BiggerPockets Money Podcast

BiggerPockets Money Podcast 70: 7 Tips for Successfully Investing in ANY Market Condition With J Scott

Expertise:
85 Articles Written

J Scott is a successful real estate investor (to say the least). But he’s also a student of the markets—and his studies have shown him that we are teetering near the top of this current real estate cycle.

In this week’s episode, J shares three reasons why he believes we’re at or near the peak based on past market cycles, and he details seven things investors should be doing to prepare for a softening market.

His number one piece of advice? Educate yourself!

J brings his A-game in this episode, just like he does with every other podcast he’s featured on. And make sure to stick around until the very end of the show for a special BiggerPockets announcement you’ll definitely want to hear!

Click here to listen on iTunes.

Listen to the Podcast Here

Read the Transcript Here

Welcome to the BiggerPockets Money Podcast Show number 70 where we interview J Scott.

At some point were going to hit that winter phase, that recession phase where the whole country just starts to trend down, but none of us can really predict when that’s going to happen. They can’t predict where it’s going to hit first, what market it’s going to affect first, but it’s going to happen at some point in the next week or month or year.

It’s time for a new American dream, one that doesn’t involve working in a cubicle for 40 years barely scraping by. Whether you’re looking to get your financial house in order, invest the money you already have, or discover new paths for wealth creation, you’re in the right place. This show is for anyone who has money or wants more. This is the BiggerPockets Money Podcast.

Scott: How’s it going everybody? I’m Scott Trench. I’m here with my cohost Miss Mindy Jensen. How are you doing today Mindy?

Mindy: Scott, I am doing fantastic. It’s finally getting warm outside in Colorado and the sun is shining like always and it’s just a beautiful day. I had a great weekend. How about you? How are you doing?

Scott: I am doing great. I used my travel rewards for my first vacation. It’s a little quick trip to Portland, Oregon. We would’ve thought would never get there for another like work trip or anything like that. Had a wonderful weekend and missed all the rain so.

Mindy: Nice, nice. Well that is always good when you can go to Portland and not hit the rain.

Scott: That’s right. Well today we have J Scott who is like master of everything. Think business finance and real estate relationship.

Mindy: He’s kind of just smart about everything.

Scott: Yes, he’s got experience in public businesses. I mean we heard his story a couple of episodes ago here on the BiggerPockets Money Podcast with regards to money, but today we have him really talking about you know market cycles and how to prepare you know really a specifically real estate portfolio, but with the some definitely overlapped into other types of portfolios for an oncoming recession. We’re going to talk about you know how to define market cycles. There is no surprise.

I think we can give this one away in the intro here that we think that we’re entering a peak market phase cycle and that a recession is looming on the horizon in some capacity or another. That’s just how economic cycles go and just basically how to make that a good thing. How to make that a win for you and your portfolio and prepare intelligently for it.

Mindy: Right it’s just because you’re entering the peak phase or we’re in the peak phase obviously you can’t time the market. You know you can only look backwards and see where you used to be, but you know we don’t know where we are in the market cycle. J gives us several tips for how to kind of view a market and how to sort of get clues from what’s going on around you as to what portion of the cycle you are in, but it’s not just invest in the lows. It’s not just invest in the highs. You can still make smart and decisions right now through investing and you know near the end of the show he says he’s doing even more investing now than he did last year.

Scott: That’s right. It’s certainly not a, you have to see selectivity and you know I think he uses the phrase bunker down, but it’s definitely like hey, here’s some common sense I hope that as we present them to you in a show you the listener, that you’ll realize that hey these are a lot of common sense concepts and ideas that you can just begin applying that really won’t have a negative impact on your overall investing structure, but that could prepare you should a recession be coming in the next couple of months as J believes well is likely next six to 15 months I think was his range.

Mindy: Yes, and even if you’re doing all of the things that J suggests there’s no downside to doing these. He doesn’t say stop investing in real estate. He says, start making more conservative estimates. Estimate a little bit higher costs. Estimate a little bit lower occupancy. Estimate a little bit less rent and if you’re wrong, if you estimate $900 for rent, but you get at thousand what’s the downside? Yay, you’re doing better.

Scott: Yes.

Mindy: You know being conservative in your numbers is always a smart choice even in the middle of the growth phase of a real estate cycle.

Scott: If you’re a listener who is thinking about getting started investing, buying that first house hack or first investment property or otherwise making that first foray into the world of investing after having maybe saved up, got your savings rate up and start to stockpile some cash will also cover some tips and strategies for you as well.

Mindy: Right, this isn’t just for people who are currently in the market. This episode is really for anybody who is considering buying a rental property, buying a real estate investment of any kind really in the next 18 months, two years.

Scott: Yes, I think so.

Mindy: 15 years. Yes. I mean it’s just. J has been investing in real estate forever and he’s so masterful in his look at just the entire market. Hey here’s how you can prepare yourself to be at the best possible advantage, to put yourself in the best possible place to not lose money. He’s not guaranteeing you’re not going to lose money, but here are really great tips to make smart investment choices.

Scott: Yes, love it. Well should we bring him in?

Mindy: Before we bring him in, let’s hear a note from today’s show sponsor.

Okay Scott. Everyone knows you and I love real estate. Like I go look at ugly houses for fun right. I saw one recently with carpet on the floors, carpets on the walls, carpet on the ceiling. I thought it would have made a really good podcast booth, but look I get it. Not everyone wants to spend their time doing that.

Here’s the thing. With Roof Stock you can invest in real estate without getting your hands dirty, dealing with tenants, or managing contractors. Roof Stock is the number one market for buying and selling single family rental homes. I’m talking about cash flowing rental homes across the US. If you want to invest in real estate, but you’re priced out of your local market, check out Roof Stock.

They connect you with vetted property managers and all properties are backed by their industry leading Roof Stock guarantee so you can invest remotely with confidence. Why wait any longer to begin building a new passive income stream. This could be your next big step on the path to financial independence. To sign up for a free account and start browsing cash flowing rental properties, visit RoofStock.com/BPMoney. That’s ROOFSTOCK/BPMoney.

Okay, thanks to today’s show sponsor. Let’s bring in J shall we Scott?

Scott: Let’s do it.

Mindy: J Scott. Welcome to the BiggerPockets Money Podcast or I’m sorry. Welcome back to the BiggerPockets Money Podcast. How are you today?

J: Great great to be here. Thanks Mindy. How’s it going Scott?

Scott: Life is good. Well happy to have you back.

J: Excellent.

Mindy: J is our first repeat guest, our first repeat customer so thank you so much for coming back. To refresh our listeners memories J has been a guest several times on the BiggerPockets Real Estate Podcast. He’s written four books for us, J?

J: Four books.

Mindy: Is that right? For BiggerPockets Publishing and he was featured on episode 43 of this very BiggerPockets Money Podcast, which can be found at BiggerPockets.com/MoneyShow43. Today we’re going to be talking about real estate investing because that’s kind of J’s specialty. We’ve already heard his money story, which was great. It was really interesting to hear that because I’ve heard your real estate investing story before, but I hadn’t heard your money story and that was a lot of fun to hear.

Today we’re going to talk about real estate investing and specifically should you start now. The market is really hot and it has been for a really long time and we’re starting to see some markets that are kind of softening up a little bit, which is leading to speculation that maybe there’s a crash coming and you know can you time it? Do you know is there a crash coming J?

J: Nobody knows if there’s a crash coming and I’m certainly smart enough, I’m certainly not smart enough to predict if and when a crash might come, but there are things that we do know so the nice thing about our economy is in this country is that we have a couple hundred years of data and experience so we know what’s happened for the last 200 years. We have kept good records and there’s a lot of what we call cycles. I mean everybody’s familiar with cycles. There are a lot of cycles when it comes to the economy.

If you look back a couple hundred years you can see that there are certain things that happened over and over and over again. It shouldn’t surprise people that our economy works in a cyclical manner. It goes up, it goes down, and actually over the last hundred and 60 or so years we’ve seen 33 cycles, economic cycles. Where the market’s gone up, it’s peaked, it’s come down, and then it’s gone back up.

We have about 33, essentially 33 case studies of what these cycles look like. If we go back over those last 33 cycles, we start to see some patterns and some things emerge and based on those patterns, based on what’s happened in the past, we can somewhat predict what’s going to happen in the future. Nobody has a crystal ball. The next one could be much bigger than what we’ve seen in the past. It could be smaller than the typical recession or downturn, but we do know that given the cyclical nature of the economy, given the patterns that we’ve seen over the last hundred and 60 years we do know that at some point probably in the near future we’re going to see a downturn in the cycle.

Mindy: I like that you said you couldn’t predict it because I see all these people especially in the BiggerPockets forums. Ooh is there a crash coming? Yes, it’s going to happen on March 14th. Like you can’t you can’t predict it and even when it does it’s not like it’s going and then it hits a brick wall.

Scott: Yes.

Mindy: It starts to slow down first and then it slows down more and then it slows down more and what’s that quote don’t wait to buy real estate, buy real estate in wait.

Scott: Absolutely. Yes.

Mindy: I love that quote. That’s one of my favorites.

Scott: I like to tell people if somebody says they know what’s going to happen and when when it comes to the economy one of two things it is true. Either they don’t know enough or they’re trying to sell you something. Wait for the pitch. See what they’re trying to sell you.

