BiggerNews: 6 Rules for Real Estate Investing in 2024

Dave:
Ever since the start of the pandemic, it seems like investors have to craft a brand new playbook for investing in real estate each and every year. Even for a seasoned investor, it’s hard to determine what the best guidelines are for investing in this continually evolving and changing market. So today we’re gonna be bringing you six rules for real estate investing in 2024.
Hey everyone, welcome to this week’s episode of Bigger News. I’m your host, Dave Meyer, and today I’ve brought on my friend a co-author of a book of mine and a longtime friend of the BiggerPockets community, J Scott, to talk through his six rules for investing in the current real estate market. And if you guys don’t know J, he is a renowned flipper. He’s the co-author of a book I wrote called Real Estate by the Numbers. He’s written four other books. He’s also a seasoned investor and keeps a super sharp eye on the market and the economy and his rules that he’s gonna go over today will help you determine which deals you should be going after and how you should think about investing in this type of market cycle. Before we bring on J, I just wanted to think our sponsor for our bigger news episode today, rent app. Rent app is a free and easy way to collect rent. And if you wanna learn more about it, you can go to Rent app slash landlord. And with that, let’s bring on Jay to talk about his six rules for investing in 2024. J Scott, welcome back to the BiggerPockets Real Estate podcast. It’s always great to have you here.

J:
I appreciate it. Thanks. It’s, it feels like it’s been a minute since I’ve been on the show. Thrilled to be back.

Dave:
I’m happy you’re back with us because I’m really excited to dig into your rules that you’re gonna give us on investing in 2024. But before we jump into those rules, maybe we should talk about what are some of the conditions that you’re monitoring that have influenced the creation of these rules? What metrics, macroeconomic conditions, are top of mind right now?

J:
Yeah, so there are a number of them and, and the economy is constantly changing. The, the markets constantly changing, but there are a few big themes that we’ve been seeing over the last couple months, even the last couple years, that are kind of driving how we as investors should be thinking about investing moving forward. And the first one I don’t think will surprise anybody, uh, but that’s inflation. And the fact that we have seen high inflation and even persistent inflation over the last couple years. Normally we as real estate investors, we love inflation. Inflation means that rents are going up. And so if we’re buy and hold investors, normally speaking, inflation is really good for us. The problem is when we see really high inflation, when we see persistent inflation, especially in this case where we see inflation that is higher than wage growth. So people are, are literally losing money, um, because the things that they’re buying cost more than, than the money that they’re making.
Um, the cost of goods is going up faster than our wages. When that happens, people can’t afford to pay higher rents. And with the super high inflation that we’ve seen over the last couple years, um, in many cases we’ve come to the point where we, we’ve come close to maxing out rents. People are paying close to 30% of their income towards their housing costs, towards their rent. And when you get close to 30%, you get to the point where apartment owners aren’t gonna be willing to rent to you because they want to see three times income for, for rent. Um, and so we’re just getting to that point where as investors, we may not have the ability to raise rent much further thanks to inflation. So, so inflation’s the first one. The second one, simply the fact that we have seen such high real estate values over the last couple years going back a hundred, 120 years or so, we can see that real estate tends to track inflation for values.
So from like 1900 to 2000. So for that a hundred years, basically we saw the inflation line go up and the real estate values line go up in lock step, real estate goes up at the, the rate of inflation. Now, we know that before 2008, prices kind of got wild, uh, real estate values went up much higher than inflation. But between 2008 and 2013, those prices came crashing down and we were again, right around that inflation trend line. So historically speaking, we can say that real estate goes up at the rate of inflation, and if we’re much higher than that rate of inflation, one of two things is gonna happen. Either we’re gonna see real estate prices come crashing down back to that, that trend line, or we’re gonna see real estate, uh, prices stay flat for a long period of time while inflation catches up. And so I think it’s likely that over the next couple years that we’re gonna see one of those two phenomenons. And I, and I do have a, a thought on which one it’s gonna be, but I think it’s likely that we’re either gonna see prices come down or prices stay the same for the next few years. I think it’s unlikely that we’re gonna see, uh, much higher real estate values over the next couple years, just thanks to the fact that that real estate values right now are so far above that trend line.

