What Works (and Doesn’t) in a Recession & the Untold Story of J Scott’s Messy First Flip

Ashley:
This is The Real Estate Rookie Show number 12.

J:
Anybody out there that feels like they need to ask that question, should I wait or should I pull the trigger right now? If you’re not experienced enough to make that determination on your own, the most likely enter is you should probably wait. Right now, like I said earlier, right now is kind of an unprecedented time. Things are a lot different than they’ve ever been, and there’s no shame in saying, “Hey, I don’t know what’s going to happen.”

Ashley:
I am Ashley Kehr and I am here with my cohost Felipe Mejia who has been bombarding me with text messages about his new Tesla he’s going to buy. So I’m calling him out right now and he’s got to set a date that he actually buys it because I’m sick of listening to him say he’s going to buy it.

Felipe:
Okay, and now I can’t get my life together.

Ashley:
So when’s that date, Felipe?

Felipe:
I’m trying to figure out how I can afford a Tesla. I know I can. I just am trying to figure out how it’s going to work into my portfolio, because it’s just way out there and I’m like, I just want to buy another rental property every time I have the money to buy a down payment on a Tesla. Anyways, that’s really hard.

Ashley:
But just keeping that money is so much sweeter than spending.

Felipe:
Just putting it into a rental property makes it so much easier, but that has nothing to do with today’s show. Today we have J Scott, the man.

Ashley:
The legend.

Felipe:
The legend.

Ashley:
A BP legend. Yes.

Felipe:
That’s absolutely right.

Ashley:
Someone was telling me that he has the most forum posts ever on BiggerPockets. That is crazy.

Felipe:
Man, he must really know what he’s talking about. Not just that. He wrote the book on flipping houses, rehabs, and he just recently, not recently but he wrote a book.

Ashley:
Well last year. Yeah. Recession-Proof Investing, and just updated it.

Felipe:
And he talks about that book as well.

Ashley:
Yeah, and he also hosts the business podcast for BiggerPockets too, with his wife, Carol and that is great if you guys haven’t listened to that yet, but J is going to break down just economic cycles, what’s happening right now, how you should invest in a downturn, and I think he does a very good job of breaking it down for rookies, for beginners, even for me. I still don’t have a great grasp on understanding economics. Definitely not the level he does.

Felipe:
Yeah, I mean he breaks down the economy and the cycles that it goes through, the business cycles it goes through and if you have real estate, you have a business. I mean ultimately that’s what he’s doing, and he breaks it down on how he’s reading it or what he thinks is going to happen, right? He gives us a little snippet into his mind.

Ashley:
A good guess, yeah.

Felipe:
A good guess like he calls it. A good tip on HELOCs, on what to do with lines of credit. I mean, he gives really good tips in this episode.

Ashley:
And we get a J Scott exclusive too. He’s never been interviewed on this before, so you’ll have to find out as we dig into the interview what that thing is.

Felipe:
That’s right. Out of all the podcasts, he finally gave one thing on here that he hasn’t gave to anyone else. So with that, let’s bring out J Scott.
J Scott, man. Thanks for being on the show. Super excited to have you here, man. How are you?

J:
I am doing well. I’m thrilled to be here. This is the one BiggerPockets podcast I haven’t been on yet, so I’m really excited. Thanks for having me.

Ashley:
I know. We have a celebrity on today. This is so exciting. What we’re going to talk about today, at least start off, is you’re a huge economics guy. I’ve learned a ton from you just about with coronavirus and what the economy is doing and recession, so today we want to focus on breaking that down for everyone, including myself. What does a rookie investor need to know about the different cycles? So do you want to start us off with talking about there’s three major cycles that you go over, correct?

J:
Yeah. Well, let’s start actually a little bit earlier than that because it’s interesting. I’ve talked to a lot of people over the last, well, especially over the last month or two but over the last couple years and what I realize is there are a whole lot of misconceptions about the economy and how it works, and that’s not surprising because things have been a little bit weird since 2008. Everybody remembers the 2008, the big recession and things have been a little bit different since 2008 than what we typically see in the economy, so for all of those investors and all of those people that have just started paying attention over the last 10 years or at any point during the last 10 years, what you might be seeing is a little bit different than what the economy has given us over the last 100, 150 years.
To step back to the very beginning, so basically we have an economy and the economy is essentially just all the transactions that happen in our society. So every time you buy and sell something, that’s the economy, and there are points in our economy where things are going really well. People are making a lot of money. People are spending a lot of money. Businesses are making a lot of money. Wages are going up. Everybody’s doing well, and we think of that as kind of an economic boom, and then we have those times where it’s just the opposite so businesses aren’t doing well. People aren’t making a lot of money. We’re seeing layoffs. We’re seeing just people spending less money, and we typically refer to that as a downturn or a recession.
So throughout the history of this country, we had these economic booms and we had these recessions, and so what a lot of people don’t realize is if you look back, let’s go back to 150, 160 years, there are very, very clear patterns to how these booms, these up economic times, and these recessions play out, and typically speaking over the last 160 years, we’ve had about 33 different cycles or 33 cycles where the economy has gone from down to up, back to down so a full cycle. And if you look, it’s actually been fairly consistent. We tend to see that economic cycle play out about every five to seven years.
So if you go back before 2008, most people that were paying attention to the economy realized that every five to seven years you would kind of have this uptick in the economy and then you’d have this recession, then uptick and a recession, and I’m probably a little bit older than a lot of the listeners out there. I’m in my mid 40s, and so I kind of remember back before 2008. I remember these recessions. I remember things getting good and getting bad and getting good and getting bad, and then 2008 comes around and 2008 we have this massive downturn, something that very few of us had seen in our lifetimes unless you were around back in the ’30s.
In the ’80s we had a couple big crashes, but it wasn’t like 2008. 2008 was kind of the worst of it, so after 2008, we kind of got on this trajectory. Things started getting better, and between 2009, ’10, ’11, and 2020, our economy just kept going up. So for a good eight, nine, ten years our economy has just been going up, and like I said, typically speaking we see a full cycle, an up and a down, over five or six or seven years. The fact that we had eight or nine or ten years of just an up economy since 2008, that was somewhat unprecedented.
So anybody that started investing after 2008 probably thinks of the economy as it just goes up. And yeah, we have the 2008 type events where it goes down, but those don’t happen all that often. In reality, those do happen pretty often. We do tend to see those recessions. We tend to see them every five, six, seven years. They don’t tend to be as bad as 2008, but there are. There are ups and there are downs.
So the first thing to understand about the economy is what we’ve seen, the fact that we saw 10 or 11 years of the economy going up, what we refer to as an expansion in the economy, the fact that we saw 10 or 11 years of that, that is absolutely unprecedented. That was the longest economic expansion in the history of our country, so the fact that obviously the pandemic that we have now that nobody could have predicted, or very few people could have predicted. That was what we refer to as a black swan event, so pretty much unpredictable just based on all the other data. The fact that we had that, yes, that took us all by surprise, but it shouldn’t surprise anybody that after eight or nine or ten years of an economic expansion, that we were going to see a downturn at some point soon.

Ashley:
And I have heard a lot of investors talk about that they think a recession is coming. You know, maybe they’re hoarding money. So what does all this have to do for a real estate investor? For our rookie listeners, what does this matter to them?

J:
Certainly because we have economic cycles, these economic cycles, typically we look at 2008. 2008 was a real estate crash. It was a crash in the lending markets. It was a crash in the real estate markets. So another thing that another big misconception that I think a lot of investors have is that when we have an economic downturn, when we have a recession, it means we’re going to have a crash in real estate prices. I know a lot of people who for the last six, seven, eight, nine, ten years have been saying to me, “I can’t wait til the next recession so I can pick up real estate at half price.”

Ashley:
Yeah, I’ve heard that a lot too.

J:
Exactly. Well, here’s the thing. Typically recessions aren’t driven by real estate. Typically it’s not a real estate crash that causes a recession. 2008 was definitely the exception. 2008 again, the lending industry was really bad. The mortgage industry was really bad. Real estate was having some foundational, some fundamental issues that led to the 2008 recession. Historically, real estate doesn’t cause the market to crash. Real estate doesn’t cause a recession. If you go back to 2001, anybody that was around then remembers the Internet boom where basically Internet stocks were through the roof and then 9/11. 9/11 caused the recession in 2001.
If you go back into the late ’80s, early ’90s there was this thing called the savings and loan crisis which was basically a lending recession but outside of real estate. Go back to the ’70s, it was oil. You go back to the ’30s, like the Great Depression, and it was things like tariffs and it was debt. All these things that contribute to recessions. Very rarely does the same thing cause a recession multiple times, and so the fact that we saw real estate cause the 2008 recession, there are a lot of investors out there, especially new investors who had this assumption that when the market goes down, when the economy goes down, real estate is going to crash.
Now, it might. There are definitely some recessions where real estate takes a big hit, and that makes sense because if you think about it, what causes a recession? People are unemployed. People’s wages are dropping. People’s hours are getting cut. Can’t afford to buy stuff. So all those things are certainly going to spill over into the real estate market. If people are losing their jobs, they can’t buy houses. If they’re getting their hours cut and their wages cut, they’re not able to make their mortgage payments. So all of those things are going to affect housing, but not every recession is going to have a huge impact on housing like 2008 did. Some will. Some won’t. There are a whole bunch of, and nobody really understands or agrees with what exactly causes housing to react to a down economy and how bad.
So yeah, it’s likely that we’re heading into a recession now. Obviously we’re in a recession, but it’s likely even when the pandemic, when the lockdown ends we’re still going to be in a recession, but don’t assume just because 2008 the stock market or the real estate market crashed that in 2020, that that recession is also going to result in the real estate market crashing. It might. It might not. But it’s important to realize that we don’t yet know exactly what the next recession is going to have, what type of impact that’s going to have on real estate. Likewise, the recession after that and the recession after that. It’s unclear if each of those recessions is going to impact real estate not much, a little bit, as much as 2008, or maybe even worse. We don’t know.