The best economists out there will tell you that while there is a lot of great data, trying to time the economy to a week or a month or even a few months it’s really really difficult. I mean we look back at 2001 and 2008. Those were both recessions. Those are the last two recessions, but they both occurred very differently.

In 2001, we kind of got to the top of the market around 2001 and bumped along the top for about six or eight months before we kind of slowly trended down and we had 2008 where we kind of rushed to the top and we’re at the top of the market for a month or two or three and then everything came crashing down overnight. It was a really, it was a very different feel between those two recessions. If you go back again through the last 33 cycles every recession feels different. Every recession is triggered by something different.

There are a lot of commonalities, but there are also a lot of very different things. I mean 2008 was a real estate crash. 2001 was a tech bubble. I mean we all remember the .com boom if we were at least teenagers back then. Go back further in the late 80s we had the savings and loan crises and you go back to the 70s and it was foil that was bubbling and so every recession kind of has its own things that precipitate it, but at the same time there are a lot of commonalities and a lot of things we see that are the same from recession to recession to recession.

Scott: What are some of those commonalities for those who have not had a chance to reup on the subject yet.

J: Sure, but let me start with something that I think a lot of people get confused about. I like to use the analogy with the economy to the seasons. We can think of kind of you have your your economy kind of going up. We hit a peak and we kind of go down.

We hit a trough and then we go up again. I like to think of that that going up phase. Often economists call it the expansion phase of the economy. That’s kind of like summer.

Now you wake up one morning, it’s summertime and you’re not going to check the weather to know whether you should be wearing shorts or a sweater. We know it’s summertime. Every day is going to be pretty nice. We’re going to where shorts most days.

We’re going to wear short sleeved shirts most days. It doesn’t matter where you are in the country and whether you’re in Seattle or Tampa. It’s going to be a nice day. Now certainly you’re going to have some rain one day. It might be windy another day.

It’s the same way in the expansion of the economy. Every day is kind of the same. Things are getting better. Unemployment is going down.

GDP what we refer to as gross domestic product with a total output of our economy is going up. The housing market is strong and it doesn’t matter where you are in the country. It doesn’t matter what day it is. During an expansion pretty much every day is a good day. Then you get to the top and then you go down the other side and you get to this recession phase.

During a recession that’s kind of like the winter where again when you wake up in the morning you don’t need to check the weather. You know it’s going to be cold out. You know you’re probably going to be wearing long pants and a jacket and again it doesn’t matter where you are in the country. In general things are going to be a lot colder than they were in the summer.

The expansion is kind of like the summer. The recession is kind of like the winter and then we have the top and the bottom and so the peak of the market or the trough of the market and those are where the interesting things happen. That’s kind of like the fall and the spring. Now we all know we’ll wake up in the fall if we wake up in October, September, October we have to check the weather because we don’t know is it going to be snowing or is it going to be 75 and sunny. If you’re in Buffalo, you could get a foot of snow.

If you’re in San Diego you can have a beautiful day that you’re going out to the beach and that’s the way the top and bottoms of the market are where every day is going to be a little bit different. You might get unemployment numbers next month and they’re really good. They’re still really good, but then the month after unemployment jumps up, but then the next month it drops down again and so we start to see weird things happening and we can’t really predict what’s going to happen day-to-day or month-to-month and we also can’t predict what’s going to happen in every market. We’re going to have some markets that are going to remain strong through the top of the economy.

We’re going to have some markets that start to weaken and get really softer in the top of the economy. If I’m talking to somebody, I live outside of DC right now. If I talk to somebody in Seattle they’re going to tell me they’re seeing a softening housing market. Me on the other hand our market’s continuing to thrive.

We’re seeing lower days on market. Things are selling for higher prices so there’s this disconnect at the top of the market both between what happens day-to-day and what happens in different markets. Right now, we’re at the top of the market. A lot of economists, I can’t guarantee that, but I think most economists agree, most Americans were paying attention kind of agree that when you’re a peak of the market so what that means is every day is going to be a little bit different.

We might get good economic news tomorrow, bad news next week, good news again next month and we’re going to bounce along the top there where things are going from good to bad and bad to good maybe for the next week, may be for the next month. Maybe for the next year, but at some point we’re going to hit that winter phase, that recession phase where the whole country just starts to trend down, but none of us can really predict when that’s going to happen. They can’t predict where it’s going to hit first, what market it’s going to affect first, but it’s going to happen at some point in the next week or month or year.

Scott: What are some of those indicators that are that you can get a say that are a lot of experts that say we’re at the peak of phase right now.

J: Yes, so there are typically I like to look at three things. First, there’s the timing factor and I talked about the fact that we’ve had 33 of these cycles over the last hundred and 60 years. If you look at those cycles there’s an average amount of time from like peak of the market to the next peak of the market to the next peak in the market. Typically speaking, that’s somewhere in the five and a half to eight year rate.

If you go back a hundred and 60 years, on average we’re at about six, six and half years, for each cycle so in general when we hit that six years into a cycle, seven years into a cycle, economists start to think okay let’s start thinking about looking at the data and seeing if things are changing. Right now we’re 11 years into the cycle. This is the longest cycle in history and we can talk about if you want what’s causing the cycle to be a little bit different than past cycles, but the fact of the matter is we’re 11 years into a cycle that’s typically about six or six and a half years long. From a timing perspective, we’re due for a downturn sometime in the near future.

The second piece is observation. You’ll look around and things just start to feel a little bit different. I mean everybody remembers 2014- ‘15- ‘16 especially if you’re a real estate investor where the market’s were really hot. Every day of the market was going up. You put something on the market and it sells in a day.

You buy something in September for one price, you list it to resell in December and it’s $20 or $30 or $50,000 higher. These days and again not every market, but these days in a lot of markets we’re not seeing that anymore. We’re seeing houses that sit for little bit longer, prices that are stagnating in some areas like Seattle and San Francisco. We’re seeing price drops in the 20% to 25% so that’s pretty significant.

We’re starting to see and feel things that are different. Consumer confidence numbers so the government measures how confident consumers are in the economy and over the last couple months consumers are little bit less confident than they’ve been the last few years. Things like, just day-to-day how much are people willing to spend on things like new cars or on a mortgage or on clothes and what we’re finding is people are spending less money. Just from an observational standpoint, it just feels little bit different now than it did three or four or five years ago when everybody was really excited about the hot economy and people had no problems spending money. The second piece is observation.

The third piece is the economic data itself. The actual data, the quantitative measures and this is the part that gets most interesting because for a lot of us who are into examining the economy it’s the data that we really care about you. There are a lot of economic indicators that tend to be good predictors of where we are in the market cycle. We talk about something called the node curve and anybody that’s been paying attention the last couple of weeks or months has probably heard this term the yield curve. I’m not going to go into too much detail, but long story short, the government sells bonds to raise money.

They pay interest to people that buy those bonds. You can buy bonds that expire in a short period of time or a long period of time depending on how long you want to hold them and typically speaking if you buy a bond that expires in a short period of time it pays a low amount of interest. You buy a bond that expires in a long period of time it pays more interest. If you look at a chart of the interest that these bonds pay what we see is a graph that kind of goes like this.

It starts low in the left at the low, the short expiration periods and it goes high to the right at the long expiration periods. That’s a healthy what we call a yield curve. Now when investors start to get nervous, they start to sell certain types of bonds and they buy other types of bonds and what we see is instead of that curve going from lower left to upper right like we see in a healthy economy we start to see that curve flatten out. That curve flattening out is just an indication that investors are getting nervous, big investors, hedge funds, even other countries so China buys a lot of our treasury bonds and Japan buys a lot of our treasury bonds. Russia buys a lot of our treasury bonds and when they start getting nervous about what’s going on in our economy or the global economy they do things that make that curve, the interest rate curve flatten out for bonds.

Over the last few months we’ve started to see that interest-rate curve flatten out. That’s a predictor of tension in the market that some investors are starting to get nervous. Then eventually what we tend to see is what we call an inversion in that curve where the really short-term bonds and really long-term bonds pay interest rates there are kind of up here and in the middle expiration bonds pay interest rates that are kind of down here. We see the shallow cup kind of form and we call that an inversion.

Historically, when that yield curve, when that curve of those interest rates inverts like that, that is the single best predictor of an upcoming recession and typically speaking you’ll see an upcoming recession within about six to 15 months after the inversion in that curve. We saw a real small inversion of that curve back in late December and then just last week we saw a major inversion in that curve. When I say last week, we’re recording this at the beginning of April so probably a few weeks ago to those who are listening now we saw a big inversion of that curve. If you look at that that’s one indicator to a lot of economists and a lot of people who follow the economy that we could be within six to 15 months of a recession.

That’s one thing and I’m sorry I harped on that for so long, but that’s a big one and a lot of people talk about that. It’s a really good predictor. Then we can look at things like unemployment so unemployment tends to go down over a strong economy during the expansion and then eventually we get to the point where what we call full employment. Basically most people that are looking for a job have a job and we kind of hit that about a year ago. That’s where I’m 4% unemployment, we got down to about 3.6% unemployment.