Dave:
Alright, well J, I’m curious what, you know, just very briefly, do you think it was a pull forward and we’ll just see sort of flat appreciation, or do you think we’re gonna see a big, uh, leg down in terms of housing prices? I think

J:
The market’s a lot different than it was in 2008 when we did see that big crash in prices. Um, the fundamentals are different. Back in 2008, basically we had a recession that was driven by bad decisions in the real estate industry, by lenders, by brokers, uh, by buyers. We don’t see those same conditions. Now, secondly, there’s a lot of demand in the market now, whereas we didn’t see a lot of demand back in 2008, and there’s not a lot of supply. There are about 80% of, of homeowners right now who have, uh, mortgages with interest rates under 4%. Those people don’t wanna sell. Why sell a property with a mortgage under 4%? Just have to go out and buy an overvalued property with a mortgage now at 8% or have to rent at extremely high rents. So people aren’t selling, people are sitting on the houses that they own.
So given the supply and demand, given that the fundamentals are pretty strong, and given the fact that historically real estate doesn’t go down in value, I think it’s a lot more likely that over the next couple years we see flat prices, flat values, while that inflation line kind of catches up to the real estate values. So that, that’s my best guess at what’s gonna happen. I don’t think we’re gonna see a big drop. We may see a softening, we may see a small drop in values. I wouldn’t be surprised, but I don’t think it’s gonna be anything like 2008.

Dave:
That does tend to be the general consensus around most experienced investors and economists. And here’s hoping you’re right, I do think something needs to change for us to, uh, experience more normal levels of affordability again, uh, but obviously we don’t want a huge shock to the system. So far, the two conditions you’ve listed are inflation and high home prices. What are the other conditions, J?

J:
Yeah, so the next one is simply interest rates. We all know interest rates are, are high, at least compared to where they’ve been over the last 20 years. When interest rates are high, a couple things happen. One, there’s a slowdown in in transactions. Um, so we’ve seen that with sellers. Sellers don’t wanna sell their houses because they have low interest rates from a couple years ago and they don’t want to have to trade those low interest rates for high interest rates. And secondly, it’s a lot harder for us as real estate investors to get our numbers to work. It’s hard to get cash flow when interest rates are higher than, than what we call cap rates. Basically the, uh, cash flow we can expect from our properties. And so just given the situation, I think it’s very unlikely that we’re gonna see a lot of transactions over the next couple years, um, which as real estate investors, we wanna see a lot of transactions because at the end of the day, the more transactions, the more distressed sellers we’re gonna have and the better deals that we’re gonna get.

Dave:
Yeah, I don’t think you’re surprising anyone there with, uh, interest rates. That is definitely a common topic. What are the last two you got?

J:
Yeah, last two I have, uh, number four is just a slowing economy. So, um, we’ve seen great economic growth over the last couple years, but we’re starting to see the economy slow down. Uh, GDP came in a lot lower than expected. Don’t know if this is gonna be a trend or if this was just a a, a blip on the, uh, on the radar, but assuming the economy slows down that could impact real estate values. I talked before about how I think values are gonna stay propped up for the next couple years, but if people start losing their jobs, if foreclosures, foreclosures start to increase, then it’s really, it, it’s possible that we could see real estate value soften and start to come down. So a slowing economy is the next one. And then finally, this thing called the yield curve. And I know it’s, it’s, it’s a somewhat complicated topic.
I’m not gonna go into the details, but let me leave it at this. Banks like to borrow money at very low rates. They like to borrow what’s called the short end of the curve. They like to borrow money, um, overnight or for a couple days or a couple weeks, and then they wanna lend it out for a long period of time. They wanna lend it at the long end of the curve. They wanna lend it for 10 years, 20 years, 30 years. And historically speaking, borrowing money at the short end of the curve, short term, is a lot cheaper than it is at the long end of the curve. So banks are used to being able to borrow money short term at very low prices and lend it out long term at very high prices. Right now we’re in a situation where borrowing money short term is actually more costly than borrowing money long term. And so banks are kind of upside down on this thing called the yield curve where they’re borrowing money at higher costs and lending ’em out at lower costs. And when the banks are not making as much money on the money that they’re lending, when they’re not making as big a spread, what they’re gonna do is they’re gonna slow down, they’re gonna tighten up their lending standards and they’re gonna lend less money. And anytime banks lend less money, that’s gonna be bad for us as real estate investors.

