Top 10 Takeaways Podcast 424 - J Scott, Amanda Han, & Matt MacFarland

BiggerPockets Podcast 424: Make More Money, Build Your Portfolio, and Get Greater Tax Deductions in 2021 with J Scott, Amanda Han, & Matt MacFarland

1. J SCOTT’S BEST HIRING TIP

I was having a discussion with Nathan Brooks and he's somebody who's been on this show. He's a Turnkey real estate operator. He's been on the show four or five times. And we were talking about hiring a couple of weeks ago on my show. And he gave one of the best tips that I've heard on hiring. And that's bring them in for a trial run, bring somebody in four hours, eight hours even a whole week. Just say, "Look, this is what I want. I'm going to pay you for the week. I might even pay you double for the week. I want you to come in for a week. I want you to do the role we're hiring you for, work with the team and no commitment. You can walk away on day two and say this isn't working. We can kick you out on day four and say, this isn't working." But by the end of that week, before you’ve committed to a long-term relationship. You know if they’re a good culture fit, you know if they have the skillset, you know if they have the personality, you know if they’re going to work out in that role. And so it’s a lot less risk on both sides. We’d like to think of it as the employer, we’re the ones taking the risk. But as an employee, a lot of times employees are taking the risk too, because they may be quitting another job and so now they’re risking coming to you. And if it doesn’t work out, they’re jobless, or maybe they’re not quitting another job, but they’re losing opportunity cost. If they come work for you, they’ve now stopped their employment search. They’ve stopped interviewing, or maybe they’ve cut off interviews at other companies. So they’re taking as much risk as you. So if you can do a trial run, it reduces risk on both sides.

2. DAVID DESCRIBES THE ATTITUDE YOU NEED TO SUCCEED

So I’m looking for people that want to come in here and they want to build an empire. Somebody who says “I have a skill set, I am good. I want an area where I can grow with no limits and I’m willing to be a mini David.” So like I was saying, when you’re the agent, if the client’s unhappy, that’s 1,000% on you, there is no shifting the blame. So I like people that have that same mindset, who walk in here and say, “I have to be accountable to David. Like David is accountable to the clients.” We all have that extreme ownership. And so when it comes to us, I’ll tell you the two people that I have been in 2020 that did the best job in my companies was my buddy Kyle Rankie. And he was someone who said, “David, just tell me what to do and I’ll go do it.” He didn’t give me pushback. It wasn’t a whole lot of, but why do I have to do that when they don’t have to do it? He had such a great attitude that he learned so quick. And the other one was my lending partner, Christian, who said, “Hey, I will advise you because I had skillset, and I had culture fit. And I didn’t have experience with all the loan officers.” And he was an experienced loan officer said, “I’ll do everything for free. I don’t care. I just want to partner with you.” And for about four months he advised everybody pretty much for free. He didn’t ask for a thing. What do you think happened at the point where I’m like, well, I can’t do it without this guy. Now he’s a partner in the company because he came in with the right attitude.

3. AMANDA & MATT TAX UPDATE

I think before we talk about next year, what’s coming up in 2021. Just want to do a quick reminder that the CARES Act brought us a lot of great tax benefits and tax saving opportunities. Those are things that we know are in existence. So as we head into the end of the year, one of the main things to do is to make sure that you’re working with your tax advisor and figure out how some of these benefits might be able to help you. I think for a lot of people, especially for investors, 2020 may not have been the best year. And so it’s really about turning lemons into lemonade. If you have losses, there are opportunities to carry it back and get refunds for prior years for immediate cash in your pocket. There are ways to access retirement funds with no penalties before the end of the year. But looking ahead at 2021, unfortunately, there’s all signs point to potential tax increases. However, from an investor’s perspective, one of the things we talked earlier is for real estate commissions you can get up to 20% of that tax free. Of course, you guys all know that there are talks that there might be limitations or phase outs of 1031 exchanges, which are huge for most of us who own rental real estate. Also, the rate could be increased to over 39%.