What we typically see is after we hit that full employment number around 4% within generally about a year we start to see employment go up and that leads into a recession. There are number reasons for that that I’m not going to go into, but unemployment, hitting that full employment number of about 4% is a good indicator of an upcoming recession. GDP, Gross Domestic Product, which is the total output of all the companies in this country. What we tend to see is GDP will go up and up and up.

The economy gets strong and then we’ll start to see the output from the companies in this country drop. Since last summer, last summer we saw a peak in GDP at 4%, which means the economy’s growing at 4% every quarter. Well the third quarter we saw a growth of 3.2%. In the fourth quarter we saw growth of 2.2%. We’re starting to see a slowdown in growth of the economy.

Now whether that actually goes negative, when it goes negative for two straight quarters we call that a recession. We haven’t seen it go negative yet so we’re not ready to say hey, we’re in a recession, but we’re seeing that trend out, which means in the next quarter or two quarters or four quarters we could see a recession. You add that on to a whole bunch of other indicators. Things like other sales are down and people will start to get less confident about the economy.

They don’t make major purchases like houses and cars. Housing market has slowed down across the country so we’re seeing a lot of these economic indicators that are basically telling us that we’re slowing down. We’re probably around the peak of the market and again at some point in the future whether it’s a week, a month, a year. At some point in probably the near future we’re going to start to see that trend.

Mindy: Okay, well I can’t really argue with the timing and I don’t want to argue with you.

Scott: Oh no please, argue away.

Mindy: That yield curve. You’re wrong. No, the yield curve was one of the best explanations I have heard of the yield curve so thank you for that because I’ve seen that term around and you know I kind of understand it and now I understand it a whole lot more. I don’t do a lot of bond investing or any bond investing, but that’s yes, that’s neither here nor there.

I’m not recommending them. I’m not recommending them whatever. Make your own decisions, but the timing, yes we’re at 11 years and that’s huge for I mean that’s three years more than the highest peak of the regular five to eight year range. That you can’t argue with that. The observation, the thing is feeling different.

The house is not selling instantly. I want to ask your opinion on this because in my market there are like three ladies who list 97% of the houses and I just saw a listing that popped up the other day. It came on the market under contract, which is interesting. That means that they had a pocket listing then they automatically put it up on the market anyway or maybe that was part of their marketing plan, whatever, but they already had a buyer when it went on the market. She listed this. I thought it was a 450 house, 500 if you really want to push and she listed it at 672.

J: Wow.

Mindy: Do you think that some of these price drops are just due to over exuberant real estate agents trying to push the market or being super aggressive on pricing or do you think that it is more a condition of the market?

J: Yes, so remember when we get to where we think we’re at the top of the market we’re going to see very different things in different markets and again the one you just described in your market I assume around Denver is not uncommon to see here where I am in the DC market. I mean things are still really strong here. I went down to Florida over a winter break with my wife and we were looking at some houses down there and it felt a lot like 2008 in certain parts of the Florida market. Where there was streets with like a dozen houses that were for sale and they weren’t moving.

Days on market were several weeks or months and so there were certain segments of the market that were still strong. Like the medium priced houses, but you get into the higher end houses and this is one thing we typically see towards the top of the market is that the higher end houses, the houses that are well above medium priced those are the ones that tend to slow down first. It’s not uncommon to see slow downs in places that have really high priced markets like New York City, San Francisco, Seattle, maybe even Denver at the higher end of the market. We’re starting to see a lot of that now where we’re just not seeing as many buyers. There certainly could be other things at play, interest rates are up a little bit and there’s not enough inventory and things like that, but you can’t deny that there are fewer buyers at the higher end of the market right now and that’s just a function of people are being more conservative.

Yes, there are other things at play and there’s definitely when it comes to things like observation you never know if what you’re observing is true just. You know when your street or your block or your city whether it’s true across the country. You never know, but when you compare the observational data that a lot of people are getting right now with the actual quantitative data, the economic data, what we’re seeing is it’s not just one or two or three people’s observation. There’s really economic data that supports these observations that we’re seeing in a lot of markets.

Again, remember it’s when you’re at the top of the market it’s like being in the fall. Somebody could walk outside and show it to you at the beach while somebody else at a different part of the country could walk outside and they’re stepping in a foot of snow. It sounds like you’re on the beach there in Denver. I’m on the beach here in DC, but I have friends in Florida and San Francisco and Seattle who are feeling like they’re walking out in the snow every day when it comes to the housing market.

Mindy: I was just in Florida and they’re not feeling like they’re in the summer right now.

J: It’s true.

Mindy: It’s 150 out there.

J: That is true.

Mindy: Okay so how can someone who is considering jumping into the real estate market invest with confidence? Because clearly the sky is going to fall and everything is going to collapse.

J: Okay so.

Mindy: I’m just I’m baiting.

J: Sure, of course. No, so maybe the sky is going to fall. I don’t know. Again I’m not going to try and predict it, but if you just look at the historical data. If you look at the last 33 cycles I think a lot of people are kind of locked into what we saw in 2008 and that’s what they think about a recession now because that’s what they that’s the people tend to remember the most recent thing that happened.

With 2008 it was an anomaly. We haven’t seen anything like 2008 since the 1930s, the Great Depression. That was literally the worst recession that we’ve seen in 90 years so 2008 isn’t the standard that we should be thinking about. I’m not saying 2008 won’t happen again. Maybe it will. Maybe 1930s will happen again.

Maybe worse the 1930s will happen again. It’s possible. Again I’m not going to try and predict, but if you look at the data, which is most likely to happen is not 2008. What’s most likely to happen is what we saw in 2001 or what we saw in the late 80s where we do get to a top and we do see a trend down and unemployment jumps to 5% or 6% across the country and days will market for houses, jumps from three months to eight months and we do see some suffering and people losing jobs and wages going down.

That’s likely to happen, but it’s unlikely that we’re going to see what happened in 2008 again just statistically speaking. It’s unlikely that unemployment is going to drop to 12% or 15%. It’s unlikely that days will market for houses are going to drop to a year and a half and we’re going to see as many foreclosures as we did and people are going to be losing jobs and people are going to be going bankrupt left and right. That hopefully was an anomaly.

When we talk about a recession, don’t think 2008. If you remember back think 2001. If you don’t remember 2001 think about a really toned down version of 2008 and when you think in those terms and when you look historically it’s really easy to support the fact that there’s really never a bad time to be buying real estate. Now if you knew for a fact that 2008 was coming again in the 1930s we’re coming again I’d say don’t buy.

Again, that’s unlikely. If you look back at 2001 and the early 90s, the late 80s, the mid-70s that was still a good time to buy real estate assuming you were following certain rules and were just investing intelligently and were being conservative. It’s always a good time to buy real estate. That’s the nice thing about real estate. As long as you’re being smart about it and as long as you’re setting rules for yourself that kind of limit your risk, limit your worst case scenario. It generally is not a bad time to be buying.

Scott: In your book, the recession proof real estate investing you know there’s a lot of really good tips in there for how a real estate investor should react and think about things at various times in the market cycle so for example there’s a bunch of tips on here’s exactly how to maybe start thinking about things if you do think that we’re in the peak phase of preparing your business. I was wondering if we could go through an exercise where we put ourselves in the shoes of someone who is new to real estate investing.

J: Certainly.

Scott: Suppose that we’re all new investors. We’re all making a $50-$60,000 a year household income. We’re saving up our first pile of money and we’re thinking about maybe like a house hack you know as our first major investment. We don’t really have that much in there. How does that thought process get affected by the potential of being in the peak phase of the market?

J: Yes. The first thing I’ll say is whether you plan to buy real estate this year or next year or the year after or whether you plan to wait a few months or a year or two. It’s always a good time regardless of what your plans are to start learning and so I tell people now. I have people come up to me and say well I’m just not comfortable investing in this market. I’m going to wait until the downturn hits I’m going to do what everybody did after 2008 and buy up all the foreclosures really cheap. What I say to them is great. If that’s what you want to do that’s perfectly fine strategy. You may not find that what happened after 2008 happens after this month, but if that’s what you want to do fine, but don’t wait until the equivalent of 2009 or ‘10 to start studying and being prepared. Now is a great time.

If you know you’re going to start buying in a year or two now is a great time to basically spend the next year or two learning the business. Learn the different types of investing. Learn how to estimate rehab costs. Learn how to estimate the value of a house or to comp a house. Learn the different types of sales and the different marketing strategies. Learn how direct mail works.

Learn how the MLS works and learn how bandit signs work. Jump on BiggerPockets. This is what I tell people. Jump on BiggerPockets.

If you know you’re not going to be investing for a year, that’s awesome. You have a year to read through hundreds of thousands of threads on BiggerPockets. Watch 300 real estate podcasts and 80 Money Podcasts and basically learn about real estate investing so that when the day comes that you’re ready to actually jump in, you’re prepared. Let’s pretend even if you don’t want to invest right now it doesn’t mean you shouldn’t start preparing right now.

Now is the time. It’s always the time, but now is a great time to start preparing. Next, I tell people let’s say you don’t know if you want to invest. Well now is a great opportunity to start preparing and start making offers. It’s possible that you won’t find a good deal for a month or six months or a year.

That’s okay. Start making offers. Start getting out there and trying real estate and if you don’t get an offer accepted for six months or a year, great. In a year when you start getting offers accepted, you have a year of experience of making offers and again comping houses and estimating rehab costs so there’s no harm, there’s no risk in making offers, and seeing what happens.