Dave:
Yeah, it makes sense. And I know that this is something of a, uh, complex topic for people, but as J just said, this really makes sense if you think about the way that a bank works, if they have to borrow money in the short term at a higher rate, increases their risk, and they are not in a position to be taking on extraordinary amounts of risk, everything that’s going on with the economy and credit markets right now. Alright, so J has walked us through the market conditions that we all need to navigate right now. Right after the break, we’ll get into the guidelines he’s personally using to make smart deals. Right now, stick with us. Welcome back to Bigger news. I’m here with J Scott, and we are about to break down his six rules for investing in the current real estate market. Let’s get into it. So thank you for sharing those conditions with us, J. And just, uh, to recap, we talked about inflation, we talked about record, high median home prices, interest rates, a slowing economy, and a yield curve inversion. Let’s move on now to your six rules for how to navigate them, because frankly, J, those six conditions don’t sound great for real estate investors. There’s not a lot of happy or positive conditions that you’re tracking there. So how do you get around that?

J:
So let, let’s start with the fact that most real estate strategies are long term and most economic and marketing conditions are short term. So if we go back to 2008 and we think about the fact that, yeah, 2008 was a really bad time, uh, to be buying certain types of properties, same with 2009, even 2010. But if in 2008 you were buying properties for the long term, you’re buying to hold for 3, 5, 7, 10 years. Well, in retrospect, as we see property values have gone up, everything has worked out. And I would suggest that if you look back through, uh, real estate history, there’s never been a 10 year time period where real estate values didn’t go up. And so while today it’s really easy to say, yeah, things are bad, it’s not a good time to be buying, consider that if you buy something today and you’re still holding it 10 years from now, you’re likely going to have made money.
So with that said, let, let’s jump into some, some rules that, that I’m following today. Um, as a real estate investor and I would consider, I would suggest other people probably consider following as well. Um, number one, I wouldn’t s suggest anybody thinks about buying strictly for appreciation anymore. Um, when you were buying in 2008, 9, 10, 11, 12, with values as low as they were, it was really easy to buy basically anything and say, okay, if I hold this property for a few years, it’s probably gonna come back in value. It’s probably gonna make me money. I’m probably gonna get more cash flow. I’m probably gonna get, uh, all the benefits of real estate. But today we have real estate values that are tremendously high. And so buying with the expectation that they’re gonna go higher is a very risky proposition. And so the first thing I would suggest is that people who are buying right now don’t factor appreciation into your deals. Don’t assume that you’re going to get appreciation, um, from the deals that you’re doing. Maybe you will, and if you do consider it a bonus, but right now, you should be buying for the fundamentals. You should be buying for the cash flow, you should be buying for the tax benefits, you should be buying for the long-term principle, pay down that you’re gonna get by holding that property long-term, but don’t necessarily factor in the appreciation into your metrics. Again, hopefully you’ll get it, but you may not.

Dave:
J, when you say don’t factor in any appreciation, I think there are different ways people approach this. Some people treat quote unquote appreciation as above and beyond the rate of inflation. Or are you saying actually flat zero price growth, you know, for the next few years?

J:
Yes. So historically, I’ve always said don’t factor in inflation, don’t factor in price appreciation. Um, and that was even before we’re in the market that we’re in now, um, I’ve always been a big believer that yes, over the long term we should see real estate values go up. But again, historically we see them go up at around the rate of inflation, which means we’re not making money on real estate values going up, we’re just not losing money. Real estate holding real estate long term is a wealth preservation strategy if you’re not getting any other benefits. And so from my perspective, I don’t like to assume appreciation in any forms, um, whether it’s it’s current conditions or whether it was conditions 10 years ago or 10 years from now. That said, there is one other type of appreciation that, that we can factor in, and that’s called forced depreciation.
And this is where a lot of us make our money. We buy properties that are distressed in some way. Uh, maybe they’re physically distressed, meaning that they need renovations, that they’re in disrepair. Maybe they’re in management distress, maybe they’re being managed poorly. The person that owns the property as a tired landlord or just doesn’t have the time to, to spend or the attention to, to spend on the property and it’s just not being managed well, they’re not, uh, managing the expenses well, they’re not managing the income. Well, if you can go into a property like that and you can renovate it again, either physically or through management changes, you can increase the value tremendously well above the rate of inflation, well above the long-term trend of increase in, in real estate values. And so I’m a big proponent of that. I’m a big proponent of forced depreciation to make money. But again, if you’re just gonna sit back and wait for the market to help you make money, historically it doesn’t happen. The market will help you preserve your capital. It will help you kind of keep the same spending power for the value of the property that you own, but it’s not gonna make you money long term.

