The 2025 “Asset Bubble” is Ballooning: Is It Time to Hoard Cash?

Dave:
Is your money locked up in single family real estate? Are you ready to explore new ways to grow your wealth? Today I’m joined by Jay Scott, a seasoned investor who’s tackled everything, every type of asset class and is an expert in portfolio diversification. And today we’re going to look at which opportunities are hot, which might be cooling, and how to decide if it’s time to stick with what you know or start diversifying. Hey everyone, I’m Dave Meyer and keep watching because by the end of this episode you’ll have a roadmap for building a more resilient and profitable portfolio. Let’s get into it. J Scott, welcome back to On the Market. Thanks for joining.

J:
Absolutely. Thanks for having me, Dave.

Dave:
I am excited to talk about various different asset classes and anytime I try and talk about this with Kathy or James or Henry, it’s impossible they only invest in real estate. So let me just ask you, before we get into this, do you only invest in real estate? Probably should ask you before you came on, but do you invest in other things too?

J:
I invest in a lot of things outside of real estate. I’m probably over allocated in real estate these days because I, for obvious reasons like real estate and we can talk about that, but I’m certainly not fully allocated to real estate and I’m diversified across quite a number of asset classes.

Dave:
Okay, good. Me too. This is exactly why I was hoping you could come and share some personal experience about investing across different asset classes. But let’s start with the obvious one, which is of course real estate. You said you’re, can you tell us just a little bit about what your portfolio looks like now and why you feel?

J:
Yeah, so I’ve been bullish on real estate. It’s the asset class that I know the best. It’s the asset class where I feel like I have the most control. So I have been comfortable putting probably more of my net worth into real estate than I would recommend other people do. I’m probably 60 to 70% real estate right now, which again is not something I would recommend for most folks. Certainly I recommend having a decent amount of money in real estate, either passive or active, depending on your inclination, but probably not as much as I do. And in terms of asset classes within real estate, I own about 1100 multifamily units. I own about a hundred single family units and I then have probably about five to 6,000 units of purely passive investments in real estate. So mostly the residential space. I don’t have a lot in commercial, but there are some commercial asset classes I like as well these days.

Dave:
Alright, great, thank you. And so clearly you have a lot of experience cost different areas of real estate. Now you said 60, 70% and that’s over index. Is that because current market conditions make you feel like there’s a better use of your money or is it just sort of high level you think in an ideal world you would be a little bit more diversified outside of real estate regardless of current conditions?

J:
Yeah, let me be clear. Everybody’s going to have their own personal utility function for risk and reward and how diversified they want to be at this point. I’m in my early fifties, so I’m an old guy and I’m getting to the point where I’m not willing to take a ton of risk
With my wealth. I want to be relatively diversified and that’s why I guess in an optimal world, and part of the reason why I’m probably over indexed, over allocated to real estate is simply because real estate is pretty illiquid in the last couple years. Real estate’s been more illiquid than it had in previous years, but for me the ideal amount of real estate in my portfolio would probably be closer to about 50%, but I don’t blame anybody if you’re younger and you’re looking to take a little bit more risk or you’re more actively more hands-on involved in real estate allocating more than 50%. It’s a personal decision. So when I talk about being over allocated, it’s just based on my personal utility function for risk and return.

Dave:
And given that everyone listening to this take everything that we’re talking about with a grain of salt, that there’s going to be different situations for different people. But let me pose it to you this way, Jay, if you just got a hundred grand, if someone just handed you a hundred grand today, what would you do with it? Would you put it in real estate?

J:
I wouldn’t.

Dave:
Okay.

J:
If somebody were to give me a hundred grand today, I would put it in the bank, high yield savings account, cd, maybe even treasury bonds. At this point I am feeling like cash is really important. I feel like we have some interesting both headwinds and tailwinds in the market and so cash is a good downside protection. So if things kind of go bad, and I find that more of my portfolio is either illiquid or dropping in value, having the cash on hand is nice just to kind of use as an emergency savings fund. On the other hand, if we have some of those tailwinds and things go exceptionally well and opportunities present themselves, then having that cash on hand can provide me the opportunity to jump on potential deals. So right now I don’t know what the future holds. I mean none of us ever know what the future holds, but I think right now is kind of a little bit more vague in terms of my crystal ball than it normally is and I could see things getting better or getting worse and I think cash right now would solve both of those problems.