Felipe:
Hey J, quick question though. Because I know this is what I would be asking, so I know that our listeners are going to wonder. Well, if the economy is so measurable you could say. You can measure. You can almost get it down to a couple years of when it’s going to be up and down. Why are so many investors and people frankly, why are so many people not ready for something like this? If the information’s out there, the data’s out there, this has been proven over a couple hundred years now based on your book, so why aren’t people more prepared for this?

J:
I think part of the reason, there’s a couple of reasons. One is that a lot of people in our industry in the real estate industry and investors in general, a lot of them are younger and they haven’t been through multiple cycles, or even if they’ve been through multiple cycles. I’ve been through probably a dozen cycles in my life if I think about it. Maybe not that many, but I’ve been through a lot, but I didn’t really start paying attention until 2001. For me, that was kind of like I was late 20s and early 30s and I’m like, “Oh, this economics thing is interesting. Oh, and real estate prices are going down.” I was looking to buy a house back in 2001. I had just moved to California, and so for me, paying attention to the real estate market in the industry, it was the first time it ever occurred to me that, “Oh, I guess this is what a recession is.”
It had happened to me before. It had happened in the 90s. It happened in the late 80s and probably it happened in the 70s when I was a kid, but I never paid attention. So until you start paying attention, it’s going on around you but you’re not really seeing the big picture, and very few people actually look at the data and say, “Okay, I can measure 160 years back 33 recessions. It happens every six or seven years.” Again, most people it’s just kind of like, “Uh, I guess it happens every once in a while,” but they don’t know if it’s every five years or 10 years or 20 years because they don’t see that big picture.
Second thing is a lot of people have very short term memories. I remember coming out of 2008. I mean, it was probably ’09, ’10, ’11, and people were to some degree psychologically scarred. They were terrified to invest a lot of money. They were terrified to flip houses, even though the market had started to recover. What they saw in 2008 scared them so badly that they were just like, “Wow, this could get really bad again. I’m scared to invest.” And then here comes 2013, ’14, ’15, ’16. Market’s going up. Stock market’s at an all time high. People are making tons of money. Flips are going crazy. All these investors are coming out of nowhere, and suddenly people have forgotten those lessons of 2008. They’ve forgotten that this can get really bad, or even if not really bad this could certainly get worse than it is, and so people just kind of, they don’t remember.
Then the third piece is just this term, we use this term “irrational exuberance,” which is people just kind of feed off everybody else’s excitement, everybody else’s thoughts and ideas, and when nobody’s talking about the market potentially going down or not a lot of people talking about the market potentially going down, everybody starts feeding off that whole excitement of, “I’ve got to buy more properties. I’ve got to start building. I’ve got to buy multifamily. I’ve got to do this. I’ve got to do that,” and it’s just people don’t tend to think for themselves. They tend to listen to those around them, and when a lot of people are really excited, everybody else gets excited and it just snowballs.

Ashley:
I can definitely relate to the first one there, being oblivious that it’s actually going on, because I was in college in 2008 and I mean, I was living my own recession on ramen noodles and hot sauce, but I had no idea that it was going on around me, and as I got older I learned more and more and now I like to learn about it and study it, but this is definitely, if we are coming up on a recession now, this will definitely be a learning experience and something I’ll want to take in as much as I can from it and learn from it.

Felipe:
Yeah, absolutely. J, quick question. How should somebody prepare for the recession coming, and should they be preparing differently as recessions are coming in their lives? Like for the 2008 should they have prepared a different way, or do you think there’s an overall way to prepare for something like this?

J:
That’s a really good question. Let me take the second part of that question first, which was should we be preparing differently for different recessions? Typically speaking, nobody knows when a recession exactly is going to occur. Like I said, we know they occur about every five to seven years, but not always, obviously. We saw that this one lasted 11 years before this one ended, and if we hadn’t had this pandemic, who knows? It could have been another year or two or three. So we do see certain similarities in the cycles and in the recessions.
Some of the things that characterize a recession are the total output of the country, like just the total output of the businesses. We refer to that as gross domestic product. It’s the total amount of products that the companies are making and people are buying and transactions that are taking place. During a recession that drops, so fewer transactions. People aren’t buying as much. Companies aren’t selling as much. Unemployment tends to go up. That’s another thing that we see consistently throughout every recession. Typically going into a recession, we see interest rates rising. That’s kind of common. Didn’t happen this time, but typically we see interest rates going up leading into a recession. That’s actually one of the things that leads or causes a recession. We typically see people’s wages falling, so businesses are cutting hours and they’re cutting salary.
So these are certain things that we see in every recession, but we never know exactly when it’s going to occur. We can start to see these things and it could be 6 or 12 or 18 or 24 months before we really see a downturn. So yeah, it may be possible to predict a recession within a year or two, but it’s hard to say, “Next week a recession is going to start.”
Then secondly, it’s impossible. Nobody’s been able to consistently do it to say how bad a recession’s going to be, because typically what happens is in a recession, there’s one, people like to refer to them as bubbles. So there’s some thing that’s completely out of whack, and when that breaks or when that bubble bursts, we see the downturn and that’s actually, it’s pretty true. It’s not always true. Sometimes there’s a whole bunch of little things that break, but a lot of times there’s one big thing that kind of breaks.
The question is, is that one big thing breaking going to lead to a whole bunch of other things breaking? So in 2008, yes, it was the mortgage crisis and the lending markets. And when that broke, that kind of broke everything. I mean, that rippled down into lots of different markets, lots of different industries and everything sort of broke.
You look at 2001. 2001 was a good example as well. We had the Internet boom, and we had 9/11, and so the bursting of the Internet bubble where all the Internet stocks went down, that was a big economic hit for a lot of people. The stock market took a big hit, and then 9/11 caused a big ripple throughout the airline industry and tourism, and a lot of other industries got hit because of 9/11. So you could have thought that in 2001, that those two big things happening could have led to a domino effect of a lot of other things happening. It didn’t, but in 2008, the mortgage crisis actually did lead to a domino effect.
So we never know what that domino effect is going to look like if it’s going to happen, and so without knowing if there’s going to be that cascading effect throughout multiple industries, we don’t know if a recession is going to kind of be, it’s going to be three months, we’re going to lose some jobs and it’s going to be not fun, and then everything gets back on track, or, things are going to get really bad and it’s going to be like 2008 or like the 1930s. We don’t know. So let’s start with those two big things. If anybody tells you they know when a recession is going to occur or how bad it’s going to be, they’re either trying to sell you something, or they’re just deluding themselves.
Now, second question. How do we prepare for that? Number of ways we can prepare for that. There are certain things that characterize different parts of the economic cycle. So we have that uptick in the cycle. We have that downturn in the cycle. We have the top part of the cycle as well, and through each of these phases of the economic cycle, there are different things that are happening around us. One of the big ones, and one of the things that I’ve been talking about a whole lot the last few weeks has been lending, and since 2008, money has been cheap. There have been hard money lenders out there willing to offer rates at like 9 and 10% these days, which is crazy. Anybody that was investing back in 2008, ’09, and ’10, they remember hard money rates at like, 16% and five points. So the fact that we’re seeing hard money at like, 9% is just ridiculous.
Banks. Big banks are lending to people who have credit scores of 560 or 580 or 600. Again, go back to 2008 and you needed a 720 or 740 credit score to get a loan on a house. Private money. Everybody and their brother has money in their IRAs now, or just money sitting on the side that they’re looking to do something with, and they’re investing in multifamily. They’re investing in flips. They’re investing in people’s rentals.
All this money is out there, and if you didn’t go through 2008, you probably don’t realize it but during a downturn. lending gets really tight. People are scared to invest their private money. Banks are scared to invest their money. Hard money lenders can’t get money from their bigger investors to invest, so we start to see a lot of tightening in the lending markets, and we’ve started seeing that over the last month or two and there are a whole lot of people that are coming to me saying, “I didn’t expect it to be this bad. I knew that things would get bad and I was hoping I’d be able to buy deals, but I was still relying on being able to borrow money to buy deals, and now I finally believe you that during a recession, it can be really, really hard to find money.”
So one of the big things that I like to tell people and a lot of investors who’ve lived through multiple recessions like to tell investors is that leading up to a downturn, and again, we don’t know exactly when it’s going to happen, but if you can time within a year or two of when it happens, that’s the time to start saving your cash, to start cashing in those properties that you think you-

Jay:
…Your cash to start cashing in those properties that you think you’d rather have the cash in your hand then be holding the property. It’s a good time to be working on your credit. It’s a good time to be taking out new credit lines like a HELOC. You don’t necessarily have to take that money out but open up a credit line so you have access to that money.