Dave:
Yeah, that makes sense. And I, you know, typically what I’ve done is underwritten deals at the rate of inflation, like you said, they, it usually tracks inflation. And so I count on properties going up, you know, 2% a year or something like that to keep pace with the rate of inflation. So I’m wondering, J, if you were a investor listening to this and you’re intending to buy something for 15 years and you’re saying, you know, maybe the next few years we’re gonna have flat, would you just put 0% appreciation for the next 15 years? Or how would you like actually go about underwriting a deal on that timeframe?

J:
I would literally put 0% appreciation for the next 15 years. And, uh, to be honest, this is what I’ve done and this is what I’ve been recommending people do, um, for as long as I’ve been in this business. So it’s not just something I’m saying now. I was saying this back in 2008, 9, 10, 11, 12. Um, my philosophy has always been, if we get that appreciation, that’s fantastic. Um, but don’t assume you’re gonna get it and don’t factor it into your numbers. Consider it, uh, uh, the cherry on top.

Dave:
Awesome. Great advice for rule number one. J. What’s rule number two?

J:
Rule number two is we need to be super conservative in our underwriting assumptions these days, both on the income side of things and the expense side of things. I mentioned earlier that inflation tends to be good for us as real estate investors, and that’s true typically, um, during inflationary times, rents are going up. And what we saw in 20 21, 20 22, uh, rents went up really quickly, really high. And that was because of inflation. Unfortunately, again, because inflation is higher than wage growth right now, there are a lot of people who aren’t making more money, inflation isn’t helping them, and when people are making less money in real terms, they’re gonna have less money to spend on rents. And so we’re unlikely to see the same historic rent growth that we’ve seen over the last 10, 20, 30 years. Historically in most markets, we’ve seen rent growth somewhere in the two to 3% range these days.
I’m assuming that for the next year or two, rent growth is gonna be closer to 1%, maybe 2% In some markets, I’m, I’m actually, uh, underwriting rent growth is flat for the next year or two. It’s hurting my numbers, it’s making it more difficult to get deals to pencil. But again, I like to go in conservatively. And then if everything works out and we do see more rent growth than we expect, then again, that’s the cherry on top, that’s the, the bonus that we weren’t expecting. But if things happen the way we are expecting, which is little rent growth for the next couple years, we’re not gonna find ourselves in a bad cash flow position or in a position where, uh, we’re at risk of losing a property because we were over optimistic or we were over aggressive in our assumptions.

Dave:
All right, so similar idea here to rule number one is obviously you don’t wanna count on too much appreciation in price appreciation for home values. Same thing in terms of rents as well, and I just want to call out, not only are rents growing slower than, uh, inflation right now, rents are also growing slower than expenses right now. And so that is something I think that really complicates underwriting a little bit in a way that at least I’m not super familiar with or used to in my investing career, where you might have to forecast lower cash flow at least in the next couple of years.

J:
Yeah, and, and you beat me to it. Um, the, the rent, the income is one side of the equation that we as investors are kind of getting, getting beaten up a little bit on these days. But the other side of the equation, the expenses we’re getting beaten up on as well. Um, if you just look at normal operating expenses, things like electricity and water and other utilities, um, things like, uh, labor costs and material costs, all of those things are going up at the rate of inflation. And as we already discussed, inflation is pretty high right now. It’s not the typical two 2.5% that we’ve seen historically. And so in our underwriting, we can’t assume that those expenses are gonna go up at the historical rate of two or 2.5% like we always have these days, inflation’s closer to three, three and a half, maybe even 4%.
And so we need to be underwriting future, uh, expense growth at these three or 4% numbers. Now, unfortunately, it’s even worse than that. Those are our regular operating expenses. We’re seeing certain operating expenses, and I’ll, I’ll use the example of insurance as the big one. In some markets, we’re seeing insurance go up at many, many times the rate of inflation. I’m in the, I’m in the Florida market and I’ve seen in Flo, uh, insurance on not only my rental properties, but my personal residence go up literally two to three times over the last couple years. And so do I expect that to continue? No, I don’t expect that we’re gonna see 50 or a hundred percent, uh, rate increases on insurance over the next couple years, but I certainly think it’s likely that we’re gonna see rate increases above inflation. So personally, when I’m underwriting insurance increases on deals, I’m assuming that we’re gonna see four or five, six, even 7% insurance increases year over year for the next couple years. And so it’s really important that on the expense side of things that we’re, uh, that we’re conservative as well, and we recognize that, uh, that the numbers that we’ve been using for the last 10 or 20 or 30 years aren’t necessarily gonna be applicable this time around.