4. J SCOTT ON POTENTIAL TAX CHANGES

I think the important point to realize is that there are a lot of people in Congress who rely on real estate as their primary source of income outside of their congressional salary. And historically speaking, Congress has not done a whole lot to vote against their own interests. So the fact that, and we’ve seen this with things like conservation easements, which actually have been tested a lot the last couple of years and certain real estate loopholes. And now I think we’ll see it with 1031s. I have a feeling that Congress is going to be very hard pressed to pass laws that would hurt them in their own pocket books or their own wallets. So I’m not too concerned about 1031s going away. That said, I think it’s pretty clear to me that we are going to see an increase in taxes overall. I think we would see that with either administration, but certainly it looks like the Biden administration is going to be taken over. And they’re certainly pushing for greater tax increases than we would see if the Trump administration were going to stay. So I think it’s something we need to prepare for. And I think as real estate agents, part of our real estate investors and business owners, part of our job is to zig and zag as things like this are thrown at us.

5. J SCOTT’S ECONOMIC OUTLOOK

So it’s such a hard question because when we talk about the economy, we’re talking about so many different things. We’re talking about the macro economy, so unemployment levels and how money is flowing. We can talk about the real estate market. We can talk about inflation, we can talk about the income gap and wealth inequality. We can talk about interest rates. We can talk about so many different things. So I’m not going to be able to cover the subject extensively, but let me kind of start with, you always want to ask first and foremost, where are we right now? And normally there’s an easy, clear response to where are we now. That’s normally the easiest question to answer when we’re talking about the economy, where are things today? The problem is we don’t know where we are today. There are so many inconsistencies in the economic indicators that we’re seeing.

On the one hand, we look at things like the stock market. Let’s just take the stock market. We hit an all time high in the Dow this week. I mean, at the same time, we’re seeing real unemployment at about 15%. We’re seeing U-3 unemployment, which is the common unemployment measure at about 8%. We’re seeing unemployment filers at 800,000 people this week. We’re seeing the largest number of people who haven’t been able to pay their rent or who haven’t paid their rent in history. We’re seeing the largest number of people now we are giving them the option of not paying their mortgage through forbearances, but we’re seeing the largest number of people in history, not paying their mortgages right now. And at the same time, as David pointed out, there are a lot of people who are doing tremendously well, billionaires are making billions and trillions dollars more.

And people that work for big tech companies are doing tremendously well. And so right now we’re not seeing any consistent people always ask me, “Where are we in the cycle?” I wrote a book all about economic cycles and people read the book and they say, “So where are we right now?” And I’m embarrassed to say that when I wrote that book, nobody had ever thought about something like this happening, not just me, but economists. And right now we’re kind of nowhere in that economic cycle, we’re outside the economic cycle. So that leads me to the next big question that we need to be answering. What’s going to get us back into the cycle, and once we get back into the cycle, where are we going to be? So start with that first question, what’s going to get us back into the cycle?

In my opinion, the thing that’s going to kind of get us back into reality, economic reality is when the stimulus runs out. Right now we’re living in a faux or a fake economy that’s being propped up by all this stimulus. And its personal stimulus. We literally sent out cheques a couple of months ago to every American. It’s small business stimulus, PPP, EIDL loans. It’s big business stimulus. I mean the too big to fail and basically carving out trillions of dollars that were just handing to businesses without any accountability. Then we have what we’re doing for renters and homeowners, rent moratorium. So people aren’t being kicked out if they’re not paying rent. And forbearances where people who own their houses aren’t being foreclosed upon if they don’t pay their mortgage. So tons and tons of stimulus. And it’s likely now that the election’s over, we’re going to see a whole lot more stimulus. At some point, that’s going to need to stop. And right now it may not seem like that time’s ever going to come, but it is going to come. And when that stops, we’re kind of all going to be jolted back into reality. And we’re going to find ourselves somewhere in that economic cycle, we’re going to find ourselves at the top of the market or the bottom of the market or somewhere in between. We don’t know where that is, but I have a feeling that once the stimulus runs out and we allow things to go back to, I use the term steady state. We kind of let everything fall into place. We’re going to see that the market, the economy in general drops. I think we’re going to say, and again, I’m just guessing, but I think we’re going to see what we refer to as a double dip where employment actually drops lower.

6. J SCOTT’S REAL ESTATE OUTLOOK

And we’re going to see a lot of foreclosures or a decent number of foreclosures, maybe not 2008 type foreclosures, but we’re going to see a decent number of foreclosures. We’re going to see a whole lot of people that are getting kicked out because landlords, unlike with our mortgages, we can do mortgage forbearance. And we can say, “Hey, don’t pay your rent for six months. We’ll add that onto the back end. So you just pay your mortgage longer.” We can’t do that in the rental world. If somebody hasn’t paid their rent in 60 months, your two options are or three options are, you forgive them and say, “Okay, just keep, start paying your rent from here,” two you ask them to pay it all back before you allow them to move forward. Everybody knows that’s not going to happen. Or you somehow figure out some hybrid where you attack it on the end, but you can’t really do that. And so for people that are renting and not paying their mortgage, there’s going to come a day of reckoning. And we’re going to have a whole lot of people that are getting kicked out on the street.