Felipe:
What if the bank closes one of those lines of credit while you have it?

Jay:
And that is certainly a risk. And so, one of the things I’ve been telling people since March when we started to see this economic shift or this economic catastrophe is that there are banks out there that could start to close these credit lines. And so, for some people I’ve actually suggested and this is not a blanket suggestion these are very individual targeted suggestions I made but for some people who knew that they were going to need access to cash for some specific expenditure maybe they had to make payments on a refinance or maybe they had to be able to cash out a hard money loan. For those people that had very specific needs for money over the next six months what I was recommending to them is pull as much money as you can out of your HELOCs, pull as much money out of your other lines of credit as you can and just stick that money in the bank. There’s less chance of a bank closing down a credit line or decreasing your credit line if you’ve actually pulled that money out.
So, it’s no fun paying interest on that money if you don’t use it which is why I don’t necessarily recommend that strategy to everybody. But for some people who know they’re going to have a specific need for their lines of credit in three or four or six months I’m actually recommending take that money out now, stick it in a bank account, pay the interest for a few months, just throw away that interest so that you know that money is available in six months. Because one of the things that we tend to see during a bad recession is that banks will start to close down credit lines or they will shrink their credit lines. If you have $100,000 dollar credit line and the most you’ve ever borrowed on it is $20,000 they might shrink that credit line down to $20,000 so definitely that’s always a risk.
So, and that’s another reason why it’s always good to have as much cash on hand as possible. We’ve all heard the phrase cash is king, well during a recession cash really is king. Because those who have cash during a downturn are going to be much better positioned to buy properties. We hear all the time everybody out there, there’s 10 million investors out there waiting for the real estate market to collapse because they all want to go out and buy real estate at half price. Well, how many of them have the cash to do that? How many of them want to do that but because they don’t have the cash and because lending is tightening they’re not going to be able to do that? So, cash really is that thing that gives you the ability to take advantage of the opportunities

Ashley:
I want to touch back on the line of credit real quick because a couple of episodes ago, I think it was episode seven, Felipe and I talked about balloon payments and explained that to everyone where it’s when you have a mortgage or a loan on a property and on a certain date a large balance is due on that. So with that line of credit that would be good advice is to pull that money off your HELOC if you have a line of credit or if you have a balloon payment due coming up so you have that money available. And Felipe, did you have that? Do you have a balloon payment coming up? Correct.

Felipe:
Yeah I did, had an ARM on a property, an Adjustable Rate Mortgage. I knew it wasn’t the best loan to get but when I got it four years ago I knew I had five years to figure it out but I didn’t want to lose the deal so that’s what I did. And I literally just got the appraisal and it came back positive so that’s really good. And I’m getting it into a 30 year mortgage and I’m actually even cashing out a bunch of money so it worked out great. Now it doesn’t always work out like that way and just like Jay said it’s individual basis. I don’t tell anyone to do the same thing I did. In fact, I don’t think it’s a great product at all but I knew that I could get out of it in five years so my goal was to do that.
But my question to Jay was, and the reason is the reason I asked about the line of credit was I had a line of credit and that’s what I did I actually pulled a large chunk of it out because I’m under contract on a property that I got 20, 30% under market value but I want to rehab it and I was going to use my line of credit to do that. And then, COVID-19 hit and I was scared that the bank might close down my line of credit that I was going to use to rehab that property, in six months to a year refinance it, get all the money back out, pay the line of credit. Everyone knows how that works. But so, in my situation I felt like it was smart to pull it out but like you said I would not advise everyone to do that unless you have a plan financially for that money. Is that what you were getting at Jay?

Jay:
Yeah, absolutely. One of the things like I said, because lending tightens one of the things we have to make sure of going into a downturn and whether it’s preparing for the downturn before it happens or right at the beginning it’s still like you said you were still able to get a loan right now and I’m sure there are a lot of people that right now are in a better position than they may be in a month or two or six from now. Now is the right time to be analyzing your portfolio and saying, “Hey, do I have any loans that are coming due in the next year or two or three?” And if you do now is the time to figure out what is your backup plan when that loan comes due if you can’t execute on your plan A.
So for a lot of us that plan A is we’re going to refinance. We’re going to go to a bank and we’re going to either refinance our hard money loan. Maybe our plan A is we’re doing a flip and our plan A is that we’re going to sell it. Maybe our plan A is that we’re going to find another private lender. Our cousin has money in his IRA and our plan A is that he’s going to lend us the money. Well, now is the time because lending’s going to get tighter and it’s going to be harder to find money. Now is the time to make sure not only do you have a plan A but you also have a plan B, C and D.
So, if let’s say you have a hard money loan and let’s say that loan comes due in eight months from now. So you’ve been flipping a property, you had a 12 month loan and you’re four months in, it comes due in eight months now is the time to go sit down with that hard money lender and say, “Hey, what happens if eight months from now the economy gets really bad and I can’t repay this loan? Are you going to call it due? Are you going to foreclose on me? Or are you going to extend that loan, maybe make me pay a point or two, maybe raise the interest rate a little bit but will you give me a backup option to extend that loan?” And if the lender says, “Yeah, I’ll definitely extend the loan as long as you’re current on your payments.” Great, there’s your plan B. But maybe the lender says, “No, you need to pay in eight months because I need this money for something else.” And now you know that you have eight months to figure out a plan B and now is the time to start working on it.
I know too many people that wait until three weeks before their loan is due, three weeks before some balloon payment is due and they say, “Oh no, what am I going to do?” And they go to the lender and they say, “I don’t know what I’m going to do.” And they say, “Well, why didn’t you come to me six months ago or eight months ago?” And so, now is the time to really look at your portfolio, look at any loans that are coming due and not just in the next three or six months. Remember a downturn can last a year or two or even three years so look at all of those loans that are coming due in the next 24 to 36 months and make sure you have a plan B for each of them.
I make loans these days to people that are doing BRRRR investments so they’re buying a property, they’re borrowing money from me to renovate it, put a tenant in it, with the plan to then refinance with a larger bank. And so, what I’ve done is I’ve gone to each of those investors and I basically said, “Look, your loan is due in up to 12 months,” whatever it is it’s typically a 12 month loan, “But if in the time that loan comes due if there’s a problem and you can’t get a refinance I am going to be willing to extend that loan. I don’t want you to just have to stress over that, I don’t want you to have to worry about that.
As long as you’re making payments, as long as you have a tenant in there that you can continue to make me payments I’ll extend that loan for a year or two or three or five. I don’t care I’m happy to extend it.” Because I don’t have anything better to do with the money I’d just loan it to somebody else for the same exact purpose. So as long as they’re paying I’m going to extend the loan. There are a lot of lenders out there that are willing to do that but I know for me I like to have a heads up. I like to know what my exposure is. I like to know where I’m going to have to put money or what money I’m getting back. So have those conversations with your lenders now don’t wait until two weeks before the loan is due.

Ashley:
I think that is so important having the multiple exit strategies. Even not in the downturn even when the economy is great, maybe a flip isn’t going to sell will this property still work as a rental property? So, let’s talk about strategies that might work in a downturn. So a rookie investor just looking to get started what would you recommend they get into flipping, wholesaling, buy and hold? What strategies would work the best right now?

Jay:
Perfect. Well, let me start with the question of what should we be doing today during this pandemic? So during a typical downturn, during a typical recession, I can give you a laundry list of what we should be doing and not doing and I’ll go into that next. But it’s worth pointing out that what we’re seeing today right this minute over the last couple months is unprecedented. I’ve written a book on economic cycles and what real estate investors should be doing and I don’t have a chapter in that book about how to invest during pandemics because nobody’s really thought about something like this happening.

Felipe:
Especially for buy and holds. I mean, as a buy and hold investor I thought that I was pretty safe during a downturn but.