Dave:
Yeah, that’s great advice. And I just want to add one thing on top of just insurance. I read an article recently that was talking about how property taxes across the country have gone up 23% since the beginning of the pandemic, but in the same period home values went up 40% indicating that even though taxes have already gone up, they’re likely to go up even more because property taxes are tied to the value of homes. And so it shows that taxes are probably still lagging of the depreciation that we’ve over the last couple of years. So you definitely want to underwrite and understand what any properties that you’re looking at, what they’re assessed at right now, and if that’s a reasonable assessment rate or if they’re likely to go up in the future as well. All right. We’ve covered two rules so far, which are similar. One is don’t assume appreciation and property values. The other is, don’t assume you’re gonna get rent growth, uh, in excess of inflation. Right. Now let’s move on to our third rule. J what is it?

J:
It’s basically be very cognizant about the strategy that you’re using to invest. And at the end of the day, there are essentially two investment strategies that that every real estate, uh, investment falls into. It’s either a buy and hold investment, you’re buying something, um, to hold for some period of time where you’re gonna generate appreciation or cash flow or tax benefits or loan principle pay down or, or some other benefit from the property, or you’re buying something for the, the purpose of of of just doing a a quick transaction. You’re buying it to, uh, flip or, or raise the value quickly and resell it. And so basically we have buy and hold versus the, the transactional flip models. And historically, both of those models work pretty well. But in a market where it’s possible that we’re going to see a reduction in, in home values and potentially even a significant reduction in home values, if we see a slowing in the economy and a lot of people lose their, lose their jobs and we see a lot of foreclosures, we could see a decent drop in the housing market.
I don’t expect it, but it could happen. Um, when that’s the case, you don’t wanna be in a situation where you’re buying properties with the expectation of being able to sell them for a profit in the short term, especially when you’re buying those properties without the expectation of cash flow. So if I buy a property today and I expect to sell it in six months, and I’m not gonna have any opportunity to make cash flow from that property, what happens when the property or when the market drops and the property value drops five or 10% over the next few months? I’m gonna be in a situation where I either have to sell for a loss or I need to hold onto the property. Normally holding onto a property isn’t bad, but if I’m not generating any cash flow and I’m paying my mortgage every month and I’m paying my utility costs every month and my property taxes and everything else, I need to upkeep that property, what I’m gonna find is I’m losing money long term.
And so what I recommend to people right now is, I’m not saying don’t flip. I’m not saying don’t do anything transactional, but recognize that there’s a much higher risk for flips and transactional deals right now than there has been in the past. And make sure that you are ready to deal with a situation where values drop quickly. If that happens, uh, do you have the reserves, um, to, to, to handle holding the property a little bit longer or are you willing to sell the property quickly, fire sale the property, and, uh, break even or even take a loss on the property? Be prepared for those situations and know what you’re gonna do.

Dave:
Alright, so that’s the third role. And J, I I have some follow ups for you there because I think this is a bit of a change from how things have gone recently. Uh, first and foremost, I just speaking to a lot of people flipping has been pretty profitable over the last couple of months. And I, I am curious if you think if you are just cautioning against, you know, what could happen and just want everyone to be conservative, or you actually think that there’s some risk that prices will decline three 5% in a relatively short order.

J:
Certainly there’s that risk. Do I think it’s a high risk? No. But we as investors, it’s our job to assess all the risks and to determine is this something that if it happens, even if it’s a a 1% or 5% or 10% chance, um, for us to assess that risk and determine what we would do if it should play out. So I don’t think it’s a high risk, but I do think it’s a risk that we should be looking at. Another thing to consider is that for much of the last 15 years, up until, well, even including today, for much of the last 15 years, real estate’s gone up in value. So we didn’t need to be good house flippers to make money flipping houses. Um, we could take a house and we could do a poor job flipping it. We could do not the best renovation.
We could overspend on the property, we could overspend on the renovation costs. And even with all of those things conspiring against us, we probably made, made money because the market was just going up so quickly. And so over the last 15 years, a lot of us as flippers have gotten into some bad habits, and we’ve gotten the attitude that no matter what we do, good or bad is gonna result in profit. And so I think we need to recognize that even if prices don’t go down in the near term, they probably aren’t going up very much higher. And if prices stay flat, then we as house flippers or we as transactional investors need to get really good at where, what we’re doing to ensure that we’re making money based on our efforts and doing the right things with, with our renovations and with our management improvements as opposed to just hoping that the market’s gonna bail us out because prices keep going