I think when that happens, we’re going to see the economy kind of dip. So how does that, then that leads to the next, how does that impact us as real estate investors? After all that talk, you would think I’d have a good answer for how all of this impacts the real estate market. But the truth is we don’t know. If you look at various recessions over the last 150 years, there’ve been several of them, 2008 was a good example of one that real estate market got crushed. Go back to the early 90s, late 80s, early 90s, real estate market got crushed. Go back to the great depression, real estate market got crushed. But then there are plenty of other recessions you’d look at 2001. Real estate was barely touched. In fact, in a lot of areas, real estate kept doing well.

Go back to the 70s and some recessions in the early 50s, the first recessions after World War II, real estate just kept going up. So we don't know exactly how real estate is going to be affected. That said, my guess is that affordability is the largest driving force and there's debate over whether this is true, but in my opinion, affordability is the largest driving force of whether an economic recession is going to lead to a real estate downturn.

And these days, what I think most people will agree is that we’re seeing affordability issues in a whole lot of markets. You look at the Case-Shiller data that bears out the fact that there’s a lot of affordability issues across much of the country. That leads me to believe that we are going to see a softening in the real estate market. Again, I’m not saying it’s going to be a 2008 sort of thing. I’m not saying it’s going to be a great depression sort of thing, but I definitely think that we’re going to see a downturn in the real estate market.

7. J SCOTT’S INTEREST RATE OUTLOOK

I don’t think interest rates are going up anytime soon. First and we’ll talk about inflation in a few minutes, but there’s a lot of pushes for inflation.The fed is pushing for inflation over the last couple of years. The best way to generate inflation is for the economy to keep going strongly. The best way to spur on the economy is to keep interest rates low. So I think we’ll see interest rates slow for that reason. Number two, the fed has printed four, $5 trillion over the last couple of months, we have to pay debt service on all that money that we’re printing and the amount we pay is directly proportionate or directly related to our interest rates. So, increasing interest rates is going to cause us to have to pay a whole lot more money on the debt and the money that we’ve printed. So, I think for that reason, we’re going to see interest rates stay low. So, all in all, I think interest rates are low for the next three, four or five years, could be 10 or 15 years could be forever, who knows.

8. J SCOTT’S MORTGAGE RATES OUTLOOK

I think anybody that’s sitting there thinking, do I need to get a mortgage now because interest rates are going up? I think interest rates are going to stay low. Now, let me talk about that. Mortgage interest rates aren’t necessarily the same as the federal funds rate, the real interest rate that the government sets or the Federal Reserve sets. So, what are mortgage interest rates going to do? Typically speaking, when there’s uncertainty in the market that has an effect on bond prices, bond prices have an effect on mortgage interest rates, and we see when there’s uncertainty in the market, we see mortgage interest rates go down. When there’s certainty in the market, everybody is a little bit more comfortable, we see mortgage interest rates go up. We’ve actually seen a pop-up in interest rates over the last week or two since the election, just because I think, regardless of who would have won the election, people like the fact that there’s some level, and you can argue whether there is any level of certainty, but I think to a lot of people, there’s more certainty than there was a few weeks ago. And so, the market is like that, but that has pushed up interest rates a little bit. Long story short though, I think mortgage interest rates are going to stay low, at least for the next couple of years.

9. J SCOTT’S INFLATION OUTLOOK

Inflation, and I’m sorry, this is probably more information than you were asking, but let’s talk a little bit about inflation. So definition of inflation, I’m not going to give the technical definition, but the definition that we tend to care about, is the price of the stuff that we buy, the consumer goods, and the commodities that we buy, going up. When the price of your milk and your cars and your rent and all the stuff that you buy goes up, That’s inflation. When it goes down, that’s deflation. So, the question is, are we going to see inflation, are we going to see deflation or we are going to see things hold steady. For a whole lot of reasons, I think we are going to continue to see inflation, and probably we are going to see over the next few years, maybe not the next few months, but over the next few years, we’re going to see an increase in inflation.