Jay:
I have been saying for a decade now that buy and hold investing is always a safe strategy but now I have to put an asterisk next to every piece of advice I give that this piece of advice may not hold up during a pandemic. First thing, if you’re looking to invest now, if you’re just getting started now, the first thing I would say is don’t be impatient. I know a lot of investors that have for the last three or six or 12 months have been ready to do their first deal. They see the market, not necessarily the market dropping but they see the economy getting bad and they’re thinking, “Okay now is my opportunity,” and they’re ready to rush right out and do a deal today or tomorrow or next week.
The first thing I would tell them is don’t, slow down. Now is a great opportunity to flush out your business plan, to make sure you know what you want to do, to understand where the market might be headed and what strategies that are going to work and not work. Now is a great time to be studying and reading and learning. Listen to all the old rookie podcasts, listen to all the old real estate, the BiggerPockets real estate podcasts, go read the BiggerPockets books. Now is a great time, go read the forums, go read the blogs, now is a great time to be learning and educating yourself and getting prepared. But right now today is not a good time for a rookie investor to actually start buying deals. Unless that deal is so good that essentially nothing can go wrong now is not a great time to be buying investments. And just proof of that is I have bought many hundreds of investments and my partners between us we’ve bought many thousands of investments and we’re buying very, very, very few investments today because there are so many unknowns.
Where we are in the economic cycle is again, it’s unknown. We’ve hit pause on the economy and when the pandemic ends or at least when the lockdown ends something’s going to happen. Either we’re going to find that we’re like in the midst of a recession, we’re going to find that we’re in the midst of a recovery, maybe we’re going to find we’re going to find we’re in the midst of a depression, we don’t know. And without knowing where things are going to be in a month or two months when everything opens up it’s impossible to know what the right investing strategies are today.
So the very first thing I’m going to say is don’t be impatient, don’t run right out and do deals. If you’re on Facebook, if you’re on BiggerPockets, you’re going to be reading about all these people that are still doing all these deals. Don’t feel the need to keep up with them, don’t feel the need to do a deal just because everybody else is. Now is a great time to sit back, to pay attention, to learn, to prepare.
Now, what strategies typically work during a downturn? The first thing I’ll say and I know this is going to disappoint a lot of people, flipping tends to not be a good strategy during a downturn. So, the entire strategy of flipping relies on buying low and selling high and when the market’s dropping and when values are going down that selling high piece is pretty tough. Sure I can buy low today, low relative to what today’s resale value is, but if the market’s dropping that might not really be a low number come three months or six months from now.
So, what I tell people is don’t buy a flip now unless a couple things. One, you get such a great deal that you’re confident you can turn around in three or six or 12 weeks and still make money or at least break even. Number two, if you’re going to buy a flip right now make sure you keep the project quick. So, during a typical recession at least it’s unlikely that the market’s going to drop five or 10 or 20% over a month but it can drop five or 10 or 20% over six months. So, don’t do projects that are going to take you six or 12 or 18 months to complete. I would tell people don’t start a new construction project right now because we have no idea where the market’s going to be in six or 12 or 18 months when that’s ready to be put back on the market.
But even a flip, unless you’re going to keep it to a month or two or even maybe three months turnaround you’re taking a big risk. So if you’re going to do a flip right now one make sure you’re getting a fantastic deal. Two, make sure that you’re keeping that deal really quick. Only take the flips that you can get done in the next month or two don’t buy five flips right now knowing that, “Okay, I’ll get one done in two months and then I’ll do the next and the next and the next. By the time you get around to that third or fourth or fifth flip the market could have crashed and you’re in a bad position.

Ashley:
Yeah. Before you go on to the next strategy I just want to mention that if anyone wants to learn a little bit more about flipping during a downturn I think it was episode 381 on the real estate podcast where Tucker started talking about speed is your best friend doing a flip during a downturn. So if you guys want to go back and listen to that more. So, what’s the next strategy you want to talk about maybe buy and hold or how’s that?

Jay:
Absolutely. So let’s talk about buy and hold. So buy and hold is one of those strategies that works in any market and again asterisk maybe not so great during a pandemic because there are people not paying their mortgage. But typically speaking a buy and hold deal, a deal that’s generating cashflow every month is going to be good in every market because even if the value of that property goes down as long as it’s generating cash flow month after month after month you’re going to be in a good position. Typically speaking during a recession we might see a small drop off in market rents in some cities, in some states, in some counties. But typically speaking rents are pretty forgiving and rents tend to stay pretty strong even during a downturn.
So let’s say you buy a property that you pay $100,000, it’s renting for $1,500 a month. If the market crashed and that $100,000 property dropped to a $20,000 property you don’t care as long as you’re still making your $1,500 a month. Because eventually that property is going to come back up to $100,000 property. So the key is that it’s generating cashflow to cover whatever your worst case situation is.
So, what can you do to ensure that it’s generating the right amount of cashflow? A couple of things I’d like to suggest. Leading into a downturn make sure that you factor in when you’re underwriting the property, and when I say underwriting I mean analyzing a deal, make sure you assume that the market’s going to drop or the rents are going to drop by about 10%. Typically like I said in most markets they’re not but the worst case scenario, and I always like to look at worst case scenarios, the worst case scenario in most markets is that rents might drop by about 10%. So, if you do your analysis and you assume let’s say rents are $1500 today, if you assume 10% less than that, if you assume rents are going to drop to $1350 a month and the numbers still work then move forward with that deal.

Felipe:
Anytime I think you should be conservative when running your numbers and run your numbers twice what they are exactly now and what’s worst case scenario.

Jay:
Absolutely. So one, I always tell people model your deals 10% lower rents than whatever they are today or whatever they were last month. Next assume that you’re going to have higher vacancy. Now that may or may not be the case. Just like market rents vacancy tends to be pretty resilient during a downturn especially in certain markets and certain types of properties but always assume that you’re going to have higher vacancy. You’re going to have some units that aren’t rented because it’s harder to find qualified tenants or you might have units that are rented but people stop paying.
So, even though technically it’s not a vacancy you may not be making money off those units so I always like to say model your deals with a 10% higher vacancy, so 10% lower rent, 10% higher vacancy. If the deal still works out with a 10% lower rent and a 10% higher vacancy buy, it doesn’t matter if we’re at the top of the market, the bottom of the market. Because again, as long as it’s cash flowing it’s probably going to continue to cash flow no matter what the market hands us. And then the final thing I’ll say about buy and hold is there are certain types of property that tend to do better during a downturn than other types of property. Did you want to ask a question Felipe?

Felipe:
Yeah, no, I was interested because all this knowledge and everything that you’re putting out I’m like okay this is all really good information. So, I’m assuming you were a pro with your very first property too, right? With your very first deal I’m assuming you totally hit it.

Jay:
Oh no, we should talk about my first deal. After this let’s talk about that.

Felipe:
Yeah, after this let’s get there because I know our listeners are going to be dying to hear about your very first deal.

Jay:
Yeah. Okay. So real quick lastly I’ll say about buy and hold though is the type property you buy is going to impact its performance, it’s most likely going to impact its performance during a downturn. There are certain types of properties that tend to perform better and it makes sense if you think about it. When people start losing their jobs and getting their hours cut and getting their wages cut they’re making less money and they’re not looking to make extravagant purchases.
For that reason, we tend to see a lot of people that are renting that A class housing, those really nice apartments or those high end houses they tend to decide, “Okay, I’m going to save my money. I’m going to be a little bit more frugal.” And the people that are renting those really nice A class properties tend to move down into the B class properties. So they might move from an apartment complex that has a really nice gym and a pool and a concierge and a Starbucks on site to a decent apartment complex that might have a decent gym and a smaller pool or whatever they’re going to move down in class. And then those people that were living in those B class properties a lot of them are going to be frugal as well. They might lose their jobs, they might get their hours cut, and they’re going to decide I need to save money. So what they’re going to do is they’re going to move from that B class housing down into C class housing.
A lot of people in C class housing well most people aren’t going to go homeless so C class housing is going to tend to be pretty resilient. In fact, during a recession C class housing, that working class blue collar housing tends to perform very well. Sometimes those values go up and the rents go up. Likewise with mobile homes, mobile homes tend to be the lowest tier where people will settle in when they start losing their jobs or they’re trying to be more frugal so typically mobile homes tend to do very well during a downturn.
So one of the things I tend to tell people is if you suspect a recession coming or if a recession’s here and you’re looking to buy a safe buy and hold deal focus on mobile homes, focus on C class properties, focus on maybe B minus class properties, but stay away from those A class and those B plus class properties because those are the ones that are going to tend to perform the worst during a downturn.

Felipe:
Exactly. That’s exactly what most of my portfolio is that way it’s just a very C, C plus, B minus, blue collar, hard working dudes and they’re doing just fine. I have yet to have somebody miss a rent payment. If anything, I’ve had people pay me a month or two in advance because they want to make sure that they still have their spot at our house. I’ve also had a whole bunch of people start calling me regarding rooms to rent or apartment basements that we have for rent as well. Because I think they’re just not wanting to pay that really high rent for the next six months to renew their lease they’re like, “Well, maybe I’ll go to a two bedroom basement that I’ve built out or something like that and I’ll wait this out just to see what happens.” So I’ve had a ton of calls actually going forward from there.

Ashley:
I’ve had people say that they wanted to buy a house and we’re going to end their lease and they actually are going to wait now to purchase property and they’ve asked to go month to month on their lease renewals.

Jay:
Yeah. There’s definitely opportunity in the lower class housing. To be honest I’ve stopped investing in other people’s deals at this point over the last year, year and a half. But the one deal that I have invested in over the last year and a half has been mobile home parks. I have a friend, and I don’t want to say his name although we all know him …

Ashley:
I was just going to say who someone who has created all this rage about mobile home parks.

Jay:
Yes but I love, love, love. I mean it’s Brandon Turner and Brandon I trust more than anybody but I just absolutely love that strategy. He picked the perfect strategy at the perfect time.

Ashley:
Yes the timing too.

Jay:
Timing was absolutely perfect. So, and then there are other things that perform well during a downturn if you’re in the commercial space. Self storage tends to perform pretty well because when people are moving from their A class to B class to C class housing they’re typically also downsizing but people don’t like to throw away stuff so they put their stuff in storage. So storage tends to do pretty well during a downturn. If you’re into the commercial retail stuff like grocery stores and retail strip centers that have groceries in them tend to do well. Medical centers tend to do well. So there are definitely a lot of classes of real estate that are what we refer to as recession resistant which means they tend to do well or at least much better than other classes of real estate during a downturn.