Dave:
I sort of feel the same way. I mean I’m still looking at real estate deals, but to me, across every asset class I feel that way. I am not super bullish on the stock market right now. I’m not bullish about real estate, but it’s not super clear what’s going to happen over the next couple of years. I think commercial real estate still has maybe not a leg down, but there’s still a lot of uncertainty to work through in that market. So cash interesting, but are you worried about inflation? Do you feel like there’s a missed opportunity? It sounds like what you would recommend is playing it safe right now, even if that comes with some risk of lost opportunity.

J:
There’s so many macro economic variables at play right now that it’s really difficult to figure out where things are headed. Let’s start with the obvious. We’re in an asset bubble in a lot of asset classes. Single family is still mostly unaffordable for new homeowners and is well above that 120 year trend line of what we normally see with single family growth. Multifamily is probably the other way. Multifamily has kind of seen a crash over the last couple of years, so I wouldn’t put it in that category. But then you look at the equities market, the stock market and stock market right now is valued at about twice or domestic GDP, and we have a term for the relative value of the stock market to GDP. It’s called the buffet indicator because Warren Buffet really likes this metric for determining how over or undervalued the stock market is. And historically that buffet indicator has shown that somewhere around one time GDP. So the stock market being valued at about the same as our domestic GDP is about right. And so being twice GDP right now, you could argue that the stock market is overvalued by up to double. And so we’ve seen Warren Buffett pull a lot of cash out. I mean he’s sitting on hundreds of billions of dollars in cash if not more. And so I don’t think it’s hard to argue that we have some overvalue in the equities markets.
Likewise crypto, I mean crypto, hard to say what crypto’s worth if it’s overvalued or undervalued, but we have seen a tremendous runup over the last couple months, and so a lot of people could argue that crypto is overvalued and again, across most asset classes right now what we’ve seen is things are overvalued. Now, what’s driven these bubbles, if you want to use that term, for the most part it’s been inflation. The government has printed so much money over the last eight years, even in the last 20 years, let’s call it back to 2008. The government’s printed so much money that there’s all this money in the economy that’s flowing eventually to the wealthy and then the wealthy invested in assets. And so all this extra money is going into assets and kind of over-inflating everything. So the question is are we going to continue to see this inflation over the next couple of years?
If so, is that going to continue to prop up these asset markets? And if something were to happen where let’s say the real estate bubble were to collapse or the equities market, the stock market bubble were to collapse, would the government step in and print a whole lot more money that would then prop those up again? So yeah, I mean in fact, I think we’re probably in for some stable asset markets for a little while, but even if we do see them crash, I think the government’s going to step in and do what they have to prop them up. So

Dave:
Is that just kicking the can down the road even more though

J:
It feels that way

Dave:
As an investor, that’s what makes this so hard, right, because if there’s going to be inflation and they’re going to print more money and prop up the asset values, you want to have your money in those asset values to keep pace with inflation, right?

J:
You do, and historically real estate has been the single best way to mitigate or hedge against inflation. If you look at 1900 through 2014, what you see is that the inflation trend line and the real estate growth trend line are basically in sync. We’ve seen real estate grow at the rate of inflation for 114 years. Now, since 2014, we’ve seen real estate kind of run away from that trend line, but there’s good reason to believe that real estate and inflation are highly correlated, and so if your goal is simply to protect your wealth, real estate’s a great way to do that.

Dave:
So your preference for cash right now, does that mean you’re going to sell assets?

J:
I have been selling a bunch of assets over the last couple of years
And for the most part it’s not just to hold cash. I mean certainly I’ve tried to bulk up my cash reserves, but it’s also to find other opportunities or to await other opportunities because I do think there’s a reasonable chance that we’re going to see softening in certain asset classes. Maybe not the entire economy, maybe not all of real estate, but I think we will see some opportunities. And so kind of rebalancing my portfolio, taking money out of things that I feel like I was highly over allocated to and now putting it into things that I’m less over allocated to has made sense for me personally.

Dave:
Are you willing to share just some of the things you’re selling? Is it real estate or stocks?