Now maybe you’ll get lucky and you’ll get a great deal. You can buy that first deal now at the top of the market. Maybe you’ll find five great deals and you can buy five great deals now on top of the market. Again, there’s no risk in making offers. There’s no risk in getting experience and getting practice doing all of the things that you’re eventually going to want to be doing a whole lot more of.

Scott: Okay so the two, the big piece there is basically just get comfortable with investing and then do what you would do basically any cycle, which is make an offer at the price that would make sense for you at that point. If it doesn’t happen, it doesn’t happen. If it does it does. You can just kind of apply the strategy across all investment cycles. Is that right?

J: Absolutely, you shouldn’t be changing. What’s going to change is the number of your offers that get accepted potentially. Maybe you’re going to be more conservative in the offers that you make, but essentially as we as real estate investors are doing the same thing that we’ve always done we’re just going to get different results at this point of the cycle. That said, in the book I characterize four phases of the cycle. I talk about four different phases of the cycle. In each phase of the cycle I think of three things.

I think of what are the strategies and tactics that are working in that phase of the cycle to first is how to identify that you’re in that phase of the cycle. That’s the most important thing. If you’re doing the strategies and tactics for one phase of the cycle, but you’re actually in a different phase that’s going to be a problem so the first thing is identifying which phase of the cycle you’re in right now. Two is identifying which strategies and tactics are most likely to do two things.

One grow your profits or ensure that you continue to make profits and two, decrease your risk because ultimately that’s the two things we want to do as real estate investors. We want to make money and we want to do it as little risk as possible. Again, the first thing is figure out what phase of the cycle you’re in. Second thing is figure out the strategies and tactics to kind of optimize your business for that part of the cycle and then the third thing and this is the thing that I think a lot of people don’t think about enough is how do you prepare for the next phase of the cycle?

Whether it’s a month out or a year out or two years out. What should you be doing now to prepare for the next phase of the cycle? If you’re jumping into real estate investing now there are certainly strategies and tactics that you can use to kind of optimize your real estate business, minimize your risks, but what I would tell people who are jumping in right now the most important thing to do is one get educated like I talked about before, but two do to things that you need to do to prepare for the next phase. The next phase being the recession phase and there are number of things that anybody can do whether you’re investing are not investing there are a number of things you can do right now to prepare for the next phase of the cycle.

Scott: Thanks.

J: I guess you’re going to end up.

Scott: Yes, we know what questions.

J: You guess the next question.

Scott: Yes.

Mindy: Wait, wait, wait, wait, this isn’t your show. This is our show.

Scott: Oh sorry. I’m sorry.

Mindy: J.

J: Yes.

Mindy: What is the next phase of the cycle?

J: The next phase of the cycle is the recession phase.

Mindy: J what should people to be doing in this phase to prepare for the next phase?

J: That is a great question.

Scott: You really walked in to that one.

Mindy: Thank you. I am a professional here.

J: Yes you are. Yes so here’s what I’m recommending to everybody that wants to be selling real estate or investing in real estate in the next phase of the cycle. The next phase being the recession phase. Again, I don’t know if the recession is coming. You know a week, a month, a year, but here are the things you can be doing now to prepare for when it does come.

The first thing I’d like to tell people is start hoarding cash so everybody has heard the phrase cash is king. That is especially true during the recession phase of the cycle whether you’re investing in real estate or anything else. The big reason for that is that when it comes to investing a lot of times we are reliant on financing. We’re reliant on other people lending us money. Most of us don’t have enough cash to just by all of the deals we want to buy out right.

We borrow money. During a recession lending gets really tight and I tell people who weren’t investing back in 2008- ‘09- ‘10 about this and they don’t really get it. If you weren’t investing back in 2008- ‘09 or ‘10 you don’t get how tight lending becomes. How difficult it can become to get a loan. Regular banks don’t want to make loans. Portfolio banks or small banks that lend to investors they don’t want to make loans.

A lot of people rely on private money so loans from family and friends and other professionals. People don’t want to lend money to real estate investors during a recession. They’re terrified of losing money so they’re putting their money in CDs. They’re putting their money in savings accounts and so the people that are the private investors that are lending money now when the market turns they’re not going to be lending any money. Hard money lenders start to go away and those that are left are charging 15% -16% -18% interest rates so hard money becomes much more expensive so the best way to combat the tightening of lending will be in the next phase is to have as much cash available as possible.

Scott: Yes.

Mindy: Okay so I want to jump in here. I get this question a lot. Oh I’m saving up for my home purchase. Where should I put my money? Oh you should put it in the stock market isn’t really necessarily the best choice because as the housing market goes down and the economy goes down so does the stock market and so the $10,000 that you put in there it is now $8,000 or $2,000 or whatever it is. Where are you hoarding this cash?

Scott: Yes so first of all I’m not telling people what to do with their money. I don’t always. Again I don’t have a crystal ball. I may have told people back in a year ago to take their money out of the stock market and put it some place safer and the stock market’s gone from $22,000 to $26,000 and now they’ve lost money because they took my advice. I’m not saying don’t put your money in the stock market, but that said during the peak phase, going into the recession phase the stock market’s going to be more volatile.

That’s actually one of the economic indicators we use to predict that we’re heading into the recession phase there’s this—a stock thing called the VIX and  it’s basically a volatility index. That’s what VIX stands for, volatility index and it measures the volatility because volatility of the stock market and as we get into the peak phase and then head down towards the recession phase we start to see a lot more volatility with the stock market. There’s a lot more risk of having your money in the stock market. Sure you might the market might go up to $30,000 from here. You might make more money.

It might drop to $20,000. You might lose money. I don’t know, but what I will say is that we’re going to see some more volatility in the market as we get closer to the recession. What I typically recommend for anybody that doesn’t like that volatility for anybody that’s saving money and they don’t want to risk losing that money put it in something that’s federally insured.

Put it in a CD. Put it in I wouldn’t recommend a money market. I like CDs because CDs will pay a little bit more than a savings account, but pay a little bit more than the money market. It’s federally insured. Sometimes you have to keep your money in for three or six or 12 months to get the full interest payments on it.

That’s going to be the most secured place to put it. Now if you are an experienced real estate investor and you really know real estate what I’m telling a lot of experienced real estate investors who have cash is use that money to lend to buy and hold investors. Use that money to lend people that are doing the BRRRR strategy because buy-and-hold is a relatively low risk strategy at this point in the market cycle. Even going into the recession buy and hold is a relatively low risk strategy when you’re conservative when you’re buying things at good prices.

You’re not over leveraging because worst-case if the market drops, lending gets tight and the investor that’s doing the BRRRR strategy can’t do the refinance piece. At least they’re still generating cash flow every month on that investment. If you’ve lent them money, if you lent money to a flipper and the market drops out from under them they may have to go into foreclosure. They’re not getting money from anywhere to pay you. The buy and hold investor is renting out their property so even if your loan comes due and they can’t pay it off.

They can’t refinance, they may still be able to repay you every month for the next two or three or five years until they’re in a better position. A relatively low risk strategy for your cash right now and again you do run the risk of it being tied up for a while, but a relatively low risk strategy for generating good returns on cash right now is to lend to buy and hold investors. That’s actually what I do with a lot of my cash rate and charging eight-nine-10-11% interest so I’m making a good return on that money. It’s relatively low risk. If they can’t refinance I just extend the loan five years and they keep paying me that eight-nine-10-11% interest so for those who don’t have that investing experience, but are saving up I’d probably recommend CDs for those that do have the investing experience I’d probably recommend lending to buy and hold investors. For those people who have a lot of money like more than the federal limits for insuring the savings account or whatever bonds are a great choice as well, but if you have that much money you’re probably familiar with those options. I don’t have that much money.

Mindy: That’s a question that I get a lot is you know I’m starting to save I don’t want and it comes from people who really don’t want to put it in the stock market because they see the volatility. I like the CDs. I like even just a plain old “high” in air quotes, high-yielding savings account like an American Express account. I think we’re making 2.3%.

J: Yes.

Mindy: Or 2%, which is such a ridiculous rate. I’d really like a lot more, but when I’m getting ready to use it and that’s really liquid. That’s just hey transfer this to my bank account and then I have it. As opposed to a CD you might have to wait three months.

J: Yes.

Mindy: The buy and hold investors like you said could you know there’s more risk.

J: Yes.

Mindy: That your money isn’t as liquid, but it’s you know you’re still generating. I like 8%. I like 11%.

Scott: The point is though that it’s not it’s generating more than that. Right so yes you’re getting 2% yield, but J is basically saying hey this is going to reduce your risk and then I think you know by implication expose you to opportunity. If we’re saying hey there’s a 60% probability that there’s a recession coming in the next 12 you know five to—what did we say 4 to 15 months or something like that—16-15 months.

J: Yes.

Scott: Is that what we’re saying.

J: Right.

Scott: You know if there’s a 60% probability that it happens and you have cash there then yes you’re only earning a 2% return. You could be earning more in the short term, but that could expose you to much higher returns somewhere in that 16-15 month period right.

J: Exactly.

Scott: That’s kind of how I think about that cash piece is hey it’s not really earning those low returns in the meantime. It’s reducing your risk and exposing you to potential greater opportunities down the line.