J:
… much better than other classes of real estate during a downturn.

Felipe:
Yeah. That’s a whole lot of information that’s really good, and personally, I know that I’m going to go back and re-listen to that last 20 minutes and just kind of take more notes.
But let’s pivot a little bit, and assuming you didn’t have all this knowledge when you did your very first deal, but let’s dig into that. Let’s dig into J Scott’s very first deal. How did that come out? Was it during a downturn? During an upturn? I mean, give us the dirty on it.

J:
I love this, because I can’t even tell you how many podcasts I’ve done, and I’ve talked about so many things, and nobody ever asked me about my first deal, at least not in any detail, so this is good. This will be the first time I’m talking about this in detail.

Ashley:
This is exclusive.

J:
Yeah, exclusive J Scott’s-

Ashley:
J Scott’s exclusive interview.

Felipe:
Yes.

J:
So everybody’s heard about all the things that go right with my investing. Well, let’s talk about this first deal and all the things I did wrong, and I did a lot of things wrong. So first of all, I give my wife full credit for me doing that first deal. We had looked at maybe a hundred houses and I was terrified to pull the trigger.

Ashley:
What were you doing before this?

Felipe:
Good question.

Ashley:
And what made you want to jump into real estate, real quick?

J:
Yeah. So my wife and I were in the tech industry. We were working full time jobs in California. When we decided to get married, we were both working like a 100 hours a week and it just wasn’t sustainable. So when we decided to start a family, we literally just quit our jobs. We moved from California to the east coast, and we said, “We’re going to figure something else out,” but we had no idea what that something else was. We weren’t planning to be real estate investors.
And while we were trying to figure out what to do, my wife just kind of, one day, said, “Let’s flip a house.” And I thought she was nuts because I am not a handy person. I can barely change a light bulb, but I still wanted her to marry me, so I wasn’t going to say no.

Felipe:
That a boy.

J:
Yeah. So it was spring of 2008 and we started looking at houses. I jumped on Bigger Pockets for the first time.

Ashley:
Wait, did you say spring of 2008?

Felipe:
Yeah, did you say 2008?

J:
Spring of 2008. Not only spring of 2008, spring of 2008 in Atlanta, Georgia which, if you look at the data, was one of the hardest hit cities in the country during the downturn. So it ended up, in retrospect, being pretty good timing, but I’ll tell you, if I knew more when I started, I would not have started then and there. So it worked out, but only because of my stupidity or at least my lack of knowledge and experience.
So spring of 2008, we start looking at houses. We found a wholesaler in our area that wanted to show us houses, so I thought, “Oh great, somebody’s going to teach us how to do this, somebody I can trust.” Yeah, it wasn’t quite that. So we looked at maybe a 100 houses between May of 2018 and July of 2018, I mean literally. I mean, every day we would go out and look at houses and every day we’d say, “No.” I’d find an excuse not to do it.
So July of 2018, and my wife said, “We are buying a house. I am not going to let you put this off any longer. The next house we see, we’re buying.” And again, I didn’t think she was completely serious, so I said, “Sure, great. Next house we see, we’re going to buy.”
We saw this house. It was probably one of the uglier houses I’ve ever seen, but we got done looking at it, and my wife said, “We’re buying it,” to the wholesaler, and he was thrilled because he had just shown us a 100 houses. I was mortified because I really, I mean, I wasn’t ready to buy. I just wanted to put it off and put it off, but I certainly didn’t want to buy this particular house.
And I’ll give my blog site later, where you can go kind of actually look at all the pictures and see all the details of this deal, but basically, this was this two story house. There was like 30 steps you had to walk up to get to the front door. It had no garage, so you literally had to walk up 30 steps to get to the front door. There was bamboo growing in the backyard, completely overgrown. I mean, the house was just really ugly, and it was on a really big lot, so that was nice, but it was just, it wasn’t a house that I imagined for my first flip.
But my wife said, “We’re doing it.” We negotiated a little bit with the wholesaler, and we came up with our numbers, and so it was a $63,500.00 purchase price for this house. I walked through to do the rehab estimate, and I remember walking through the house, looking around, and thinking to myself, “I have no idea what I’m looking at. What am I supposed to be writing down? What questions am I supposed to be answering? How do I know what needs to be done and what doesn’t need to be done?”
I remember walking into the bathroom and pointing to, in the shower, the grout lines in the shower were black, and I said, “I think this house has mold.” And honestly, I thought, “We’re going to have to get mold testing and mold removal,” because the grout was black. That’s how little I’d paid attention to my own house, which was probably 10 times more disgusting, at least until I met my wife. So I had no idea what I was looking at. I had no idea what questions to ask.
Somehow, I came up with the number $30,000.00 for this rehab. No idea how I came up with that number, and then everybody was telling me, “Well, you have to be conservative.” So I said, “Okay, I’m going to add 10%.” So $33,000.00 was my rehab estimate. Now, in retrospect, here we are 12 years later, I’ve written a book on estimating rehabs. I know what things cost. That rehab is probably a $70,000.00 or $80,000.00 rehab.

Felipe:
Oh my gosh.

Ashley:
Wow.

J:
That’s just kind of a preview of where we were. Okay.

Ashley:
Yeah.

J:
So $33,000.00 from my rehab estimate. I assumed I would hold this property for three months. We were paying cash, so we didn’t have many holding costs, which was good, but we had property taxes, we had insurance, all that, but I assumed three months, and I figured three months is plenty of time to get this thing renovated and turned around and resold. No problems there, and then we came up with a resale value of, I think, $130,000.00 or $135,000.00. So purchased for $63,000.00, put $33,000.00 into it, so that’s $93,000.00. I think I had $15,000.00 in holding costs. That’s a $108,000.00, and resell it for about $130,000.00, so that’s about a $22,000.00 profit. I was thrilled with a $22,000.00 profit.
Turns out that, one, we paid too much. So $63,500.00, in retrospect, we probably should have bought this house for $30,000.00 or $40,000.00. There were other houses that were very similar that we later learned were selling down the street for like $20,000.00 less, so we overpaid just based on the comps. Two, we started getting our rehab estimates, and I mean, I was getting estimates between $60,000.00 and a $150,000.00, so I had no idea. We were going to lose money from day one just because I underestimated the rehab, but we can talk about that in a second.
So we made a mistake on the purchase. We made a mistake on the rehab. On the resale-

Ashley:
So you’re saying, “The next house we see, we’re buying,” is not a good strategy to start with?

J:
Not necessarily a good strategy, though I will get to the good part of that. The good part of that is, if we had not purchased this house, it’s very possible we never would have bought a house.

Ashley:
Yeah, that’s true.

J:
So I do give my wife credit that she made us kind of jump off the cliff.

Ashley:
You finally took action.

J:
We finally took action, and probably not the best property, but it was better than not taking action. So we made a mistake on the purchase, we made a mistake on the rehab costs. We assumed it would take three months from purchase to sale. I think, even in a good market, as a first time investor, even a great market as a first time investor, a full rehab, you have to allocate more than three months. This was 2008. I mean, we should have allocated 9 or 12 months of reserves.
So we made a mistake on the holding costs, and then in retrospect, that $130,000.00, $135,000.00 resale price was actually closer to $115,000.00 or $120,000.00. So we literally made a mistake in every number on this flip. All four areas, purchase, rehab, holding, and sale, we made a mistake.
Now, what did we do? So we got into this. I ended up finding a contractor who said, “I can do all of this for $30,000.00, no problem whatsoever.” Single guy who had his own tools. He was like, “I can do everything from the roof to the plumbing, to the flooring.” I was thrilled. He was doing this for $30,000.00.

Felipe:
That just sounds like a bad tattoo waiting to happen there, bud.

J:
Oh my God. So first lesson for anybody out there that’s getting ready to do their first flip, don’t hire somebody that says they’re going to do all the work themselves. First, they’re not going to have the skills to do it. Nobody is. I mean, you can be a jack of all trades, but you don’t want a jack of all trades to do a retail flip. People aren’t going to see past those types of problems. So finding somebody that says they’re going to do it all, first, they’re not going to do a good job on all of it.
Second of all, they likely are not going to estimate the cost of the job correctly. Typically, those people are going to go in with rose colored glasses. “Yeah. I can get this done for $30,000.00,” thinking, “Ah, if I get it done for $50,000.00 or $60,000.00, that’s great.” I, as the investor, I wasn’t expecting that $50,000.00 or $60,000.00. I was expecting $30,000.00. For them, it was kind of like, “Yeah, I’ll try and get it done for $30,000.00.” They’re not the type of people that use the software to create the rehab estimates and they track everything in Excel and they know their costs. They’re just throwing out a number.
And then number three, if you find somebody like that, you’re probably going to wait 3, 6, 9, 12 months for this rehab to get done.

Ashley:
Especially if they’re doing everything themselves.