J:
So selling a bunch of real estate, we have sold, and this isn’t necessarily reflective of my views on the market overall, but I owned a bunch of single family houses in Florida and I am not bullish on Florida real estate for a couple of reasons. One, we saw such an influx of population over the last couple years that things kind of got too heated and shot up in value. We’re starting to see that soften. We’re starting to see population trends kind of reverse and a lot of people are moving out of Florida, we’re not growing nearly as quickly and we’re starting to see housing prices come down. Additionally, we’re having a problem with insurance in the state where insurance costs are doubling, tripling, quadrupling over the last couple years. And so it’s making the economics of owning rental real estate really difficult to justify. And so for me, that’s kind of been an opportunistic sale. We bought a bunch of stuff back before covid, it shot up in value. I think things are softening, so we’re selling and we’ll probably allocate that money to something again outside of real estate just to kind of rebalance that portfolio because right now I feel like I have too much in real estate.

Dave:
You live in Florida, so you’re seeing this firsthand or experiencing that and listen that kind of market, you can only do something so much. It just feels like regardless, as you said of how you feel about the overall asset class, there are certain areas where you feel like, I’m sure you did well on those properties. And it’s like the risk reward profile now has changed not just because the risk has gone up, but also the reward profile has declined a little bit.

J:
Yeah, remember there are different ways we make money in real estate. We make cash flow, appreciation, tax benefits, loan pay down. Those are kind of the big four ways. When we bought these properties back in 2018, 1920, we were making decent cashflow because we bought them cheap and rents were pretty high. Expenses were pretty low during the covid years and since Covid, we made a lot of appreciation. We’ve been paying down these loans that we got at three 4%, which has been great, but now with expenses exploding, property taxes going up and insurance costs going up and labor and material costs going up and utility costs going up, we’re seeing very, very little cashflow. And so yeah, I’m not saying that these investments are bad, but as you pointed out, sometimes the return profiles change and for me, I want cashflow these days and I’m just not seeing it in these properties. I’m not comfortable that we’re going to get a lot of appreciation over the next couple of years. So for me, looking for greener pastures is just the right move for these properties.

Dave:
We have some more to cover with Jay, but first, let’s take a quick break. Stay tuned. Welcome back to On The Market. I am Dave Meyer here with Jay Scott discussing where you should put your money. Next. Let’s pick up where we left off. What about stock? Are you holding onto your equities portfolio or are you selling that too?

J:
Yeah, so I’ve never been tremendously allocated to stocks. What I do own in the market is for the most part diversified ETFs. So I’m certainly not going to preach personal finance here. BiggerPockets has a great podcast for that. But I will say that if I’m going to invest in the stock market, trying to pick individual stocks has not been very lucrative for me. I haven’t been very good at that. I do trade some options. Again, haven’t been tremendously good at that. So for me, diversification in the market is kind of the way to go when I do invest in the market. That said, I think the market is highly overvalued right now.
The bulk of market returns has been driven by a very small set of stocks. We talked about this thing called the Magnificent seven, which are the seven companies that have kind of driven equities growth over the last couple of years and they’re in the tech sector and AI has propped them up, but for the most part, a lot of the market is slowing down and earnings are still decent because again, inflation and growth is still decent for a lot of these companies. But if you look at their price to earnings ratio, a lot of them are higher than they have been in history. And again, the overall value of the market is so high right now that it’s probably not sustainable. So for me, I’m comfortable taking some chips off the table in the stock market and waiting for some better opportunities.

Dave:
I’m just candidly thinking about doing the same thing and I don’t really pick individual stocks a little bit, but I had Scott Trench on the BiggerPockets podcast, Scott Trenches on, he knows much more about this stuff than I do, and we were sort of just chatting about how overvalued the stock market is and he was like, I think I’m going to sell a lot of my index funds and buy real estate. And right after that, truly that day he sold 40% of his stock portfolio and is using it to go buy a multifamily property, I think in Colorado for cash, which if you’re trying to take risk off the table, that seems like a pretty good option to me and it sort of got me thinking about it. I have a hard time seeing where the upside is for the equities market right now. How much more can it possibly go up?
I’ve been wrong about that in the past, but I do feel particularly nervous about it. And I read this article about the similarities between the current market and the.com bubble, and it really resonated with me that during 98 to 2001, the peak of the.com bubble, it was the scenario where everyone sort of knew the internet was going to be huge. Everyone agreed, big deal going to change, the whole economy is going to change society. And people were just like, I just want to bet we’re putting money in, we’re betting on pets.com, we’re betting on all these crazy companies that have no underlying fundamentals. And then it blew up. This analysis I was reading is kind of like, this is what’s going on with AI right now. People are dumping money into the stock market. Everyone agrees AI is huge and it is, but no one knows how we’re going to make money off of it.
You’re betting on meta because you think they’re going to win, but no one really knows, right? No one, they don’t have a proven business model based off ai. We know that Amazon’s pouring money into it, but then a company like Deep Seek comes along and all of a sudden you see that there’s of course going to be disruptors in new entrants into this market and maybe they’re the ones who make money. And so that’s why it feels so bubbly to me. We know AI is going to be huge, but it’s not based on fundamentals, what people are betting on. It just seems highly speculative.