J: Absolutely and I’m not saying again I’m not saying to put your money there and wait, but if you’re waiting for a particular event for example you’re waiting to save up enough money to buy your personal residence with house hack or you’re saving up money to buy a rental property then there’s nothing wrong with leaving it in the savings account for three months-6 months-12 months. Even a little bit longer, keep in mind we talk about these 2.2% interest rates of returns. In reality we have inflation. Inflation is around two or 2.2%, which means every year the money that we are holding on to that we’re storing under a mattress or putting in a savings account is purchasing about 2% less than what it was the year before so if you’re getting 2% return in a savings account or a CD or a bond what you’re really doing is you’re breaking even. You’re getting a little bit more money, but next year your money is going to buy less than it did this year. Don’t fool yourself into thinking you’re really getting a 2% return, but it’s that way with any investment. If I’m getting 8% by lending it out it’s really 6% a year because we have inflation so. Always something to keep in mind.

Scott: Yes.

Mindy: Okay so you said here are some tips. Start hoarding cash.

Scott: Yes. Next one is focus on building your credit so it kind of goes along with cash. I mentioned how tight lending gets. It doesn’t stop. It gets tight. It’s a lot harder to get loans, but it becomes harder to get loans because the lenders are requiring better credit.

They’re requiring more income. They’re requiring more assets and you can’t necessarily impact your income or your assets, but what you can impact is your credit. What we see is just in the conventional lending world if you’re buying a house, if you’re a regular buyer buying a house these days you can get a loan from a conventional lender or Fannie Mae, Freddie Mac. If your credit score is around 660-680 you might pay a little bit higher than if you had a higher credit score, but if you have a 660 or 680 credit score you can theoretically get a loan for to buy a house right now.

During a recession if you look back to 2009-2010- ‘11 even 2012 what we saw was lenders were requiring a 740 credit score. It was big news in 2011 I think when the first lenders said hey we’re going to start lending to people have a 720 credit score. The first thing that’s going to happen is lenders tighten up their requirements is they’re going to require better credit scores. Now is a great time to really focus on building your credit, to focus on getting your higher interest rate debt down if you have high interest rate credit cards or if you have a high interest rate car loan. Start paying that down.

Talk to a good financial consultant, somebody that really understands credit and figure out should you be closing accounts? Should you be opening account because these things will impact your credit score, but focus really on building up that credit score because once the market starts to turn you’re going to need a better credit score to get loans.

Mindy: That’s a really good tip.

Okay if you know anything about BiggerPockets you know we love business books and our guests give us so many great recommendations. It’s hard to find time to read them all. This is why I recommend you use Blinkist. It’s an app that takes the need to know information, thousands of nonfiction books and condenses it down into just 15 minutes of reading or audio. I really like using Blinkist when I’m on the go. To revisit classics like Rich Dad, Poor Dad or The 4-Hour Work Week or I can check out new titles like business marketing by Seth Godin. Blinkist has a ton of books recommended by the smart people you hear on this very show and right now for a limited time Blinkist has a special offer for you. It’s a free seven day trial. Just go to Blinkist.com/BiggerPockets to start now. That’s Blinkist spelled BLINKIST.com/BiggerPockets.

One of the best ways to build your credit is to pay your bills on time.

J: Absolutely.

Mindy: This sounds like a no-brainer, but 35% of your credit score is based on your ability to make on-time payments. I can be sometimes flighty and not necessarily remember that my credit card is due on the 30th. There’s a lot of ways to make these on-time payments that don’t require you remembering to make the payments. First of all you could just set up a Google calendar or whatever calendar you use. Alert hey tomorrow pay your bill. Set them up on automatic payments. That I think almost everybody has automatic payments except my water bill for some reason so then I just have to remember that or I just give them the credit card.

J: Yes.

Mindy: Yes, you know automate as much as you can so you don’t have to think about it so you don’t miss it because that is a real number killer. A real credit score killer is just missing a payment by one. I remember the first place I ever bought I’m sitting there going through the with the lender and she’s like oh here’s your credit report. It looks like you made a payment late like six years ago.

I’m like really? I don’t remember that. Like I never remember making a late payment. She’s like well you know this is coming up. She’s like did you maybe just not get the bill? I’m like sure let’s say that. Like it was a very different time when I bought my first place, but you know they keep that information forever. If you are not making payments on time. Start. Number one start.

Scott: Yes and the other thing I would say is go out and understand what your credit looks like right now and why it looks that way right. I mean you can get these free credit reports or you can go to a site like Mint.com or Credit Karma, all these different online places will show you pretty clearly what’s impacting your credit score and why right and if you have any missed payments take care of that. Then start playing with the finer points there because it sounds like you know you’re targeting a 750 or above really to kind of be in a strong position going into any type of recession. Does that?

J: Yes.

Scott: Better commentary J?

J: Absolutely, yes. If you can get your credit score to about 740, you’re probably going to be positioned to not only get loans, but also get the best rate loans. Just to not to pile on to what you guys were saying, but keep in mind, there’s a site called AnnualCreditReport.com, which is a government basically requires that the credit, the three big credit companies provide you a free credit report once a year. You can go basically once a quarter is it four credit companies.

Scott: It’s three.

J: Three to four.

Mindy: Three.

J: I think it’s three times a year or each one once a year. You can basically go every four months and request a copy of your credit report from one of the credit agencies and that’s a great way. It’s a freeway to every four months to verify that you don’t have anything on your credit report that you didn’t expect to have on your credit report. Just a tip there.

Mindy: Yes and the people who are putting the information into the credit report they make mistakes. They transpose numbers. They forget or you know it doesn’t get entered properly. Whatever so if you you know if you’re just starting out you want to start building your credit. Go and get a copy of your annual credit report for free like J said at AnnualCreditReport.com. We’ll put links to all of this in the show notes, but go there and just choose one. It’s Trans Union. I shouldn’t even start this because I can’t remember them all. There’s three.

J: Equifax and Experian.

Mindy: Yes there is. There you go. Equifax, Experian, and TransUnion. Pick one. Choose one. Ask them for a copy of your credit report and then spend some time reading through it. Make sure everything on that report is actually what has happened in your life because maybe somebody else’s name is J Scott and their information got put into yours or maybe you never lived at this address so you need to take this information and you know correct it if it’s wrong because that could be affecting your credit score too.

J: Absolutely.

Scott: Okay so after hoarding cash and building your credit what else?

J: Next thing I would recommend. Open up and again you want to make sure that your credit score is strong before you do this, but considering. Consider opening up lines of credit. I talked about hoarding cash.

A lot of us don’t have access to a ton of cash, but we may have access to cash through lines of credit. A line of credit is basically just credit given to us by a lender, by a bank that’s secured by something. It might be secured by real estate so you can get a line of credit against your personal residence if you have equity in your personal residence. You can get a line of credit against your business if you have assets in your business. You may be able to get a line of credit against yourself personally just by having I really good credit score, a personal line of credit so I recommend that people talk to banks, talk to lenders, and find out if you can get a line of credit or multiple lines of credit.

What a line of credit is is it’s basically cash that’s available to you when you need it. You don’t take it now unless you need it now. You only pay interest on it when you use it so if I take out a thousand dollars tomorrow I’ll pay interest on that thousand dollars until I pay it back and then once I paid it back I’m not paying interest until the next time I take money. Lines of credit are like cash in the sense that you have that money available guaranteed when you need it and it’s also like a loan in the sense that you’re paying interest on it. It’s kind of the best of both worlds.

You’re only paying interest when you have it, but you have access to it. Get access to lines of credit if you have the ability to. Again, opening up lines of credit might impact your credit score so if your credit score is borderline, make sure you’re talking to a financial professional, who understands credit before you just go willy-nilly open up a whole bunch of lines of credit, but if that’s an option for you I highly recommend it.

Scott: When you’re talking about opening up lines of credit you know I got a house so I can get a home equity line of credit right, a HELOC on that and get access to that. You know I can call up my credit card company and ask for my limits to be raised right, my credit card. What are some other actions that I can take if I’m looking to take your advice?

J: Those are the two big ones so for most people. Get your credit card limits raised and get a line of credit against your personal residence. Now if you own a business it’s generally especially these days not very difficult to get a line of credit from the bank that you bank with. If you bank with a big bank like Bank of America or Wells Fargo a lot of times they’ll send you promotional things for line of credit against your business especially if you’ve had your banking with them for a couple of years.

If you have a bunch of inventory or equipment or you own real estate in your business a lot of times you can get a line of credit against those things. There are a lot of people who buy rental properties for all cash and then will go find a small local bank that will give them a home equity line of credit against the rental properties, which is even better in my opinion than a mortgage or a refinance because again you’re only paying interest when you’re actually using that money. Then again if you have a relationship with a bank that you’ve had for a long time and you have a good credit score, go ask about a personal line of credit. Banks, some trust, not my favorite bank out there, but they’re well known for giving what are called unsecure lines, personal lines of credit, which means if you have a good credit score and you’ve been working with them for a long time a lot of times they will give you a line of credit just against you personally based on your financial situation.

Scott: What kind of amount are we looking at for a personal line of credit to that effect?

J: It’s a good question. I don’t know the answer to that. I’ve never actually gotten an unsecured personal line of credit. I’m guessing that it’s going to be very dependent on your income.