J:
Especially if they’re doing everything themselves. And then, when you start asking them, “Hey, this is taking a long time. Can you bring in somebody to help you?”
“Sure, I’ll bring in somebody to help me, but then it’s going to get really expensive.” So first lesson I learned in this business was the jack of all trades contractor is probably not the right kind of contractor for your jobs.
So anyway, long story short, this flip talk took us three or four months, should’ve taken three or four weeks. We actually did get pretty close to budget, though if I go back and look at our scope of work, I mean, we had an 18 year old HVAC in there that we didn’t replace. The roof was close to 20 years old. We didn’t replace it. So we took a lot of shortcuts. Again, we made essentially every mistake we could make.
We threw the property on the market at, I think, $125,000.00 or $130,000.00. We got one offer that fell through. I got really scared and said, “Oh no, we’re never going to be able to sell this property,” because it had been on the market for three weeks. This is 2008, when six months was probably the right amount of time. So I got really scared. I said, “We’re not going to sell this. Let’s just rent it out.”
So long story short, we got a lease option tenant in there. They stayed for about two years. They destroyed the house. They left in the middle of the night one night. I mean, we only found out that they left when we got a call from the police that there had been a break in at the house, and we realized they had probably been gone for two or three weeks at that point.
And so we did a complete second rehab. At this point, we had done like 30 or 40 renovations, so we were ready for it. We did a second rehab. We put it back on the market. We put it on the market at a good price. We got a quick sale. We ended up making $1,200.00 on this deal.

Felipe:
Oh, what is that per hour worked?

J:
I’m-

Felipe:
I mean, what was your hourly on that?

J:
There is zero chance I made minimum wage. But I look back and I think to myself, “Okay, it took three years. I made every mistake I can make. I probably literally made less than minimum wage. I probably made $2.00 or $3.00 or $4.00 an hour, ridiculous amount of stress, ridiculous amount of headaches for this deal,” but I look back, I made money. I made $1,200.00.
And so, what I tell people is be conservative, because that’s the only reason that we made $1,200.00, was because even though we overpaid, I still assumed $63,000.00 was a low number. Even though we mis-estimated the rehab budget, I still assumed in my calculations, that I was going to have a decent amount of profit, so if I ate into that profit for the rehab, I’d be okay.
So every step of the way, I miscalculated the numbers, but I was conservative still, and so the fact that I was conservative allowed me to kind of make every mistake in the book on that first project and still make a small profit.

Felipe:
So it sounds to me like you learned all of the lessons that we real estate investors learn in that one property. It sounds like you just learned everything in one property, but what I’m also hearing is, you took action. You took on a project that was out of your comfort zone. I mean, you even still made money proving that real estate’s forgiving. It seems like you learned a lot during this process, but more importantly in all of it is, you took action, which is trajectory to where you’re at now.

J:
Absolutely, and that’s the thing that I tell everybody, is that at the end of the day, I’m not telling anybody to jump in without learning, without researching, without listening, without reading, without talking to other people, but at some point, you’re going to know that you’re ready and you’re going to know that you’re just delaying because you’re scared. People know that.
I’ve talked to enough investors that, when I say to them, “Do you feel like you don’t know enough? Or do you feel like you’re just too terrified to take the next step?”, 99% of the time, that investor knows the difference. I mean, we always think, “I’m not sure that I know enough,” but if you really are honest with yourself, you know if you’ve studied enough, that you’re kind of ready to take that next step.
And so what I say to people is, “Have that conversation with yourself or with your spouse or with your partner and be completely honest. Am I not buying a deal because I feel like I’m not ready, I don’t know enough? Or am I not buying a deal because I’m just scared to take that that leap?” And if you can be honest with yourself, and most of us can, if the answer is, “I’m just scared to take the leap,” well you’ve done the hard part. You’ve come to that realization that this is what’s stopping me and you no longer have that excuse that I haven’t learned enough or I’m going to do it next month or next year.
You have to accept the fact that, because you’ve said to yourself, because you’ve admitted to yourself that you’re just scared, you have to accept the fact that you’re either going to do a deal soon, or you’re never going to do a deal.
Here’s one of the big secrets that I learned in real estate, and I try and tell this to everybody that’s kind of in that analysis paralysis phase. I meet a whole lot of people out there that fall into one of two categories. Either, one, they’ve done zero deals. They read and read and read and study and study and study, and they never actually pull the trigger. That’s probably about 90% of the people I meet.
Then there’s the other 10%. Those are the people that have done 2 or 3 or 5 or 10 or 50 or a 100 deals. You know what type of people I never ever meet? I never meet anybody that’s done one deal. Do you guys know anybody that’s done one deal and stopped?

Ashley:
That is such a good point, because I don’t, and the whole time you’ve been talking about this being scared of and thinking of how people have said they have fear, they’re afraid to do it. But look at you, I mean, almost worse case scenario. A lot of bad things happened in that first deal, and look at how far you’ve come now, that you can get over those challenges, and sometimes those are the most successful people that have failed in the beginning and it just helped them overcome those hurdles and be stronger in the end.

J:
Yeah. People have to realize nobody does one deal, because once you get that first deal, it gets a 100 times easier. The second deal is so much easier than the first, and the third is so much easier than the second, and after you get that first deal, everything kind of clicks into place. Like I said, when I walked through that first house, I said, “I don’t know what I’m looking at for the rehab estimate.” After doing one rehab, the second house I walked through, I was just like, “Okay, I know what I’m looking for. I remember on that first house, the flooring was crap. I had to replace the flooring, I had to redo the tile here, and maybe I should check the plumbing and see if that’s working.”
And I knew all the questions to ask, so that second deal was so much easier. So what I tell people is, if you’re terrified, just do that one deal, because I promise you, if you don’t give up and you do that one deal, before you know it, you’re going to realize that you’ve done 5 or 10 or 500 deals.

Ashley:
That is such great advice, and I hope that our rookies listening will take that advice and take action. And you do get addicted once you get that first deal done and it does become easier. So we have a segment. It’s called The Rookie Request Line, and a rookie calls in and we hope you can answer a question for them.

J:
I will try.

Ashley:
And if anyone else would like to call in and we’ll play your voicemail on the phone, or on the podcast, you can call 1-888-5-Rookie, and leave us a voicemail.

Jake Myers:
Hey, guys. My name is Jake Myers. I’m from Redding, California. I’m looking to get into another rental property. I was ready to pull the trigger before all this craziness hit the market. So my question is, are you guys waiting to see what happens? Or are you guys continuing to purchase more real estate? I’m kind of worried that the stimulus package is going to inflate the economy and raise prices, while on the other hand, I’m worried that this is going to lower prices, so I should wait. So just wondering whether I should wait? Or pull the trigger? Thanks, guys. Bye.

J:
So my answer is, to anybody out there that feels like they need to ask that question, should I wait, or should I pull the trigger right now, if you’re not experienced enough to make that determination on your own, the most likely answer is you should probably wait. Right now, like I said earlier, right now is kind of an unprecedented time. Things are a lot different than they’ve ever been, and there’s no shame in saying, “Hey, I don’t know what’s going to happen.”
Because let me tell you something. I get to talk to some of the best investors in the world, some of the most experienced investors in the world, and the thing that I’ve realized is, none of us have any idea what’s about to happen next. I mean, I’ve talked to people who think, literally in three or six months, we’re going to be at an all time high in the stock market, real estate prices are going to go up. Then I talk to people who think, in three or six months, we’re going to in a depression greater than 1930.
So even the best investors in this business can’t agree on where things are going, so for anybody out there that’s confused and they don’t know if now’s a good time to buy, you’re not alone. I don’t know if now’s a good time to buy. So what I would tell those people though is, it’s not a time to curl up in a ball and kind of run away from what’s going on. Now’s not a time to sit in front of the TV and just say, “Okay, I’ll think about real estate again in six months.” Now’s the time to start reading and studying. Create your spreadsheets. Go look at 20 deals and run the numbers so you get better at running the numbers. Go figure out how to expand your credit lines, go figure out how to save cash, go find partners. This is something I’m telling a lot of people.
During a downturn, if the market gets bad, one of the nice things about a bad market is there’s going to be a lot of opportunities, but for new investors, it’s hard to take advantage of a lot of opportunities at once. And so, if you want the best chance to be able to take advantage of multiple opportunities, build a great team. So go find a partner, go find somebody that’s good at acquisitions, go find somebody that’s good at raising money, go find somebody that’s good at managing renovations or good at estimating renovations. Go start putting together a team, so that if some great deals start to present themselves in three or six months, if we have some great opportunities, you’re going to be ready.
So now may not be the time to go out and be spending money, actually closing on a deal, but certainly now is a time to be working on your real estate business.

Ashley:
That’s a great point about building your team too, because now is the time to watch those professionals and see who is excelling during this time, who has their stuff together. Your CPA, lawyer, your realtor, how are they handling everything that’s going on right now? And that could really determine if you want to continue to partner with them, or maybe form new partnerships with the people on your team.

J:
Absolutely.

Felipe:
No. Yeah, that’s absolutely right. I’m definitely, myself, looking at my team and seeing how people are reacting, including my realtor, my CPA, and what they’re doing during this time, because that’s going to tell me if I should keep them onboard going forward past this. Are they positive? Negative? What’s going on? So I’m really looking at my team right now, and I think everyone should.
J, before we get to some of our funner questions going forward, I did want to ask you one more thing. Where do you think the market will be through the rest of 2020?