Dave:
Up. And what would you say, J, then, to this narrative that seems to be everywhere, that if and when rates drop, that we’re gonna see this massive increase in property values? Again,

J:
It’s possible. Um, I I think if, and well, not if and when we see rates drop, we are gonna see rates drop. Um, but the, the big question is when are we gonna see rates drop? And I know a lot of people were expecting that it was gonna happen early this year, and then people were expecting it was gonna happen in the summer of 2024, and now people are talking about it happening at the end of 2024. But the reality is we don’t know. And it could be a year away, it could be two years away. For all we know, we could see rates actually increase before they eventually drop. I mean, uh, the, the Fed chairman, Jerome Powell came out last week and said, um, it’s, there’s not a high chance of it, but for the first time in many months, he’s acknowledged the fact that we may have to raise rates or they may have to raise rates again before they lower rates.
Again, I don’t think it’s a high chance, and I don’t think that rates are gonna be this high for the next five or 10 years, but it is possible that we’re gonna have high rates for the next several months or for the next year or two, and we may even have a spike in rates between now and when they start coming down. And so we need to factor that in, especially if we’re gonna be flipping houses, because remember flipping houses, we don’t wanna hold properties for longer than three or six months, and I think it’s unlikely that we’re going to see rates drop in the next three to six months.

Dave:
All right, so we gotta take a quick break, but stick around. We’ve got more of J’s investing guidelines for you right after this. Hey, investors, welcome back. J Scott is here and he has more golden rules to follow in today’s housing market. Let’s jump back in. All right, let’s move on to rule number four. What do you got J? Rule

J:
Number four. Um, and I’m gonna be channeling my 2008 investor self <laugh> when I say avoid adjustable rate debt. So we saw a lot of this back in 2004, 2005, 2006, where investors were assuming, um, that interest rates were gonna stay low long term. Um, and I know right now we’re, we’re thinking interest rates are gonna go down a good bit long term, um, but we were surprised back then and I think there’s a risk of being surprised right now. So, uh, adjustable rate debt basically puts you in a situation where when that debt expires, whether it’s a year from now, two years from now, five years from now, um, you’re gonna be at the whims of the market to see what your new rate is. And I’m hopeful that rates are coming down over the next five or seven years, but I’m not positive it’s gonna happen.
Not to mention a lot of adjustable rate debt is five to seven years out. A lot can happen in five to seven years. Maybe we see rates drop over the next year or two, and then three or four or five years from now we find ourselves in, in another recession or, or, or I’m sorry, in another expansion market booming, and the fed has to raise rates again. And so we could be in the next cycle by the time adjustable rate debt, um, uh, adjusts if you bought it today. And so, uh, I highly recommend that anybody that’s that’s getting mortgages today, take that hit. I know it costs a little bit more. You’re gonna get a little bit higher interest rate on fixed rate debt, but personally, I sleep better at night knowing that I don’t need to worry about what’s gonna happen three or five or seven years from now. And knowing that even if I get fixed rate debt, if uh, rates do drop a good bit in the next couple years, I can refinance and I can take advantage of it. But I want them, I wanna know that the deal’s gonna work today at today’s rates. And again, if I get that, that benefit of being able to refinance at a lower rate, again, just another cherry on top,

Dave:
I’m definitely with you on that one. And honestly, right now, the spread between adjustable rate mortgage rates and fixed isn’t even that big. So it just doesn’t even feel worth it given everything you’re talking about. Alright, rule number five, what do we got?

J:
Rule number five, don’t buy anything or hold anything right now that you’re not willing to hold for the next five or 10 years. I, I kinda like this, this rule, regardless of what market we’re in, but especially when we’re in a market where we don’t know that where values are headed, only holding things that you’re willing to hold or able to hold, and there’s two, there are two very different things willing and able to hold for the next five or 10 years on the willing to hold side, you wanna make sure that, that you have properties right now that are cash flowing to the point that, that you can, you can continue to survive if they cash flow a little bit less or your return on equity is high enough that you don’t have much better options. Um, but also your ability to hold. So, um, are you gonna need that cash?
Are you five years from retirement where you’re gonna need cash flow from something else because you’re not gonna get it from your, from your job? Well, what happens if we find ourselves in a recession in the next couple years, values drop and it takes seven or 10 years for those values to come back. Like we saw in some markets after 2008, um, you could be in a tough position. So right now, um, assume that you’re gonna need to hold for five or 10 years, hopefully that won’t be the case. But if you make all decisions with the expectation that your horizon is five to 10 years out, you’re probably not gonna be disappointed because again, if you look historically speaking, uh, real estate tends to only go up over any 10 year period.