It’s going to be dependent on your credit score. It’s going to be dependent on what assets you own so I don’t want to throw out any numbers because I’d be making them up. Typically speaking, against a business you can often get 50% of the value of any equipment or inventory so let’s say you own a business that sells stuff. Hopefully if you own a business it sells stuff.

Let’s say it sells a physical product as opposed to a service. Let’s say you have a half million dollars of that physical product in inventory at any given time and you own that inventory out right. A lot of times banks will give you the line of credit against that half million dollars in inventory because that’s their collateral. If you don’t pay the loan they know they can take that inventory and presumably sell it at some discount and get their money back.

50% is not uncommon for a business line of credit against equipment or inventory. For a house or a rental property a lot of times it’s 75% or 80% so if you own a $300,000 house that you own outright it wouldn’t be uncommon for you to be able to get $200 or $225,000 in home equity line of credit against that real estate.

Scott: Just to clarify you know the alternative here to achieve a similar result would be to just refinance and take out the cash. If they have $300,000 property I can either get it a line of credit where I don’t have I don’t take any money out until I need it and I start paying interest once I’ve taken out the cash or used, starting to use a line of credit or I can refinance the property and pull out a ton of cash that way.

J: Right.

Scott: The advantage there is that you’re going to have a fixed interest rate.

J: Exactly.

Scott: You have the easy option for a fixed interest rate if you refinance versus a variable interest rate on your line of credit right so what’s your?

J: Absolutely.

Scott: Why do you recommend the HELOC versus the refinance there?

J: No, that’s a really good point. There’s actually so that’s the first big thing. If you’re going to refinance versus a HELOC you’ll typically get a lower interest rate. Typically interest rates on HELOCs.

One it’s going to be variable. The interest rates are going to change so interest rates are going to fluctuate on the HELOC with interest rates so if you take out money today on your HELOC you might pay five and a half percent interest on that money. If rates go up two point next year and you take out money next year or even the money you took out this year that you’re still repaying next year, the rates that you’re paying on that money even though you took it out this year when rates were low if you’re still paying interest on that money next year when rates are higher you’re going to be paying a higher interest rate. That’s one of the big differences between a refinance where you fix an interest rate, a lower interest rate for a long period of time versus a variable interest rate. The other thing to know is that it is possible with a line of credit that a bank generally writes into the terms, into the contract that they have the right to rescind that line of credit or reduce that line of credit so let’s say again you have a $300,000 house.

You get a line of credit for 80% or $240,000. If the bank thinks that your house has dropped to $200,000 in value they can come back and say well we’re going to drop your line of credit to 80% of the new value, which is $160,000 so you could overnight find that your line of credit has decreased or even gone away and in some cases the bank might say you have 30 or 60 days to pay off whatever you owe. There’s certainly a risk there. Now that said it did happen after 2008 to a lot of people that had lines of credit, but unless there’s a huge downturn, unless there’s a major recession it’s not really common for banks to call lines of credit or two new lines of credit. It’s not a common thing, but it is a risk so to your question of when should people be doing the fixed refinance versus a HELOC it’s really a personal decision.

For me, it boils down to how often I’m going to need that money. If I think I’m going to be using that money full-time between now and 10 years from now I’d probably just rather do a refinance because I’m going to be paying an interest every month for the next 10 years. For me though, I typically use a HELOC for more bursting type things. I might use it to buy a rental property that I’m going to refinance in six months so I need that money for six months and then I’m not going to touch the line of credit for a year. I only pay I only want to pay interest when I actually am using that money because it’s a very small percentage of the total time so you can run the number. You can say, “Hey if I’m paying 4% over 30 years every month this is how much interest I’ll pay in over 30 years versus I have a HELOC for the same amount and I’m paying 6%, but I’m only paying it a quarter of the time over the next 30 years.”

You can run those numbers and see where it falls and what’s better for you. The other thing is some people just sleep better right knowing that they can choose to be debt free tomorrow. I can pay off my HELOC and be debt free, but still have access to the money. Other people would rather just get fixed low rate interest so a lot of it is psychological as well.

Mindy: I want to tag on to this really quick so point number three is open up lines of credit. I want to suggest .3A is to start building a relationship with a local bank or credit union.

J: Yes, yes, yes.

Mindy: I have been with Chase bank since they were Bank One and First Chicago and I think somebody maybe somebody before that. I’ve been with Chase Bank since before Scott was born and it is actually true, Scott so, but they don’t know me. I’ve been with them for 30 years and they don’t know who I am at all and they don’t care about me because they’re so big. I started connecting with a local credit union in my city because they want to you know better the city.

They do a lot of advertising in the newspaper talking about how they want to help the city and you know we support local businesses yadi yadi yada and as I start gaining this relationship with them they are more inclined to give me a personal line of credit or to give me a business line of credit because my business is in their city too. I have a HELOC on my house with them even though I have some random mortgage that gets sold every six months or whatever. Connect with a local bank. Look around and see you know Chase in your city is not a local bank.

Somebody who has one or two branches, somebody who’s headquartered there. Somebody who does portfolio loans. Somebody who is invested in the community in a way that a large branch or a large nationwide bank is not going to be is a really great way to get these lines of credit especially when times are tough. They’re like oh Mindy is really awesome because she has all the stuff. You know she has all these ties to the community. She’s not just going to up and leave and leave us high and dry because she’s invested in this too. I just wanted to throw that out there, start talking to local banks now.

J: Yes, and can I throw out one more point about that?

Mindy: No, this is my show, not yours.

J: Okay.

Mindy: Yes, absolutely of course you can.

J: The other thing to keep in mind and I know there are people that would be like well I walk into Wells Fargo and they know exactly who I am and they call me by name and they call me on the phone and offer me all these things so that’s all well and good, but here’s the thing to know about these big banks, they don’t make their own rules. If they want to lend let’s say on the purchase of investment property or they want to lend on the purchase of your personal residence basically their lending money and then they’re turning around and they’re selling that loan to a big organization like Fannie Mae or Freddie Mac and so Fannie Mae and Freddie Mac basically will tell the Wells Fargos and the Bank of America if you want to be able to sell the loan to us here are all the rules you need to follow. You need to verify that the borrower’s credit is this and their income is this and their assets are this and you need to check literally hundreds of boxes if you want to make a loan to them and then turn around and sell it to us. Bank of America or Wells Fargo or Chase they don’t have the ability to say yes, your credit score is a little bit low, but we’re going to make an exception for you because we’ve been working with you for 20 years and we know you.

They can’t do that even if they want to. Now, the local banks what you refer to as portfolio lenders, what a portfolio lender does is they don’t turn around, they might, but they don’t necessarily turn around and sell the loans to a Fannie Mae or a Freddie Mac. They use the money from their depositors. They use the money from other people that bank with them to make that loan.

What they can do is they can make their own rules. They can say hey Mindy yes, I know your credit score is a little on the low end, but we’ve been working with you a long time. We trust you. We know you.

You have cash with us. You have accounts with us so we’re going to do the loan anyway because we have the ability to do that or they can say to you, “Hey Mindy I know that Wells Fargo can’t loan on your 11th investment property because that’s the rule they’re only allowed to loan on 10 or in some cases four, but we don’t have to follow those rules.” We’re going to make 50 loans to you. I know people that literally have 50+ loans with small portfolio banks. They do the BRRRR strategy and literally every single loan 25-50-75 times they turn around to a small local bank and they get a loan. These small banks have the ability to make their own rules and if you have that relationship they’re not handcuffed to say we’re not allowed to do this even though we want to. They can do it.

Mindy: Yes, that’s the beauty of a local bank and you may not get the best rates with the local bank, but the local bank.

J: It would be a little higher.

Mindy: Is yes, but the local bank is giving you money when other people aren’t so you know do you want zero dollars or do you want more than zero dollars at a higher percent interest rate so okay. Do you have any more points to make about opening up lines of credit?

J: Yes, none about lines of credit, but I’m going to make one more recommendations prepare for the next phase.

Mindy: Oh yes, well that was going to be my next you keep are you reading my mind?

J: I’m on your show.

Mindy: You’re on my show. You’re a first welcome back guest. Okay so next tip. Last tip.

J: Yes, last tip so for anybody that has short-term debt again and this goes back once again to how lending gets tight during a recession. If you are going to need to refinance any loans in the next three to five years let’s say during the time that could be the next recession. Do it now so restructure any debt that might be coming due in a couple of years. Restructure that now so that you’re not in a situation in three years where a loan gets called due let’s say on a rental property and you’re having difficulty refinancing because the lending has gotten tight. Instead refinance that loan now for five or eight or 10 years out so that we’re probably going to be during in the next expansion during a strong part of the cycle by the time that loan comes due. If you have any loans that are going to come due or if you have any loans that you can restructure to low interest rate so we don’t know interest rates are going to go in the next couple years, but they’re still historically low as we’ve been saying for several years now is a great time to restructure that debt and I’ll throw a loan with that.

If you own any properties that you are interested, that you’re not interested in holding for at least 3 to 5 years you’re thinking yes I might sell this thing in a year or two. Sell it now because most likely as we get into that recessionary period values are going to drop. I’m not telling people to sell your properties. I’m not saying don’t hold them for five or 10 years, but what I’m saying is if you were going to sell them in a year or two anyway it’s probably better now than in a year or two.