J:
Yeah. So I am happy to give my, I’m not even going to call it an opinion. I will call it a guess. I already said earlier that anybody that tells you that they know where the market’s headed or how good or bad it’s going to be is just making stuff up. So let me start with what I’m about to say. I’m just making stuff up. This is my guess based on data that I’ve seen and where I think that data could lead. It’s my guess based on trends that I’ve seen, people I’ve talked to, but here’s my guess.
I think at some point, in the next month or so, hopefully, we’re going to, for the most part, get out of this lockdown, and once we get out of this lockdown, I kind of use the metaphor, we’ve run off a cliff and we’ve dropped down to the bottom of the cliff, and at the bottom of the cliff, there’s a trampoline, and that thing that’s fallen off the cliff is the economy. And so, the economy goes all the way down, like as bad as it can get, it hits a trampoline at the bottom, and when things open back up, that trampoline kind of pushes the economy back up.
Now, anybody that knows physics knows that when you bounce on a trampoline, if you don’t add energy, you’re never going to get back to the same point that you started at, so you’ll never get back to the top of the cliff. The question is, how high back is the economy going to bounce? Is it going to get close to the top of that cliff? Is it going to get only about halfway? Where are we going to settle in once that initial bounce, after the lockdown, kind of takes hold?
My take is that we’re going to settle in, in a place that looks like a typical recession. So we’re going to have decent unemployment. There are a whole lot of people that are not going to get their jobs back after this unfortunately. A lot of businesses are going to go out of business, a lot of businesses are going to slow down. There are going to be fewer people traveling. The tourism industry is probably going to take a hit. People might be-

J:
The tourism industry is probably going to take a hit. People might be going to like the beach, their local beach, but people aren’t going to spend necessarily $10,000 to go to Disney World after this when they don’t know what’s happening with the economy. So, I think that we’re just going to see a general slowdown in the economy over the next three to six months, we’re going to see what’s basically a typical recession. And then, in six months we could go one of two ways. I think things could either start to get better and we could come out of that recession the way we typically come out of a recession. Or we could see what ends up being a very, very, very bad downturn.
Now, there are three things that I think will play a part into which way we go. So, like I said, next three to six months kind of typical recession. And then, from there, it branches off either better or worse. And the three things that I think will, ultimately, determine whether it gets better or worse are number one, there were a lot of things in the economy that were not looking great leading into this pandemic. The economy was pretty strong, stock market was great, unemployment numbers were great. Everybody knows that. But there were certain other numbers that were less strong. We were cutting interest rates and manufacturing was in a slump, and retail wasn’t doing great, and wages weren’t really keeping up with inflation. So, a bunch of economic numbers that were just less than stellar.
So, it’s very possible that this pandemic exacerbates all of those things that weren’t looking great before. So, if the whole interest rate situation ends up being really bad, leading into this pandemic interest rates were in a bad place, that can cause a whole bunch of different industries like manufacturing and retail, and tourism, it could cause those industries to snowball and it could cause everything to just go out of control. So, basically, all those economic indicators that weren’t great leading into this could get a whole lot worse, so that’s number one.
Number two, the government is spending literally trillions of dollars, it could be 5 or even $10 trillion before this is over to keep the economy going. That’s a necessary thing. I mean, nobody likes having to spend $5 trillion to print money but, in this case, I think it’s an example of a time when it’s absolutely necessary to do. The question is what is that going to break? How is spending $5 trillion, or 3 trillion, or 10 trillion over a few months what does that break in the economy? We’ve already seen this whole thing in oil. So, for anybody that hasn’t been paying attention, basically oil prices for crude oil have gone negative, something that’s never happened before. Nobody could have predicted.

Ashley:
Who would have thought that would have happened?

J:
Exactly. It was one of those, I refer to it as an unintended consequence. The mortgage industry, we’ve had a lot of issues in the mortgage servicing industry because of the forbearances And because people are being told they don’t have to pay their mortgage or pay their rent. So, that’s an unintended consequence. What are these other unintended consequences besides oil, besides the mortgage industry that all the stimulus breaks? Is there something really, really big that happens that we break that just destroys the whole economy? We don’t know. So, that’s number two.
And then, the number three question that we don’t know the answer to, so we don’t know if things are going to get better or worse is what’s going to happen with future lock downs? So, we could come out of this lockdown for this pandemic next month, and everything gets better. We find a vaccine, or we find a good treatment, or we find out that 90% of the people have already gotten it, so we are mostly through it. And that’s a good scenario. The bad scenario is what happens if we don’t get a vaccine, if in six months we hit the fall, and the virus comes back really hard, and we have to go into a second lockdown, or a third lockdown, or a fourth lockdown? That can derail the economy again.
So, at the end of the day, the risks are all the things that were kind of not great in the economy leading into this pandemic, those things can break. All the stimulus that the government’s releasing during the pandemic that could break something. And future lock downs that could really derail the economy again. If any of those three things happens and cascades and dominoes, I think, we could see a major, major, major, major downturn. If none of those three things happen, so if we get really lucky, then I think people are right, what we might see is we see a typical recession. And then, in 6 to 12 to 18 months, everything’s back on track again.

Ashley:
Thank you for sharing that with us, J. I think it’s always interesting, at least for myself and I think our listeners too, is hearing someone’s perspective, and your guess on what could be the future. Because I think that’s what everyone is wondering now is what is going to happen? And, hopefully, it will help them make a decision whether they should continue to invest, keep investing. But really everyone needs to make that decision for themself. And I’m really glad that you had brought that point up too.
And we did mention it a little bit earlier, but you did write a book about this for anyone who wants to read it, that wants to find out some more information about understanding the economy and how these cycles work. Can you tell us a little bit more about that?

J:
Yeah. So, economics has always been a passion of mine, and real estate’s always been a passion of mine. And I realized about a year and a half ago that there were no good books out there that talked about economic cycles and the economy, and how it relates to real estate, and us as investors. So, I wrote a book called Recession-Proof Real Estate Investing. And it is basically all about how the economy works, all about how economic cycles work. And then, all about, the whole second half of the book is how us, as real estate investors, we should be modifying our strategies and our tactics to ensure that during any part of the economic cycle, whether it’s up or down or flat, that we’re maximizing our profits and we are minimizing our risks. And so, that was released about a year ago through BiggerPockets, again, Recession-Proof Real Estate Investing. And then, just this week they released the paperback version, so I’m very excited about that.

Ashley:
And that has an updated intro in it.

J:
It has an updated intro and actually several sections have been updated. I wrote the paperback version just at the beginning of the pandemic, beginning of March, so I updated a few sections just related to some of the new information that we have.

Ashley:
So, if you want to purchase that, you can go to a biggerpockets.com/recession. And if you buy it from there, there’s also a lot of freebies too. You have some guides that you’re giving away with that?

J:
Yeah, there are a whole bunch of bonuses. And there is a couple Q&A, conferences that I did live with some investors. And I think they’re releasing a couple other bonuses. I don’t know exactly what they are, but there are a couple other bonuses there too. But what I would tell people is if anybody gets the book and is reading it, what I would suggest is over the next three to six months assume that we are in the recession phase of the cycle. And those are the strategies that you should probably be considering most seriously at this point.

Ashley:
Good. Well, yeah, so if you guys want to check that out, biggerpockets.com/recession. And now we have some fun questions to ask you.

J:
Let’s do it.

Ashley:
Felipe, you want to take the first one?

Felipe:
Yeah absolutely. So, what’s a quote that sums up your approach to real estate? You’ve been doing this for quite some time. You’ve gone through a couple of recessions and ups and downturns. And hell you wrote the book on it, right? What’s one line, or quote that you just live by when it comes to this now?

J:
I’m a big fan of Warren Buffett’s famous quote of, rule one for investing, don’t lose money. Rule two, see rule one, not the exact words, but I’m a big fan. I’m a very conservative investor. And I think that’s actually one of the reasons why my wife and I do so well working together is that she tends to be a lot less conservative. So, she kind of pushes me out of my comfort zone. But I credit a lot of my success to the fact that I’m very meticulous about the numbers. I’m very conservative. I don’t take a lot of risks. I’d probably have a few billion dollars more if I were less conservative, but I’m happy to-

Ashley:
It helps you sleep at night, [crosstalk 00:08:17].

J:
I like to sleep well at night, yes.

Ashley:
Okay. So my question isn’t really on our list that we choose from, but I am curious as to what are you doing for your kids, if anything, to involve them in your real estate business? And are you trying to build a legacy for them?

J:
So, well, starting with the second question, no on the legacy. I think a lot of people like to push their kids into what they do. I would love my kids to be entrepreneurs. I would love my kids to be investors. But I’m also realistic enough to know that if I don’t push them, they’ll probably find other passions. So, if what I create ends up being a legacy, if they end up taking over any of our businesses, whether it’s our real estate business or any of our other businesses, that would be awesome. But I like to kind of build on the assumption that they won’t. So, that way I won’t be subliminally or subconsciously kind of pushing them to do that. I want them to follow their own path.
That said, I find it very important that our kids understand money and understand investing, understand the way capital flows through markets. I guess, that’s a complex way of saying we just involve them in our investments constantly. So, our kids went to their first closing, our oldest went to his first closing when he was six days old.

Ashley:
Oh yeah?

Felipe:
Got to start them young.