Dave:
I totally agree with you on this one. And also agree that this is just a good principle when you’re buying buy and hold investments in general. There’s just usually, even in good times, it takes several years for buy and hold properties to earn enough equity and money to overcome just some of the selling costs there. Also, as you hold on to debt longer, you pay down more principle relative to the interest you’re paying. And so there are a lot of benefits to holding on for a long time. And in this type of uncertain economy, I often tell people, if you’re uncertain about the next year, if you’re uncertain about two years from now, sort of look past it and think about where the housing market might be at your time horizon, five years, 10 years from now, 12 years from now, at least for me, that makes it easier to make decisions. But that sort of brings up the question, if you’re someone who’s retiring in five years, J, you’ve said you don’t think flipping is particularly safe right now, and you gotta be extra careful if you’re a buy and hold investor, you gotta be thinking on a five year time horizon. Are are people who have that short time horizon, you know, outta luck in this type of housing market?

J:
Uh, I’m gonna be honest, it’s, it’s a, it’s a bad time to have a short term time horizon for real estate investors. That said, um, if you have a short term time horizon, what are your alternatives? Your alternatives Are the equities markets, the stock market

Dave:
Also at all time highs <laugh>. Exactly.

J:
Um, I think there could be a lot more volatility in the stock market over the next five years than there could be in real estate. Uh, the bond market. Well, maybe there’s some opportunities with bonds, but most of us don’t invest in bonds. Um, what else are you gonna invest in where you’re going to get the consistent returns even if you don’t get those outsized returns that we’ve become accustomed to over the last 15 years? I can’t think of any other asset class where we’re gonna get the consistent returns, the cash flow, again, the tax benefits, the principle pay down, having our tenants pay down our mortgage month after month. I can’t think of any other asset class where we’re gonna get that. So yes, it is gonna be a tougher time for real estate investors over the next few years to make as much money to make as much cash flow or as appreciation of the, as they made the last 15 years. But I would still rather be in real estate right now than any other asset class.

Dave:
Yeah, it makes sense to me and I appreciate your honesty. I don’t want people who have that short horizon making bad decisions. And so if that is, you take this advice carefully and think about where you wanna allocate your resources because although there are risks in every investment, every asset class, there are more risks in real estate as Jay’s been talking about right now than there has been for most of the last 10 or even 15 years.

J:
Just to put a finer point on it, I think we’re gonna see a whole lot fewer people over the next 10 years quitting their jobs to become full-time real estate landlords, um, than we’ve seen over the last 10 years. But what I would tell anybody out there is that doesn’t mean you should sit around and wait for times to get better. Those 10 years are gonna go by whether you’re buying real estate or not, and you’re gonna be much happier if you bought real estate now than than waiting 10 years for the next bull run or the next good market.

Dave:
All right, let’s get to our last rule, J.

J:
Yeah, last rule is an interesting one, um, and one that I’ve hadn’t really talked about, uh, until the last few months, but that’s, we really need to start paying attention to some of the legislation that’s governing us as real estate investors these days. And there are a couple categories of, of that legislation. Number one and, and a big one that everybody’s talking about is short-term rentals. Short-term rentals have been a super popular asset class over the last couple years. A lot of people have bought a lot of property, made a lot of money, uh, but what we’re seeing in some markets, and again, I’m in Florida, I’m, I’m in a beach town in Florida, um, siesta Key and even here where you would expect that the government should be very friendly towards short-term rentals, uh, because we love tourists here. That’s where our income comes from.
That’s where our revenue comes from. What we’re finding is that a lot of citizens, and therefore a lot of government officials are now taking kind of a, a, a negative stance against short-term rental owners. And so we’ve seen, again, in my area, we’ve seen short-term rental legislation, the tides turned, and we’re now seeing longer periods that landlords are required to rent for. We’re seeing, um, tighter restrictions on rental, uh, on short-term rentals in which areas they can be, uh, employed. And so if you’re a short-term rental owner, definitely be cognizant of the fact that where you invest your local government may or may not be friendly towards you as, as a short term rental owner, and that could impact your ability to make money long term. What I say to anybody who’s still thinking about buying short-term rentals and what I’ve been saying for the last couple years is your plan B should always be to be able to hold that property as a long term rental.
And anytime I look at a short term rental, I underwrite a short term rental. If the numbers work, the very next thing I do is I, I underwrite it as a long-term rental. And I say, do the numbers still work? If the laws were to change in my area where I could no longer rent this thing short term, could I rent it for a year at a time and still make money? And if the answer is yes, well then you’ve got a good backup plan. If the answer is no, then you need to figure out what your backup plan might be.