J:
There will be winners, but trying to figure out those winners long-term is really tough. I mean, you mentioned pets.com. I made a lot of money day trading pets.com. Luckily I didn’t make any long-term bets on them. Same with a company called Books a Million, which I thought was going to do better than Amazon. And so you can’t predict these things. I do want to say one thing, and I’m talking about how I think the stock market’s overvalued. You’re talking about Scott taking out a significant portion of his net worth from the stock market
Just to make sure that we cover both sides of this. I’m sure there are a lot of people sitting there, and I don’t fault them at all, that are saying, look, that’s ridiculous. Time in the market beats timing the market, and so you put your money in, you leave it and it grows. And so I don’t fault anybody who takes that view because the reality is most people who try to time the market end up losing money. So I’m not saying I’m smarter than anybody else, I’m just giving my opinion. And so it’s just something to consider.

Dave:
Totally. I agree. And I’m not set on selling. It’s just something I normally don’t even think about, and right now I’m kind of at least just playing with the idea. Of course, you pay taxes too though, so if you’re going to pay capital gains on that 20%, is that paying that tax worth the potential downside? It depends, I guess how bad you think the downside is. If you think the downside’s 30 or 40%, but if it’s a 10% correction, probably not. So it’s super hard. Now, what opportunities are you looking for? Is there anything you have a line of sight on or are you just kind of becoming less aggressive right now?

J:
I’m kind of sitting back and I’m waiting. There’s a lot of things at play. I think single family real estate, I said two or three years ago that I think we’re in for five to seven years of flat single family real estate values. So far that’s been true. I think for the next three to four to five years, we’re going to be flat real estate values. While that inflation trend line kind of catches up to the real estate value trend line. And so I think real estate is likely to be relatively flat over the next couple of years, but there are other asset classes within real estate that might be interesting. So let’s talk about multifamily.
Multifamily has seen basically a 2008 type event over the last couple years. In 2008, single family took a 20 to 25% hit across the country over the last two and a half years. In multifamily, we’ve seen between a 25 and a 30% hit to values. So basically what we’ve seen in multifamily over the last couple years is worse than what we saw in single family back in 2008 in the Great recession. So there could be some opportunity in multifamily just because we are now kind of at the lows over the last 15 or 20 years. Additionally, we’re not seeing a lot of housing starts and building permits, meaning we’re not seeing a lot of developers start development on multifamily real estate, meaning over the next couple of years, while populations probably continue to grow, we’re unlikely to see a whole lot of new inventory come online. So with less supply and more demand, it could be that we see higher rents and higher prices. Now that said, there are a lot of political things at play that we can’t necessarily factor in right now. Number one is things like tariffs. As we’re recording this, the president has been talking about putting a 25% tariff on aluminum and steel.

Dave:
Yeah, I think that’s going into effect today. We’re recording this on February 10th, just so everyone

J:
Knows. And so that could have a tremendous impact on building costs and tariffs on other things like lumber. If we see tariffs on lumber or other building materials or construction materials or finished materials out of China, could cost a lot more to build. And we may see builders kind of sit on the sidelines for a while, and that means we’re going to have even less supply come online. But then on the demand side, we have deportations. So if we see a million people, 2 million people, 5 million people, like some are talking about deported, well, that’s going to cut back tremendously on demand for real estate units. And so that reduction in demand could soften prices and soften rents. Then you have all this stuff happening with federal employees. So we’ve heard talk about cutting hundreds of thousands, even millions of federal employees. If you look at the numbers, we have about 150,000 federal employees in dc. If you take the surrounding area, Maryland and Virginia, it’s about 600,000 federal employees. Imagine if a quarter or half of them got laid off, they’re probably not going to stay in that area because it’s tremendously expensive. When you have hundreds of thousands of people leave a city overnight, that can really change the economics of real estate in that city. And so we could see, and also as well in other places that are heavily concentrated with federal employees, we could see the economics of real estate change overnight depending on what happens with the current administration.