J:
Yeah, absolutely. He is on every job site with us. I mean, we don’t go to the job sites anymore, but for many years they were on every job site with us. We don’t do a deal, whether it’s a business deal, or a real estate deal, or any other deal that we won’t sit down as a family and talk through the deal. It’s something my wife and I like to talk through all of our deals, but we like to involve the kids. So, we’ll actually walk them through, this is how we do the numbers and let them ask questions. And you’d be surprised. I mean, even at 9 and 10 years old, they often ask insightful questions that get us to think.

Ashley:
Oh I’m sure, yeah.

J:
Yeah. And then, we try and do things the formal way. And I’ll explain what I mean by that in a sec. Every time we do something, so my kids wanted to start a lemonade stand last year. And instead of just doing the here’s some lemonade, here’s a table, go sell some lemonade. My wife and I did the more formal thing of, “Okay, well, let’s talk about how much it’s going to cost to start a lemonade stand. So, what are the things we need? What are the ingredients? What are the cups? What’s the signage? What are the tables? And where are we going to get that stuff? And for the stuff we have to buy, how much is that going to cost? And you guys don’t have any money, so how are you going to pay for that?”
“Well, how about if Mom and Dad loan you the money. And then, we go out together and you can pick the kind of lemonade you want to buy, and you can pick the kind of cups you want to buy. And we can talk through how we want to price that. And you guys make all the decisions, whether they’re good decisions or bad decisions, we’ll figure that out later, but you make all the decisions and we’ll loan you the money.” And then, they did their lemonade stand. And, at the end of the day, we counted all the money. And I said, “Well, we loaned you this much money, so you need to give us that much money back.

Felipe:
Plus interest.

J:
Now, let’s see how much … Yeah, well, we hadn’t started [crosstalk 01:17:18] yet, but we did that separately. So, they returned the money and we actually create a P&L, an income statement. So it was like, here’s our gross revenue, here’s our cost of goods, so here’s the amount we spent on cups and lemonade. Here was our expenses. Here was the amount of money we had to pay Mom and Dad back. And then, here’s our profit at the bottom. And so, from a very early age they realized that just because they make 20 or $30 at the lemonade stand doesn’t really mean they make 20 or $30. And they were really disappointed that first time to find, “Oh, we have to pay back the $20 that we borrowed from Mom and Dad.” But, at the end of the day, they made some money.
And the same day they did their first lemonade stand, I think they had like $35 or something, I said to them, I said, “How would you like to invest that money?” And they said, “Well, what does that mean?” And I said, “Well, this is the way it works, if you want to give me that $35 what I will do is I will give you $3 for every month that you let me borrow that money. You don’t have anything to do with the $35, you’re just going to put it in the bank. But if you give it to me to use for whatever I want to use, I’m going to give you $3 every month.” Or it was 3.50 because I did 10%. “I’ll give you $3.50 every month, and then in six months I’ll give you the $35 back.
And so, they were like, “Oh, I don’t know. Okay, sure. We’ll do it.” I sort of pushed them to do it. And I said, “But if we’re going to do this we have to make it formal.” So, I made them write up a promissory note. So, I Chase and Cade are loaning Mom and Dad $35 at 10% interest for six months, blah, blah, blah, blah. And I said, “Okay, every month I need to give you the money, if I don’t give you the money you get interest or you get a penalty.” And so, every month they get really excited because now they’re up to like $600. So, they’ve taken their birthday money, they’ve taken their lemonade money, and they keep giving me this money, and I’m stuck paying 10%. I mean, it’s crazy. And I think they’ve realized that they’re taking advantage, but they still do it. And so, every month, basically, that’s more than they’d get from an allowance.

Ashley:
Yeah.

J:
And so, we basically treat money the same way it’s treated in the real world. We don’t just give them money like an allowance because in the real world you’re not just given money. If they want to help us with a project they get paid to solve problems, they don’t get paid hourly. So, you come up with a good idea that generates money, well, you get a commission off that.

Ashley:
Yeah. That’s a great idea.

J:
Yeah. Just like the real world

Ashley:
And with them giving you their money that’s saving that money too instead of them spending it.

J:
Exactly. So, yeah. So, we treat our kids like we would business partners.

Felipe:
That’s really good. I love that you’re still incorporating them in the business, but not really forcing them to do anything that’s out of what they would like to do. And then, they’re making money. They’re kind of seeing how it works with 1 or $2 here and there. I can’t wait to see their faces when you start showing them what taxes is going to look like though, so that’ll be a followup one.

J:
We talked a little bit about taxes. They haven’t incurred that penalty just yet.

Felipe:
That’ll be a great one to see when you have to pay them back all that interest and 30% gone.

Ashley:
If you want to walk in the hallways of this house you have to pay it. If you want to use the common areas …

J:
Exactly.

Ashley:
You have to pay a tax.

Felipe:
That’s hilarious. So, I guess for my question, next would be, and this is going to be kind of away from real estate a little bit, what’s a bucket list item that you still want to cross off? It sounds like you’ve done great in real estate. You’ve done a lot. You’re now in mobile home deals. You’re here, you’re there, but what’s something that you would want to cross off your personal bucket list?

J:
It’s so funny. I don’t have any one or two things.

Felipe:
J Scott’s done it all.

J:
No, I haven’t done it all, but there’s so many things I want to do, but it’s kind of like if they don’t happen … So, my wife and I would love to spend a couple of years living abroad.

Felipe:
Nice.

J:
So, we’ve talked about moving to Italy. Like we we’d love to live in Italy for a couple years. So, I guess, that’s big on our bucket list. Do we do it with the kids? Or we wait until the kids are out of the house and then we do it? I don’t know. I’d say that’s probably our biggest thing.
We lived in Northern California for a long time, love Northern California, so we’d love to retire eventually to Northern California, so wine country. But those are kind of the two big things. And anything else, I don’t want to say we’re simple people. We like things, but yeah, it’s, for us, just spending time together as a family, and being able to do our little vacations. I mean, we take weekend trips all the time. And for us, that’s just the best thing in the world.

Felipe:
If I can add something to that J, and this is a little bit off the course here, I’ve noticed so much happiness in people that take weekend trips. We’ve started to do that. Instead of like, “Oh, I’m going to take one vacation at the end of the year.” I’ve heard a lot of people that are just really happy and they just take weekend trips all the time.

J:
I find those big trips, the thought of like going to Disney World or something, that’s just horrific-

Ashley:
Exhausting.

J:
It’s exhausting. My kids, they’re just as happy, I mean, they’re 9 and 10 years old, but they’re just as happy, if we went to California they’d be just as happy driving down the street and getting a hotel down the street because, for them, it’s the staying in a hotel, getting to do the pool, going out to dinner. That, to them, they don’t care if we’re in California, or if we’re in Europe, or if we’re in the next town over.

Felipe:
They’re happy to be with Mom and Dad.

J:
Yeah. And so, for us, I mean, we live in Florida, we live basically a couple of miles from the beach. So, for us, every day is a vacation, so no complaints. And we’re-

Ashley:
Nice place to quarantine.

J:
Yeah, it is. It has been.

Ashley:
Good. So, thank you so much for providing so much valuable information to everyone, and getting that exclusive on your first deal. We feel privileged.

J:
Absolutely. This was so much fun. Thanks guys.

Ashley:
Yeah. Can you tell everyone where they can find out more information about you and possibly reach out to you?

J:
Absolutely. So my wife, Carol, and I, first and foremost, are the co-hosts of the BiggerPockets Business podcast, so for anybody out there that wants to learn more about business and being a business owner. And, remember, if you are a real estate investor you are a business owner. And so, we talk all about how to be a better business owner, whether it’s real estate or any other business you could have. So, check out the BiggerPockets business podcast. On BiggerPockets, I am J Scott. On Facebook, I’m JScottInvestor. And anybody can reach me via email any time, my email address is the letter J @jscott.com.

Ashley:
And you need to promote your Instagram because we’re big Instagram people here too.

J:
Oh yeah. So, I’m up to like 3000 on Instagram.

Ashley:
That’s good.

Felipe:
[crosstalk 01:24:01].

J:
That took me a long time.

Ashley:
You’re going to catch up to Felipe.

J:
Yes. I’m trying to catch up to Brandon Turner, he’s at like 120,000 now. My Instagram is jscott_123flip. And actually, I guess I’ll mention this, if you go to my website, I haven’t updated it in years, but I started running a website in 2008 called 123flip.com. And there I detail, in gory detail, like right down to the penny, our first 50 deals. So, if you’re a house flipper, or you want to be a house flipper, and you just want to learn about every mistake my wife and I have made in this business most of them were made during those first 50 deals, so go check it out.

Ashley:
Yeah. We’ll put links to that too in the show notes, so everyone can check it out, and a link to your book, and definitely the podcast. Because I’ve listened to a ton of your guys’ business podcast. And you’re so right, as a real estate investor. You are a business owner and a lot of the systems that your guests talk about are very relatable to a real estate investor, yeah.
Okay. Well, thank you so much. I am Ashley at Wealth From Rentals, and he’s Felipe [Ma-hia 01:25:08] REI, and don’t forget to join our Facebook group Real Estate Rookie. And do you guys have a business Facebook group?

J:
We are working on a business Facebook group, so …

Ashley:
Awesome, well we’ll post it, in the Real Estate Rookie one we’ll post it in there, so everyone can join that.

J:
Awesome.

Ashley:
Okay, thank you.

J:
Thanks guys.