Dave:
Well definitely agree with you there, J, in terms of short term rentals. But I do want to just underscore J’s point here, which is that you need to understand regulations and legislation because they can be both detrimental to your investing strategy, just like short term rental regulations. And there’s some other ones that we’ll talk about in a minute, but also they can be positive too. There are now things on the West Coast where there’s upzoning, you can build ADUs or there’s more municipalities, state governments enacting things that can help you afford a down payment, especially if you’re a first time home buyer and looking to house hack. So I think the point really here is to understand the particularities and details of what’s going on in any market that you are considering investing in.

J:
Absolutely. Um, and, and like you said, there are good things going on. We’ve seen affordable housing grants and affordable housing laws popping up in a lot of states. Federal governments starting to spend more money on affordable housing. Um, local state governments, again, are spending more money there, but then there’s other negative regulations that we need to consider as well. A lot of states and a lot of cities are starting to implement rent control and basically impacting the, the ability to raise rents, which might be good for tenants, but isn’t good for us as landlords, especially when we see operating expenses and insurance and property taxes going up as quickly as they are. If we don’t have control over our ability to raise rents and allow the, uh, the supply and demand, the market forces, uh, to determine what our, our rental increases are gonna be, we could be at a disadvantage. There are a number of other pieces of legislation that, that have been proposed in a number of states. Again, as you said, some good for, for us as real estate investors, some bad for us as real estate investors, but it is important that we know what legislation is likely on the table and how that legislation’s going to affect us, not only short term, but long term.

Dave:
Yeah, that’s, that’s very good advice. And I think people, there’s good ways to do that. And you should be looking not just on a national level, but on a state level and really on a municipality level. I think a lot of the very specific things like shortterm rentals, rent controls are often handled by states and local governments, and I know it’s boring, but going to those types of meetings or subscribing to a local newspaper, something like that, so that you’re constantly informed is really gonna help your investing strategy. And let me just summarize here, the six rules we discussed. Number one was don’t assume that you’re gonna get appreciation in terms of property values. Number two was don’t assume rent growth for the next couple of years. Number three was be very cognizant of what strategies you’re using, particularly if you’re considering buying now non-cash flowing properties. So that’s properties just for appreciation, but also strategies like flipping four was avoid adjustable rate debt. Five was consider your time horizon and don’t buy anything you aren’t able to and willing to hold for five to 10 years. And lastly, we talked about understanding potential legislation and how it can affect your investments. J, thank you so much for sharing your thought process and your rules with us today. We appreciate your time.

J:
Absolutely. And let me just end by saying that I know a lot of that sounded, uh, overly negative and maybe, uh, a bit alarming to a lot of people, but my attitude has always been be conservative, assume the worst that’s gonna happen. And I’ll, I’ll say it again. When the worst doesn’t happen, just consider that to be, uh, an additional bonus or, or the extra cherry on top. So if we go in with, with that negative attitude and the skepticism and then everything works out, everybody’s gonna be happy, it’s much better than going in with an optimistic attitude and then finding something bad that kind of throws us off.

Dave:
I totally agree. I always, I always say I love putting myself in a position where it’s great when I’m wrong and it’s, uh, that’s exactly what you’re talking about. Just be conservative. And if you’re wrong, it’s only a good thing for you. And if you think underwriting with these types of strict criteria is not possible, I’ll just tell you from my own personal experience, it is still possible. I underwrite very similar to what J is talking about here, and I’ve still been able to find deals this year. You do have to be patient, you do have to work hard to find good deals, but it is absolutely still possible to stick to these conservative underwriting tactics to stick to the fundamentals and still invest here in 2024. For anyone who wants to connect with J. He of course has five books with BiggerPockets. You could check those out. We’ll put all of his contact information in the show notes below. Thanks again, J, and thank you all for listening to this episode of Bigger News. We’ll see you again soon for another episode of the BiggerPockets Real Estate Podcast.