Dave:
Yeah, it’s just too early. We just don’t know yet. And we’re three, four weeks into the Trump’s term and we’ve seen talk of tariffs. They’ve come on, they’ve come back. We’re seeing a lot of layoffs or hiring freezes, and that data just hasn’t come out yet. We don’t know how that’s going to ripple through the housing market, through the labor market. For that reason alone, the holding cash thing is pretty appealing. Still ahead. We’re going to dig into whether it’s time to sit on cash or jump into new investments. So don’t go anywhere. We’ll be right back. All right, let’s dive right back in with Jay Scott and explore where you should consider investing next. I worry about holding too much cash personally. So I’m still looking at real estate deals, single family, small residential kind of stuff that I think is pretty recession resistant. Not all of it is, but I look at that. Are you saying that you’re just looking at nothing right now?

J:
No, we’re certainly always looking in the multifamily space. We probably look at a hundred deals a month in the single family space, in the single family space. I’m not actively, I have a partner that I buy single family with and we’re still buying one or two properties a month as flips or rentals. We’re still being active, just not to the same degree converting these looks into actual deals as we were a couple years ago. So we’re looking at as many properties, but we’re being very selective. We’re increasing our criteria that we’re using. We’re lowering our expectations In terms of interest rates, I mean that’s another one that we didn’t really talk about,
But what we’ve seen over the last month or two is that there’s a good chance Federal Reserve isn’t going to be bringing interest rates down much this year, if at all. And even if they do, it’s reasonable to assume that 10 year treasury rate’s not going to come down, which means mortgage rates aren’t going to come down. And so we could be in for another year, even two years of higher mortgage rates, which means all of those people who were suggesting, Hey, buy now and refi when the rate drops and make lots of money, it may be a little bit longer before the rates drop. And so if you’re not cashflow positive now, you may be in for a tough year or two. So that’s another thing to keep in mind. But again, we’re still looking at deals. We’re just being a lot more conservative on our underwriting assumptions. Things like our expenses, things like our rent growth, things like our mortgage rate. And if a deal comes along that still meets that more conservative criteria, we’re jumping on it so we’re not stopping.

Dave:
Okay. That’s basically how I feel about it. It’s just be extra vigilant about it and really only buy the cream of the crop right now. And there will be, I think there’s going to continue to be decent deals out there, but you have to sort through a lot of crap, to be honest. Like you’re saying, you’re looking at a hundred multifamily deals, probably not buying a lot or any of them. So I think that’s just the reality of it, but that’s just being an investor, right? There are sometimes where deal flow is abundant, sometimes where it’s pretty scarce. We’re in a scarcity time, but there are still absolutely good things to be looking at right now.

J:
And outside of real estate, one asset class that I invest in pretty heavily is passive business investments. So specifically in the technology sector, things that are often called angel investments. So I invest in startup technology businesses, and while historically that’s been pretty lucrative, what we’ve seen over the last couple of years is those types of investments are having the same issues that real estate is. So if you see real estate, especially like commercial and multifamily, real estate interest rates are hurting a lot of deals simply because these properties are coming up on the end of their loans, they need to refi and interest rates are higher than when they originally took out loans. We’re seeing the same thing in the business world where a lot of these businesses that take venture capital, they get two to three years of cash to run their businesses, but they know they’re going to need cash again in two to three years. Well, we’re now going on three to four years since venture capital was throwing money around, and a lot of these businesses are running out of cash and they’re trying to figure out where they’re going to get their next two to three years worth of cash. And so we have a lot of businesses that otherwise would be very viable. They’re building great products, they’ve got great teams. They may be close to profitability, but if they can’t fund the next couple years of development and growth, they may be having layoffs and investors may be losing money.

