J Scott's Recession Proof Real Estate Investing: Ask Me Anything!

[J Scott]

Hey everyone!

BP has just released my latest book:  .

It is all about how the economy works (starting with the very basics and working up from there), economic cycles and how we as real estate investors can design and pivot our investing businesses around shifting economic circumstances.

The book not only talks about how to modify your investing strategies and tactics during a downturn in the economy, but how to change up your business during EVERY phase of the economic cycle.  It also talks about what you should be doing months and years in advance of economic shifts to prepare the eventuality of the economy changing.

If anyone has any questions about the book, or questions about the economy, economic cycles or investing strategies/tactics (that aren't covered in the book), here's the place to ask them!  

Happy to try to answer any questions you might have...

[Account Closed]

Originally posted by @J Scott:

Originally posted by @Andrew Angerer:

Hey J,

Fan of your books and other works, I just finished reading your guide to estimating ARV ebook. I know that the '08 recession was ( partially ) caused by sub-prime mortgages, where as today, there are few sub-prime mortgages on houses but many sub-prime auto loans. My question is, do you think the next recession will look similar or different from the last in terms of how easy it will be to find foreclosed properties/ short sales?

I talk a lot about this in the book, but here are my general thoughts...

A lot of real estate investors who have come along since 2008 tend to think about real estate being the root cause of any market downtown -- in 2008, the mortgage crisis destroyed the economy and they assume this is how it typically works.  So, they judge the strength of the market (both real estate and the economy) by looking at real estate data and statistics and saying, "Real estate is strong...all is good!" or "Real is weak...all is bad!"

But, in actuality, for most recessions, real estate isn't a cause.  Real estate is just the unlucky economic sector that gets dragged along because other parts of the economy are struggling.  In 2001, it was the tech bubble that lead the downturn.  In the late 80s, is was the S&L crisis.  In the 70s, it was oil that caused negative ripples through the economy.  

In most cases, real estate goes down during a recession not because there are systemic issues in the real estate market (like in 2008) but because the economy is crap, interest rates are high, consumers are overloaded with debt, people are losing jobs, etc.  No matter how sound the real estate market might be, if these other things are happening, real estate is going to get hurt because homeowners are struggling to pay their bills and renters aren't in a position to buy.

So, looking at today's housing market and saying, "All is good because real estate looks good..." is not sound economic forecasting.  Real estate is a "lagging indicator," meaning that it's going to look good even as the economy turns down.  A few months after the economy starts to suffer, we'll start to see the real effects on the real estate industry.  By the time people start saying, "Real estate is looking bad..." the economy will likely already be showing major cracks.

Which leads me to the answer to your question...  :)

I don't think there are any major systemic issues with the real estate market right now (again, unlike 2008).  The industry is still pretty sound, at least in the single family residential sector (I could argue that multi-family has some other issues).  So, whether we see a big drop in real estate and whether we see a lot of really cheap properties this time around will be highly dependent on how bad the broader economy is.  

How high unemployment goes.  How high interest rates go.  How much further inflation increases.  How badly GDP gets hit.  What happens with consumer debt.  Etc.

And unfortunately, nobody knows the answer to that question.  Personally, I don't think things will be as bad as 2008, but I'm just guessing (like everyone else, including all the economists).  The big concern I would have for our economy right now is consumer debt.  This is just unsustainable, and I have a feeling that default on consumer debt (and student loan debt) could lead to a big economic snowball...

https://fred.stlouisfed.org/series/TOTALSL

But again, good economists will admit they have no idea how bad the next downturn will be.  Could be relatively small, like 2001 (or smaller).  Could be big, like 2008 (or bigger).  But anyone who tells you they know is lying to you... :)

Amazing thread.  Courageous post inasmuch as a lot people simply do not want to hear anything about a recession.  I'm chiming in my 2 cents here...

I like to fancy myself a "crack pot economist and economic tin foil hat wearer" but, I try to base my craziness on cold hard facts.  That said, the next recession will make the last one look like a walk in the park.

Each day we do NOT start the next recession, the worse it gets.  Here's why...

• Student loan bubble. HIGHER education is extremely overvalued.  
• Auto loan bubble.  Auto loan defaults are skyrocketing - particularly on used cars.
• Derivatives bubble.  I think we're at like a quadrillion now? That's crazy. 
• 70% Americans don't have $1,000 in cash for an emergency.
• The average household is $17,000 in debt. 
• The average person who has owned their home for 20+ years will has about $30,000 worth of equity in it.  
• Re-financings on homes reached record levels this decade and balloon payments on about 1.5 million homes will come due in about 15 months. THAT'S THE FIRST WAVE.  

We have not seen a confluence of events like this at any time during economic history - for ANY civilization.  In the case of the United States, booms and busts are perfunctory to living under a debt based fiat currency system that some may refer to as a Ponzi scheme.  

Any sequence of events can trigger all of these things to pop one after the other.  Or what if they pop simultaneously?  However, we all know that all of these things will end somehow. 

When I look at global debt, the dollar crisis, the RETIREMENT crisis seems to be the big pink elephant in the room no one wants to discuss, I sit up in my chair a bit more... 

Humans are literally dying out of the stock and real estate market and there are not enough humans who have the resources to replace them. 

There are going to be less people participating in 401k's - which has been the "secret" to the success of the stock market.  If money wasn't automatically taken from peoples paycheck for gambling in stocks with outlandish PE ratios today, and no real business in 2001, I doubt they'd sit down the weekend after pay day, shop for stocks, and place buy orders.  

So, the market relied on trillions of dollars automatically deducted from paychecks that won't be there to deduct anymore.

Furthermore, baby boomers were able to acquire and LEVERAGE debt. Baby boomers were able to start with a small SFR and allow that appreciate to a point where they could leverage it to buy a 4 or 8 unit building. No so for their kids and grandkids.

The average college grad will never qualify for a home under conventional terms. Let that sink in. Each year we are graduating MILLIONS of kids who will NEVER be able to qualify for a mortgage under conventional terms (solid credit, steady employment, 20% down).  

I was just reading an article where a freelancer was able to buy a $650,000 house after struggling to document income.   

This is not sustainable. There has to be a reset.  I hate to sound like a Debbie downer, but we will see a massive global recession at some point in time.  Don't get me started on the inevitability of dollars flowing back to shore which will in turn cause crazy inflation... The world is looking to "de-dollarize" as our dollar is backed by nothing more than the threat of force against oil producing countries who refuse to use it in trade. What happens to the dollar when we lose that leverage? 

China is playing a SUPER long game and has absolute and total global dominance as a part of it's 100 year plan... 

Must destroy to rebuild.  I'm nearing 40 and the most loving thing this country can do for my grandkids is to let this current system die and rebuild anew.  Based on sound money.