Mindy: Yes, that’s really excellent advice. Sell the dogs now. Who is it Steve, Steve from Washington says you know I’ve been cherry picking and I like these properties. I don’t like these properties anymore. I’m selling the dogs at what I believe is the top of the market and you know you might, we might be wrong. This might be the beginning of the top of the market and there’s still a little bit left in there and maybe you would make you know an extra thousand dollars next year, but maybe you don’t and Jay I thought you had a crystal ball, which is why invited you back. You don’t, you’ve claimed that you do not so I don’t have a crystal ball either. Yes, I like that. If you’re going to if you’re thinking about selling them, if you’ve got one that’s pumping out a lot of money, keep it, but if you’ve got one that isn’t I am now really really regretting the triplex that I didn’t buy over the weekend.

Scott: Well I’ll just throw it here I mean this is a get back to basics. Right get your foundation really strong right have some cash. Make sure your portfolio is really strong and can weather any downturns. Sell off the stuff that you don’t think is a great fit for you’re clearly in your long-term vision and then you know it sounds like this you know this tip might not be a miss like focus on your expenses and just kind of make a quick you know make sure that that your savings rate is continuing to be strong right of the day one stuff. Right all that stuff that you may not have had to think about as much in the last year or two or three because you know you probably got a raise that work or a couple of promotions and you know your property or home value increase. Your rental property is doing well all that kind of stuff. You know now is the time to really fortify that position and strengthen it and not go and take the $10,000 vacation or whatever it is right.

J: Yes.

Scott: Spend wisely and focus on all the basics that we talk about every single week on the show.

J: Yes and I actually in the book I include that tip. I include a whole bunch more tips then what we talked about, but like you said a lot of this is common sense. I can’t tell you the number of people that have read this book and basically said to me I learned so much and yet it was so obvious because a lot of this once you understand how the cycle works and you see how it’s things have gone down the last hundred and 50 years with previous cycles. A lot of it starts to make sense and you can start to put the pieces together to say, “Yes, of course this is what I should be doing now and of course this is what I shouldn’t be doing now.” It’s all it’s really it’s common sense, but it’s stuff that we don’t think about very much so it’s not necessarily common sense to us yet.

Scott: Love it.

Mindy: I love it too.

Scott: All right J so we’ve talked about what we should be doing to prepare for a recession or the next phase in the cycle that we think might be coming. What if we’re investing and building our portfolio today what are we kind of—what do we kind of do to maximize our returns in the current cycle, in the short term?

J: Yes, absolutely so if you’re flipping houses today and a lot of us are flipping houses and I know there are people that ask me every day should I stop flipping houses? My answer is no. You don’t need to stop flipping houses, but I would certainly be more conservative and take certain precautions. One, make sure you keep your project short because again it may be a month or two or three or five or six before we hit the next recession, but if you have a project that’s going to take 18 months there’s a much better chance that we’re going to be in the next recession by the time we finish that project and you could see that the values have dropped out from under you so keep projects quick. Two, make sure you’re getting good returns on your projects so I like to tell people do some research on your local market and see how much of a price drop we saw in real estate in the last couple of recessions.

For example in the DC market we tended to see about 12% to 15% worst case in 2008 and a little bit less than that in 2001. If we expect the worst case in my area that the market is going to drop let’s say 12% then I want to know that my profit margins or any flips that I do are at least 12% so that way if the market drops 12% I’m going to break even on those deals. If I do a deal that’s 8% profit margin and the market drops 12% I’m not losing money on that deal. Make sure that your profit margin support whatever you think is the likely or the worst case scenario during a recession in your market.

If you’re doing buy and hold, buy and hold is good any time during any part of the cycle. Never a bad time to do buy and hold investing, but they’re are again just like with flipping there are some things you want to keep in mind. One, make sure you’re being super conservative with your numbers. When I’m evaluating deals at this point in the market cycle I like to assume that my rents are going to drop 10% and my vacancy is going to increase 10% so if I have 8% vacancy typically now I assume 10% higher than that or closer to 9% vacancy.

If my rents right now are a thousand dollars a month I’m going to assume closer to $900 a month so that way going into a recession if rents drop and in many markets they will if vacancy increases and again in many markets it will, you’re prepared and you’ve underwritten your deals. You’ve analyzed your deals in a sense that you’ve accounted for those things. If you can still make money with 10% lower rents and 10% increase vacancy then it’s probably a good deal. What you’ll find is once we get through the recession your numbers are even better because you assumed the worst.

There is a there are some tips there. If you’re lending again I would say don’t lend to flippers because if the market drops out you basically have one one recourse, you can foreclose and you’re going to foreclose on a property that’s probably worth less than you lent on it, but if you lend to buy and hold investors you have that extra piece of recourse, which is hey I’m going to extend your loan for as long as it takes you just keep paying me monthly cash flow. Keep paying me interest every month from your market rents that you’re receiving and we’ll just extend this loan and at least you know you’re going to get paid for the next two or three or five years until the market improves and you can pay that off.

Scott: Or you foreclose on a rental property.

J: You could foreclose on a rental property, but why? If you’re getting paid every month just happy, happy with that cash flow because it’s probably more money then you’re making anyway.

Scott: It just sounds better than foreclosing on a half completed flip.

J: That’s a really good point. If you have to foreclose, you’d rather foreclose on a property that’s still generating cash flow.

Scott: Yes.

J: Than a property that is under one.

Scott: I would certainly not say to foreclose unnecessarily. I’m just saying that.

J: Yes.

Scott: Yes.

J: We talk about a whole bunch more tips in the book, but those are a few tips for if you’re flipping or buy and hold or lending.

Scott: J recently came out with a book called the book Recession Proof Real Estate Investing. It’s an e-book only so it’s a short quick read, but it’s full of fantastic information. It’s kind of got his style just so we talked about all day today on the show how to kind of think through what a market cycle looks like. What are the leading indicators of market cycles? How can you know again we go through these things, timing, observation, and then the economic data.

He really makes a strong case for how you can kind of sort through in your mind when a recession or the next stage in any type of economic cycle is coming and it’s not just about really you know the recession proof real estate investing is the title of the book, but really I thought it was more of just kind of a how to handle all the market cycles and adapt a strategy at any time in a market across a variety of different things. Really got a lot out of it. I just kind of read, I read through it again this last weekend actually and thought it was fantastic, but personally going to begin following some of the advice that J gives out in terms of hoarding some cash, taking out some lines of credit, you know making sure that I’ve got my ducks in a row and my financial house in order because you know the risk is low from doing these activities and the upside is pretty big and being prepared if there is a recession coming along. Definitely couldn’t recommend the book more highly.

J: Thank you.

Mindy: Yes, and it’s a really great time for this book to be coming out because like you said we’re probably nearing the top of the the current real estate cycle and I just I see this question pop up so much in the BiggerPockets forums. Should I wait for the market crash? And inevitably, the first response to everyone of those questions is well when is it going to crash and you know you don’t know, but being prepared is what is it? The best defense as a good offense?

J: The other way around.

Mindy: The best offense is a good defense. Yes okay.

Scott: Yes.

Mindy: Clearly not a football person.

Scott: And this too. Yes, and again that doesn’t mean you know I’m not timing the market or anything like that, but I can adapt and say hey there are some signs that are coming along and I can slightly modify my approach just to kind of reduce my risk and potentially have a shot at greater returns if some of those things end up being true. Not going to stop investing entirely or growing my business to a halt, but I can certainly start preparing in some ways to take advantage of what economic data and our observation are kind of giving us.

Scott: Yes, the biggest mistake I see people make is they are so focused on today and now that they’re not spending that 10% or 20% of their time that they should be looking forward and paying attention to what’s coming in preparing for what’s coming. I’m not saying that everybody should hunker down and move into their bunkers and hoard guns and amo because the next crash is coming, but what I’m saying is start paying attention to the market. Figure out what is likely to happen. Take a look and pay attention to the economic indicators and start preparing. Because preparation is always good.

Mindy: Right and you know what’s the downside of starting to hoard your cash while still running the numbers on properties and analyzing them and seeing you know who this is a really great property. I’m going to offer on it. Great and then you hoard your cash some more after that. What’s the downside of building up your credit? What’s the downside of opening up a line of credit now or you know reorganizing your short-term debt. Loans are what is it? The interest rates have dropped in the last couple of weeks. Have you seen that? I was like wait. What is the rate? I have to tell to everybody it’s like 5% and it’s closer to 4%, which is really really awesome. Okay so I’m sorry I cut you off go ahead.

J: No, that’s okay. I was just going to say I’m doing more deals this year than I was doing last year so a lot of people like look at me and they say oh so I guess now that you’re so familiar with all of the all the economic stuff and you think a recession is coming, you’re probably slowing down and to be honest no I’m not slowing down. Again, the more now that I was doing last year or even the year before.

Mindy: That’s awesome. That’s awesome. Okay so J thank you so much for coming back on the show. Our first repeat guest. You’re actually really kind of good at this podcasting thing.

Scott: Yes, you should start your own or something like that.

