash in deals that I was doing. That is my preferred asset class not only as an active investor but as a passive investor. Instead of passively investing in somebody else’s deal, I passively invest in mine. In the last three deals, my partner and I put about $3 million of our own cash in because we think that is the safest place for our cash now.

It’s stuff that you’re in charge of, whatever that is.

I like multifamily. That’s where I’m putting my money. It’s the reason that I got into multifamily because I decided a few years ago that it’s where I want to be putting my money long term.

It is an interesting time because we all know that cash is on fire but at the same time, there is this frothy feeling in the market. We’re all seeing the deals that are trading for almost negative cap rates.

We were looking in Texas, in Dallas, a few months back and right before this inflation hit. You’re seeing cap rates in the high twos. It’s like, “You’re taking all this risk to invest in multifamily? It’s not a treasury bond. Are you getting treasury bond yields? It’s nuts.” People were paying for it. It’s super frothy markets.

Are you actively buying now? Are you buying into the run-up and price here? Are you being a little more cautious? How are you structuring?

Maybe we’ll see things ease up.

You’re seeing bank rates now on multifamily in the mid to high fours.

Unfortunately, rent control is a political hot button. We see many markets around the country that are moving towards more rent control. It is recommended that you should be aware of the political landscape of whatever market you’re looking to… Click To Tweet

One of the nice things about investing and betting on my own deals is that it makes me very concerned. I like to think I align my interests with my investors anyway but this forces me to align my interests with my investors. I’ll never do a deal that I wouldn’t have a lot of my time.

You are the investor. You align with yourself pretty well.

My partner and I had this spoken rule, “We’re not going to do a deal only to do a deal.” We like to keep our team relatively lean. We don’t have more employees than we need. We keep more 1099 than we keep full-time employees. Let’s be honest. In 2021, we did zero deals. We would have loved to have done 10 deals and bought 2,000 units in 2021. We didn’t find a deal, so we didn’t do a deal. The fact that we keep our team wean allows us to modulate what we’re doing without having to do deals to get acquisition fees to pay our team.

In 2021, we did no deals. In 2022, we’ve done two. We got very fortunate to find two off-market deals. We may not find another deal until 2023 or 2024. I don’t know. Anybody that feels like they have to be doing deals now is not in a good position. As you said, it can be tough to come by. When you see cap rates in the 2s and 3s and the low 4s, it’s hard to generate cashflow for your investors. You may still be able to find a good value-add project that needs a lot of renovation that, in 3, 5, or 7 years, you can sell for a huge profit. With cap rates at 2% or 3% in that 3, 5, or 7 years, you’re not going to be generating much more than 4%, 5%, or 6% in cash. Any investors that need cashflow to survive, it’s a tough place to be.

We’re pretty excited about multifamily. We think there’s a lot of money to be made in industrial markets tighter than a drum now. We think self-storage is a good place to be. There are a lot of things. Inflation heals all mistakes, truthfully. If you stay into a deal, even if you overpaid, you got a bad deal. As long as you can service that and hold it, you’re going to make money, generally.

In 2018, I decided multifamily was the best place to be. In hindsight, now that we’re four years in, I love multifamily. I have two asset classes. I like self-storage because it has a lot of benefits for multifamily. During an economic downturn, self-storage tends to boom. People don’t like to get rid of their stuff. They downsize and move in with families and roommates. They need to put their stuff somewhere. Instead of selling it, they think, “I’ll store it.” Self-storage is a great place to be now. A light industrial warehouse is also a fantastic place to be because the retail landscape is changing. A lot of companies are now moving to warehouse their inventory.

We’re looking very smartly at some retail as well. We’re seeing ten caps. Is that oversold? On cashflows at ten caps, are you kidding me? Especially if there’s a repositioning place. Retail is not dead. It’s shifting. It’s changing but it is not dead. JP Morgan said, “If you want to make money, you invest when there’s blood in the streets.” You got to be fearless when everybody else is afraid. When everybody else is afraid, it’s a good time to take a look and say, “Is this overdone a little bit?” To me, it’s a huge contrarian opportunity. There’s always something good and a place to play.

Going back to the multifamily acquisition, we’re all in agreement that, “Inflation’s here and real estate is a great place to be protected against that.” What we’re seeing is some of the risks that investors are taking in this market are not getting into a good deal but getting into a poorly structured deal with too much pref equity.

Real estate will do fine but the investment might not be fine because it’s poorly structured.

ILB 30 | Scaling Real Estate
Scaling Real Estate: Moving forward, it’s really going to be about who can manage the properties the best and who can carry out their business funds.