Dave:
Similar to you worked in tech for a little while before I was full-time in real estate. I have a lot of friends who work for venture capital, angel funds, that kind of stuff, and their companies are getting hurt. It’s hard to find money for them, and that’s not always a reflection of the quality of the businesses. And so yeah, it’s a good opportunity to find this. I think this is why you see people like Cody Sanchez and Alex or Moey too. There are a lot of businesses out there that are just struggling right now, even though they have good fundamentals where people are trying to buy up those, even if they’re not tech companies, service-based businesses and that kind of stuff as well. So Jay, I am curious if you’ll give me some personal advice about asset allocation. I’m buying a house in a couple months and I’m wondering, should I buy it for cash if I have the ability to do that, should I do that and save myself a 7% interest rate or would you put similar money into a single family rental property? I look at deals that can break even get a three or 4% cash in cash return in a decent market. Which one would you do? Because I’m really on the fence about this.

J:
Let me start with kind of a higher level maximum that I’m operating off of these days. It used to be that I looked at my portfolio from a diversification standpoint as asset classes. I wanted this much in real estate, this much in the stock market, this much in tech businesses, this much in crypto, this much in bonds, et cetera, et cetera, et cetera. These days, I’m less concerned about the asset class and I’m trying to diversify more based on liquidity. I want a certain amount of assets in my portfolio that are highly liquid, another number of assets that are relatively liquid, another that are maybe more illiquid, and then some that are completely illiquid. So that gives me the opportunity to ensure that, again, if things go well, I have liquidity so that I can jump on opportunities and if things go poorly, I have cash that I can sustain my family and my businesses while we work through some economic softening or whatever the issue is. So for me that diversification these days is a lot more focused on liquidity versus illiquidity as opposed to real estate versus stock market versus something else.

Dave:
I just want to explain to everyone, liquidity is sort of a relative term, just how easily you can turn an asset into cash. So a cash is obviously the most liquid asset, something like a business or Jay’s Angel investments, highly illiquid asset. And then I don’t know how you consider real estate. I’d say rental property, real estate, relatively illiquid takes probably months to sell. But I’m curious about what you think about a primary residence because you could refi, you could heloc, but go on.

J:
Yeah, so one of the nice things about a mortgage for a primary residence is unlike commercial loans, you very rarely have a prepayment penalty, which means that if you find a better alternative for your loan, whether it’s then taking your cash and paying off that 7% mortgage six months from now because you have a bunch of extra cash that you don’t need, that you can’t use, great, you’re not going to see a penalty for doing that. Or if interest rates go down and you want to refinance, you’re not going to take a penalty for doing that. So for me, it’s a much easier choice for me to say, I’m going to finance my house knowing that I can change that decision pretty easily a week, a month, a year, five years down the road if the situation warrants it. So if I were in your shoes, I would probably do that. Second best choice for me is pay cash, but then get a

Speaker 3:
Heloc. The

J:
Problem with the HELOC is that number one, it can go away. We don’t see that often, but certainly back in 2008 in the midst of the great recession, we saw a lot of banks pulling HELOCs. Number two is that with interest rates, HELOCs are basically a floating rate for the most part, and so you lose that benefit of getting a conventional loan where you get a fixed rate for 30 years. And then number three is that there’s no amortization. You’re not paying your HELOC down over time generally by making that minimum payment. Whereas with your personal residence, your conventional loan, every month part of your payment is going towards principal. So you’re paying that down over time. So from my perspective, get the loan and if you have a whole bunch of cash in six months or a year or two years that you don’t need and you realize I have no better place to put it, pay off your loan.

Dave:
Yeah, I guess the way I was thinking about it, just so everyone knows sort of why I am thinking about this is that I am curious about opportunities in the next year or two for multifamily like you were talking about. And I’m wondering if putting it into my primary residence is basically just holding it in cash, but a little bit better. I could save some money, keep some dry powder, put it in a high yield savings account. You’re getting what, 4% now? Four and a quarter. If I put it in my house and don’t pay that mortgage, I’m essentially earning 7%. So it’s just a better return on that cash under the presumption that I could refinance or HELOC when I need to. And it’s not like intending to keep this money in my primary residence forever. It’s just kind of a store of value and a way to lower my living expenses right now and stockpile some more cash for what might be better buying conditions in a year or two.