Biggest reasons there are, one, the FED came out about a month ago and said, We want more inflation, we have not seen enough inflation. We can talk about why that is if you want, but basically, when the FED says, we want to see more inflation, good rule of thumb, the FED gets what they want. They create what they want. So, when the FED says, we want more inflation, typically that means we ARE going to see more inflation. Number two, as long as interest rates are low, interest rates… Low interest rates spur the economy, economy being spurred, drives inflation. Typically, inflation is driven by the market doing well. Third, we are printing lots of money, when you print lots of money, that deflates the value of our currency and, we see inflation. So, long story short, I think we are going to see over the next three, five, 10 years, a decent amount of inflation. 

But, a lot of people say, well, how about in the next month or two or six or 10, are we going to see a lot of inflation? Do I need to worry about all my money like the value of my dollars going to zero and, I think over the short term, we are not going to see a lot of inflation because, there are two other things that factor into inflation that are important. Number one is demand, when the economy is kind of soft and there’s not a lot of demand for goods inflation is caused by basically everybody wants to buy lots of stuff so, businesses need to start making more stuff and, they have to hire more people, they have to buy equipment and buy inventory and buy warehouse space. And, when they spend all that money, they have to raise their prices so they can get the money back. When people aren’t spending money and the economy is not doing well, businesses are not raising prices and we don’t see a lot of inflation. So, short-term, I think until the economy gets it back on track a year, two years, three years, whatever it is, I don’t think we are going to see a ton of inflation. The inflation starts in three, four or five years. And then, number two, is, just like gravity in the physical world, there is this gravity in the inflationary world, gravity, there is this general push of towards deflation. Prices tend to drop, because we get more efficient at doing things we automate. And so, to get inflation, you actually have to work at it. Inflation does not happen automatically, deflation happens automatically. And, so I think over the next couple of years, we are not going to see a ton of inflation, but over the next three, five or 10 years, we are probably going to start to see more of it.

10. J SCOTT’S BEST INFLATION HEDGES

So again, lots of things we could discuss here, let me start with one of the biggest concerns longer term. And, we talked about inflation and as I pointed out personally, one of my bigger concerns, longer term is inflation. And, that’s one of the reasons that I love real estate. If you’re concerned that we’re going to have inflation and it’s no guarantee, some people think we’re going to go the opposite way, but if you’re concerned we’re going to have inflation and I am, the second best hedge or the second best investment you can make when you’re concerned about inflation is real estate. And, the reason for that is if, let’s say I have $100,000 and next year I still have $100,000 in cash and, the price of everything doubles, my $100,000 is basically worth half as much. Inflation has cut my spending power in half.

And so, cash is a bad thing. Real estate is a good thing because if I took that $100,000 and I put it in real estate, if everything doubled in the next year, most likely the value of my real estate doubled in the next year and the amount of rent I’m getting doubled in the next year because, typically with inflation, the value of real estate and the value of market brands keeps pace. So, real estate is probably one of the best ways to preserve the value of your capital over any inflationary period.

So let’s talk about the best, the absolute best hedge against inflation is debt. And, here’s the reason for that. Let’s say, I buy again, $100,000 property, let’s say I make $100,000 a year and let’s say that $100,000 property, I have a mortgage payment every month of $1000, quick math, how much of my annual salary am I putting towards mortgage every month? 1%. 1% of my annual salary is going away towards mortgage every month. Now, again, let’s say next year, prices of everything, doubles, value of that property is now $200,000, I’m getting twice as much rent. And let’s say, because everything’s doubling, my wages are going up too. So now my wages, instead of making $100,000, I’m now making $200,000. Did my debt go up by twice? How much am I paying on mortgage every month, I’m still paying $1,000. And that $1,000 is no longer 1% of my salary, it’s a half a percent of my salary. That’s a half a percent.

And so, basically I’m paying down that debt with quote, unquote, cheaper dollars. Basically, I am taking the debt when the dollars are worth a lot, and then I am paying them down when I have a whole lot more money when I’m making a whole lot more money. And so, with real estate, typically I can keep pace with inflation, with debt, not only can I keep pace with inflation, I’m actually benefiting from inflation because I’m paying down that debt with cheaper dollars. I am not telling anybody out there over leverage, I am not saying get as much debt as you possibly can, use debt wisely. Always use that wisely, but intelligent use of debt during inflationary periods is literally the best way to make money.

*Brandon’s Bonus Takeaway - I am even going to go one above debt, that the best investment you can make in a potential recession is in your own education.