We’re seeing a lot of these deals that they’re using bridge financing. You have some of the adjustable-rate risks. You’re probably buying an interest rate cap but that gets expensive. You’re also putting pref equity on top. You’re effectively leveraging to 90% or more sometimes.

With the debt service, they might be on the fringe of their debt service coverage. If they have any hiccup inability to rent, they lose the deal. The smartest place to play is to make pref equity now or debt to be offering those terms to people and being ready, “They stumble and I take over the property at a discount.”

One of the biggest risks I’m seeing years ago was that 2018 was a great time to get into multifamily. A lot of people did. What they found is they projected these 3, 5, 7 year holds. By 2020, their properties rose tremendously in value. The stuff in 2019, they sold in 2020. The stuff in 2020, they sold in 2021. They started to get this idea that, “We always reject 3 and 5 years out but we’ve been able to sell things after 1.5 to 2.5 years. Let’s start taking on properties where we can project a sale in 2.5 or 3 years, which we can talk about.” It’s unrealistic for a full repositioning.

Generally, a repositioning takes about two years to do all the renovations and then you need a year of stabilization to get your trailing twelve months of financial data, then you need a few months to sell. Three to five years is pretty reasonable for a full repositioning but all these investors saw that they were able to sell for huge profits after 1.5 or 2.5 years. The properties they started syndicating in 2021 and now 2022, they’re projecting out, “We can keep doing that. We can do a 2 or 3 projection where we don’t do a full repositioning. We only need a bridge loan for three years. We’ll buy a rate cap. We’ll get 1 or 2 extensions and maybe that will be great.” Who knows?

You could get three years in and then you see the downturn. Now they’re running out of extensions and the rate caps are about to expire in year five. What do you do? What I like to tell anybody that’s in this business is it’s great to have a plan A that’s 2 or 3 or 5 years but make sure you have a plan B, C, and D that will allow you to hold this property for 7 years or 10 years or at least be able to tell your investors, “If something bad happens, here’s my mitigation. Here’s what I’m planning to do.”

We’re a big fan these days that everything we’re looking at and putting offers in on in the last two properties we bought last month and the month before was assumable loans with ten years left. That’s our mitigation plan. We have had fixed-rate debt for ten years. Worst case, if there’s a downturn, hopefully, ten years will allow us to weather it.

This is probably a pretty good interest rate on the assumable?

One was under three. One was under four. The one that was under 4 is 3 years of IO left. They were great rates.

That’s such a great point. You may have a three-year plan but you better have a ten-year plan that’s workable because in ten years, at 8% inflation, you’re going to see the price of the value of that property based on inflation. It will go up about 50%, double over in ten years if you can raise rents to keep up with inflation without a change in cap rates.

In this environment, cashflow is king. Click To Tweet

You’re going to make money. You just got to hold onto the property. You got to not lose the property no matter what you do. In inflation, it does in real estate. We’re going in with 3 to 5-year business plans on all of our purchases but we have a secret ten-year plan on the shelf. It’s very doable and we’re going to make our investors whole no matter what happens. That’s what I love about this. You’re going to make money one way or another way.

The last years in multifamily have been about acquisitions. The next couple of years is going to be about asset management. It’s going to boil down to, “Who can manage their properties the best? Who has the best business plan? Who has the best property managers and the best asset managers? Who has the best relationships with lenders?” That’s what’s going to drive the next couple of years.

A lot of big syndicators in this business are my friends. When I have investors that ask me about my historic returns, what I like to tell them is, “Don’t listen to me. I can give you big numbers. I’m not giving you big numbers because I was that smart. If I didn’t make a lot of money, I’d have to be an idiot. It was so easy to make money.”

Luck has always been the best investment strategy.

Moving forward, it’s going to be about who can manage the properties the best and who can carry out their business.

One of the interesting thoughts I’d love to know your comment on is we’ve seen incredible rent growth in the past years. There are multifamily investors that have been a big benefit. Do you see any headwinds from rent control or other regulatory risks that are going to affordability? The single-family side has been going down quite a bit. It’s the same with rent. Wages are increasing but not at the same rate as rent. If it’s sustained, it’s going to create some friction. What do you see there if they’re going to be challenges and headwinds for rent growth going forward?

Let me start with your specific question about rent control. I like to stay away from politics. Unfortunately, rent control is one of those political hot buttons, whether it should or shouldn’t be. That’s beside the point people will take a partisan stance there. I see many markets around the country that are moving towards more control of the real property markets in general. It’s going to be much harder for us as investors, landlords, and syndicators to be profitable in those markets. I certainly recommend that people be aware of the political landscape and whatever markets they look to invest in, then take that into account.