J:
Yeah. One of the other benefits while I’m thinking about it, of going the conventional loan versus HELOC is that you get to lock in the value of your house today. So you have less downside risk. So let’s say you buy a $500,000 house today and you get a 75% loan to value conventional loan, you’re getting $375,000 basically in cash coming back to you because you financed it. Let’s say your house value drops to $400,000 over the next year, and then you want to take out that heloc. Now you’re only getting $300,000 if you get a 75% loan to value heloc. So there’s some downside risk, whereas there’s also upside protection. If your house goes up to $700,000, well, you can still take a HELOC out for 75 of the difference. So you still have that ability. You just don’t have the downside risk.

Dave:
All right. Well thanks for that advice. What I’m probably going to do is hedge and just take out a small loan, put 50% down, something like that, and just basically do half and half is kind of what I’m thinking. But I appreciate your insight. This is something I never would’ve thought about a year or two ago, but I have a lot of rental properties. I still consider buying them, but it’s also just a good way to lower my living expenses, which as everyone knows, living expenses, just going crazy right now.

J:
Well, I’m not the host of this podcast, but I, I’m going to steer because you just brought up something that I think is worth steering in a little bit different direction. One of the things we didn’t talk about yet is based on what’s going on in the economy and based on what’s going on in real estate, what does optimal leverage look like these days? I mean, you could argue that back in 2013, 14, 15, 16, a lot of people were comfortable having 90% leverage getting a loan for 90% of the value of their property or even a hundred percent of the value because they didn’t see a lot of risk in the market.

Dave:
Totally.

J:
These days, are we really comfortable at 90, 95% loan to value?
Not me. Not me either, because I don’t think it would be unrealistic to see even the single family market drop 5% and basically you’re now underwater on any of your holdings. So these days, one of the things, again, along with changing my thoughts on diversification from asset class to liquidity, I’m also highly focused on that total amount of leverage I have across my portfolio. Now, I’m a lot more comfortable at 60 to 65% leverage because again, I don’t think we’re going to have an event where things drop by 30%, but I don’t like being underwater on my properties. And so if I have the choice, I’m going to choose lower leverage over higher leverage these days.

Dave:
Totally. For decade, it did make sense to maximize leverage, not in every scenario, but it was very reasonable to maximize leverage and take out as much debt because when you feel good about prices going up, that’s the best way to maximize your returns

J:
And when interest rates are low.

Dave:
But now I think taking a slightly more defensive posture just makes sense. That’s what I will do. And even when I buy a property, even though I’m going to take some risk and I still think it’s worth it, putting more down just makes sense because I don’t think there’s going to be a crash anytime in the near future. Could it go down 5%? Sure. And also when people like Jay and I who go on podcasts and talk about the economy, say things like, I don’t think this is going to happen. There’s always a degree of probability and certainty that we’re speaking with. And for me, my certainty about the market’s not going to crash is like medium right now. It’s not high. I don’t feel great about that. Four years ago when I said the market wasn’t going to crash, I felt very strongly about that, and now I think it makes more sense to just be candid that there’s a lot more uncertainty. And that doesn’t mean you can’t do anything, but it just means the types of investments you need to make, need to be a little bit more defensive in nature. You just can’t be as aggressive in this kind of environment.

J:
And keep in mind, everybody is going to have a different perspective on that and everybody’s going to have a different level of risk tolerance. I mean, my closest partner in the single family space, somebody I’ve been working with for 15 years, we own a whole lot of property together. I recommended last week selling a couple properties to him and he basically said, over my dead body, I mean he, he’s that confident that not only are values not going to go down, but rents are going to go up and values are going to go up over the next couple of years, and he make good arguments for why that may be the case. And so smart people can disagree. And for anybody out there that is more certain that we’re going to have a crash, nothing wrong with that. Anybody out there that’s more certain that there’s going to be prosperous times ahead, nothing wrong with that either.

Dave:
That’s all for today’s episode of On the Market. Big thank you to Jay Scott for sharing his insights on all these different asset classes and how to diversify your portfolio. If this episode got you thinking about shifting your portfolio, share it with a friend or leave a comment below. But before we go, I also wanted to mention BiggerPockets brand new Tax and Financial Services Finder. If you are eager to get started in real estate investing, a smart first step is to partner with an investor friendly financial planner who could help you get your house in order and ensure you’re set up for financial success from the get-go. Go to biggerpockets.com/tax pros to get matched with a tax professional and financial planner in your area. I’m Dave Meyer. Thanks for tuning in and we’ll see you next time.