J: Well, funny that you mentioned it so I guess this is our big announcement, but I am going to be hosting my own podcast and I’m going to be doing it with my amazing wife and business partner Carol. We’re actually going to be hosting a podcast created by BiggerPockets and we’re going to be calling it the BiggerPockets Business Podcast where we’re going to be interviewing business owners both investors and non-investors alike and really digging down into how to build, scale, and optimize businesses from people that have done it in the trenches. Starting this week, we’re going to be releasing our first episode of the BiggerPockets Business Podcast.

Scott: Love it. I’ve been looking forward to this for so long. I cannot even begin to describe how excited I am for this show and for you and Carol as the host. I mean you guys have just been through so many, you just have studied and really developed a strong philosophy, tempered that with experience in the real world and then interacted with so many people across all these different types of business, real estate, personal finance and investing concepts. I just can’t think of anyone who could be better situated to kind of describe and help people build businesses and build wealth than you and Carol so thank you so much for agreeing to do that and we’re looking forward to it.

J: I really appreciate it and our first guest is going to be somebody that I have a feeling many many many of your listeners are going to be interested in in hearing from. I’m not going to say who it is. We’re going to leave that as a surprise, but make sure you listen to this week’s BiggerPockets Real Estate Podcast where we’re going to be talking more about the business podcast and then tune in to the business podcast later this week.

Mindy: Yes, if you are not already subscribed to the real estate show it is the BiggerPockets Real Estate Investing Podcast and the episode that J is talking about is our episode number 328 so you can find that wherever podcasts are. BiggerPockets.com/Show328 is where you can find the show notes for that episode and I am really looking forward to that. That is going to be a great podcast. You’re an excellent guest. I can only imagine that you’re going to be a fantastic host.

J: Thank you and I want everybody that’s listening if you have any thought or input into the business podcast, into the economy, into anything I’ve talked about, don’t hesitate to reach out to me. I love interacting with everybody. Can I tell people where they can reach me?

Mindy: I was just going to ask. Where can people find out more about you, J?

J: Excellent. You can reach me, email, the letter J at the numbers 1, 2, 3 flip.com. [email protected] is my best email. My website is 123Flip.com. If you didn’t guess and if you want to find me on Facebook, JScottInvestor and I post a lot on Facebook and I communicate with a lot of people on Facebook so if you’re on Facebook, friend me on Facebook.

Scott: Awesome.

Mindy: And of course here on this little website called BiggerPockets.com.

J: I am J Scott on BiggerPockets.com and hopefully most of you know that because hopefully most of you are on biggerpockets.com. If you’re not go register for biggerpockets.com right now.

Scott: Then follow J Scott.

Mindy: Then follow J Scott everywhere. J do you have a favorite joke to tell at parties?

J: My wife likes this this one. Okay hold on. If I can tell this correctly.

Mindy: Because we got to have a joke in every show.

J: Okay, here we go. Knock knock.

Scott: Who’s there?

J: Control freak. Okay now you say control freak who.

Scott: Control freak who? I got it. First I let you go and do your thing you’re so forceful about it.

J: If you were a control freak you’d get that one.

Mindy: That’s my favorite joke ever. I had my microphone on mute and I started laughing so hard. I’m like oh they’re not going to hear me laughing. Okay I want to give a little shout out to my friend Liam who is seven I think him he asked me, he told me this joke yesterday okay what’s your name?

J: J.

Mindy: What color is the sky?

J: Blue.

Mindy: What’s the opposite of down?

J: Up.

Mindy: J blew up. Hahahaha. Thanks Liam. He’s seven or eight.

Scott: Yes.

J: I think that that’s a seven year old joke because both my kids were telling that joke when they were seven.

Mindy: Okay do we haven’t anything else we want to add? We want to add go listen to the BiggerPockets business podcasts because it’s an awesome show.

Scott: That’s right.

J: Awesome.

Scott: No, I think we’re pretty good here. J thank you so much for sharing your wisdom yet again here on the BiggerPockets Money Podcast. We appreciate it. Love the book. Definitely want to encourage everyone to go out and get that and thanks so much for your time.

J: Awesome. Thank you and I look forward to being the first three time guest on the Money Podcast.

Mindy: Ooh.

Scott: I’m sure that will happen.

Mindy: Okay great. Thanks so much J. Have a good day.

J: You guys too. Thanks.

Scott: All right, that was Jay Scott. He’s delivering his wisdom for the 15th time and really the beginning. It’s just the beginning of the fountain of the knowledge of knowledge that we’re about to receive from J through his new podcast.

Mindy: I just think that the business podcast is the next natural step in the BiggerPockets podcast empire and J is a really perfect person to host that show. He’s knowledgeable in starting your own business. He’s knowledgeable in running your own business. He’s knowledgeable in real estate. He’s knowledgeable about money. He’s just kind of the total package.

Scott: Yes, him and Carol have built just an amazing business portfolio and have tons of experience and have made consistently smart, calculated choices with a strong philosophy behind them the entire time. Right and this is BiggerPockets right so our audience, you the listener, we presume are looking to use real estate as at least one part of a portfolio that may achieve financial freedom. It’s totally fine if you don’t, but typically that’s how most folks do it. There’s a lot of overlap obviously around on real estate and personal finance.

You have to have a strong personal financial position you know in our opinion to have a sustained chance at succeeding in the real estate business. Right, but a lot of people that are interested in real estate are also going to do small businesses. Right they’re also going to build their own private empires whether that’s in real estate or something else and then deploy the earnings from that into investments like real estate and there’s just so much overlap and ability to learn and grow an application from business to real estate and real estate to business in investing to business and money management to business and money management to real estate that we think that there’s just this great overlap between the three shows that we’re going to have here, the BiggerPockets Money podcast, BiggerPockets Real Estate Podcast and now the BiggerPockets Business Podcast.

Mindy: Yes and you know even if you’re not focused on starting your own small business, the BiggerPockets business podcast is going to be a great going to give you a lot of tips for running your real estate business, something I see in the forums over and over and over again is you will have a much greater chance of succeeding as a real estate investor if you treat it like the business that it is.

Scott: Yes and you know moving over into just a career in general. Even if you’re not going to start a business no thinking like an owner, like the owner of a business, someone who’s growing the business will help you in your career. Right because as an employee we’re rewarded when we generate returns for share holders. Right.

Mindy: Right.

Scott: That’s the job. That’s one of the jobs of an employee working at a business and I think that that will that just learning from that from my perspective like J’s will help regardless of whether you’re the owner or an employee or a salesperson or whatever it is and helping move your career or long.

Mindy: Okay so the book is Recession Proof Real Estate Investing. You can find it at biggerpockets.com/recession. It is an e-book only. The show is BiggerPockets Business. You will want to tune in to the BiggerPockets Real Estate Podcast on Thursday, May 2nd to hear J’s special announcement. Okay Scott, shall get out over here?

Scott: Let’s get out of here.

Mindy: Okay. From the BiggerPockets Money Podcast episode 70, I am Mindy Jensen and he is Scott Trench and I have no clever ending for today.

Scott: We are leaving.

Mindy: We are leaving goodbye. Thank you for listening so much we appreciate you so very much. Send all your bad jokes to [email protected] Over and out see you later alligator.

Scott: Bye-bye.

Watch the Podcast Here

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds. Thanks! We really appreciate it!

Podcast Sponsors

Roofstock helps investors buy and own remotely by connecting you with vetted local property managers. Buy a leased single-family rental property for a little as $20K down. Roofstock’s innovative marketplace and concierge service eliminate the traditional hassles of real estate investing.

Signup for free account here: roofstock.com/bpmoney

Second Sponsor

Almost none of us have the time to read everything we’d like to read. Yet we lose countless hours to activities that bring us little joy such as commuting, chores and staring at our phones. What if we could turn these little blocks of unallocated time into precious and rewarding moments for learning and reflection? Founded in 2012 by four friends, Blinkist now connects 6-million readers worldwide to the biggest ideas from bestselling nonfiction via 15-minute audio and text.

Blinkist has a special offer for YOU. It’s a FREE 7 day trial — just go to Blinkist.com/biggerpockets

In This Episode We Cover:

  • Reasons J believes a market crash is coming
  • On the 33 case studies of what economic cycles look like
  • Talking about the last 2 recessions
  • J Scott’s analogy with economy to the seasons
  • Phases of the economic cycle and indicators he knows the market is on the peak
  • What a yield curve and GDP is
  • The reason why the price drops in the market
  • How can someone who is considering jumping into the real estate market invest with confidence
  • What might happen in the next recession of the market
  • How does a newbie investor get affected by the potential of being on peak phase of the economic cycle
  • What should people be doing now in preparation for the next phase
  • The importance of building credit and paying your debt on time
  • His recommendations for someone who is investing right now
  • The biggest mistake he sees people make
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Tweetable Topics:

  • “Don’t wait to buy real estate, buy real estate and wait.” (Tweet This!)
  • “Cash is king.” (Tweet This!)
  • “The best offense is a good defense.” (Tweet This!)
  • “They don’t make their own walks.” (Tweet This!)

Connect with J

The BiggerPockets Money Podcast is for anyone who has money… or want to have more! Join BiggerPockets Community Manager Mindy Jensen and Director of Operations Scott Trench weekly for the BiggerPockets Money Podcast! Each week, financial experts Mindy and Scott interview unique and powerful thought leaders about how to earn more, keep more, spend smarter, and grow your wealth. You'll get tips for getting your financial house in order and actionable advice from guests who have been in your shoes - and found their way out.