As to the larger question of where I see market rents headed, before, I said one of the nice things about real estate is that market rents never seemed or rarely seemed to drop. They slowly go up. Over the last few years, that slow increase has jumped. I hate to say this time is different because this time is never different. You almost have to wonder, “Is this time going to be a little bit different? Are we going to see a reversion to a mean when it comes to rents when unemployment starts to go up and wages start to stagnate if they do?”

I’m not saying they will. Who knows? Maybe this crazy market will continue for ten more years. If we see a stagnation in the market, unemployment increase, or real wage growth compared to inflation be negative, it’s possible. People aren’t going to be able to afford where they’re living now. We may see a drop in market rents. With that said, we’ve seen such a boost in rent over the last couple of years. Anybody that bought back before 2022 or the middle of 2021 is probably still okay but we could see a reversion to the mean in rents. We could see dropping rents or at least a flattening out until GDP catches up a few years out.

ILB 30 | Scaling Real Estate
Recession-Proof Real Estate Investing: How to Survive (and Thrive!) During Any Phase of the Economic Cycle

What do we see in rent growth in 2021? Was it 14% or something like that? It’s incredibly high. I’ll go out there on a prediction. We might see one more of another big jump in rent increases, and here’s why. The reason why I would say this is because the Great Recession caused a massive amount of wage growth. We saw dramatic wage growth. People are feeling pretty flush. Some other stats show household net worth is super high, and household net income has taken a big jump up. We could see one more.

Not to mention all the supply shortages of this household inflation.

This is one of the things worth mentioning and I see this a lot from folks in my position that are doing syndications. I’m sure you’ve seen this as well, where you hear about this crazy rent growth. You see it forecasted through CoStar, Yardi, or whatever tool you like to use. You see these 5%, 6%, 8%, 10% forecasted rent growth. You bake that into your numbers but at the same time, you don’t bake in 8% inflation in your expenses. You say, “That’s only 2% or 3%. I can rely on the rent growth. Don’t even worry about the expense growth.” They have 8% rent growth and 2% expense growth and that’s not realistic. Unfortunately, it’s a double-edge.

It goes both ways. J, I’d love to hear your final thoughts here. You wrote the book Recession-Proof Real Estate Investing. From a passive investor standpoint, what are the words of advice or caution you would give a passive investor looking to allocate more to real estate, especially in this environment?

In this environment, cashflow is king. Years ago, I would’ve said lending’s a great way to make money but with inflation, the lender’s getting crushed. Transactional type investments don’t make sense. I was investing in flipping partnerships years ago. We’ve seen interest rates bumping and who knows that price could drop 5% next week? We don’t know.

What I recommend to anybody that’s investing passively now is to rely on the cashflow because cashflow is consistent and can weather storms. Not negative cashflow but positive cashflow. I like any investments that have at least a five-year horizon. I prefer an 8 to 10-year horizon. I like those investments that can weather a vacancy bump like multifamily. Multifamily, triple net leases, and self-storage tend to be pretty resilient to vacancy.

I like the bread and butter, which is real estate investments. I know it sounds boring and simplistic but now’s not the time to get fancy and invest in alternatives and crazy asset classes. I’ll also point out and this is important, that the biggest indicator of risk is always going to be returned. If you want lower risk at this point, don’t go into a deal that’s promising you 30% and 40% returns. Can they return 30% to 40%? Very possibly. I see a lot of those deals. A lot of those deals happen to return 30% and 40%.

The new construction ground-up development stuff over the last couple of years and some alternative type investments have returned a ridiculous amount of money but there’s a correlated amount of risk when you’re being promised 30% and 40% returns. A lot of people don’t realize that returns are directly correlated to risk. The higher the return, the higher the risk.

If you want lower risk, go after those investments that tend to be low in return. Also, you need to trust the operator, the asset, and the business plan. You need to know what the other risks are. Generally speaking, I’m looking at lower risk even if it means low return investments to weather the storm if there’s a storm. There may not be a storm, but if all indications are, then it’s possible.

J, thanks so much for joining us in the show and sharing some of your thoughts and wisdom. What’s the best way for the audience to get ahold of you if they want to get some of your books or learn more about the Bar Down?

If anybody wants to learn more or contact me, it’s www.ConnectWithJScott.com. That will link you out everywhere.

All right, thanks so much.

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About J Scott

ILB 30 | Scaling Real Estate

J Scott (he goes by “J”) is an entrepreneur, investor, advisor, author, and partner at Bar Down Investments, focused on buying and repositioning large multifamily properties. In the past fourteen years, J has bought, built, rehabbed, sold, lent-on and held over $150M in property around the country. J holds strategic advisor roles in several companies and is the author of four BiggerPockets books on real estate investing, including the best-selling, The Book on Flipping Houses. Find out more about J and connect with him at www.ConnectWithJScott.com.

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