BiggerPockets Real Estate Podcast

BiggerPockets Podcast 374: What Real Estate Investors NEED to Know About the Coronavirus, the Economy, and the Problems at Your Door

Expertise:
377 Articles Written

Rent’s due… or is it?

From quarantines to eviction moratoriums to a plummeting stock market, COVID-19 has upended seemingly everything—and today we talk through what it all means for real estate investors.

J Scott, author of Recession-Proof Real Estate Investing, and Scott Trench, author of Set for Life and CEO of BiggerPockets, join Brandon and David for a roundtable discussion packed with perspective and insight.

We begin with a high-level analysis of today’s economy and discuss how you can fortify your portfolio in the face of a likely recession (there’s still time!). Then, the guys take on your most pressing questions—starting with, “What happens if my tenant doesn’t pay rent?”

*NOTE: If you want to skip directly to audience Q&A, that section starts at 58 minutes.*

Whether you’re a brand new investor nervous about getting started or a veteran waiting for the right opportunity to deploy capital, this episode will give you a chance to take a deep breath and assess the playing field.

We hope you enjoy this special episode, recorded March 18. Stay safe, take care of yourselves, and tune in for more coronavirus content across all BiggerPockets’ platforms in the days and weeks ahead.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Brandon:
This is the Bigger Pockets Podcast, show 374.

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Scott:
Cash flowing real estate is protection. Yeah, there are a lot of things in real estate, and I’m not saying everything, and we can talk about this. There are a lot of things in real estate that aren’t going to work well right now. Cash flowing assets, cash flowing real estate, are going to work well whether you’re in a recession, whether you’re in an expansion or anywhere in between.

Speaker 1:
You’re listening to Bigger Pockets Radio, simplifying real estate for investors, large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place. Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com, your home for real estate investing online.

Brandon:
All right. What’s up guys? J Scott, Scott Trench. Hey. Welcome to the show, guys.

Scott:
How’s it going guys?

J:
How’s it going? good to be here.

Brandon:
Good. The world is changing rapidly right now. A lot of our listeners, a lot of our members on Bigger Pockets, on the forums, on the blog, comments are asking a lot of questions. People are rightfully a little bit nervous and freaked out right now. Other people are looking and saying, is this the opportunity we’ve been waiting for in terms of our, should we start buying right now, or should we start selling right now? That’s the whole point of today’s show, is just to really dive into what’s going on with the current state of the world. Before I actually jump into all that stuff guys though, I do want to first of all, welcome my cohost of the day, Mr. David Green. Hello David Green.

David:
Hello Brandon.

Brandon:
What’s going on man?

David:
Thank you for remembering that I exist. I was like-

Brandon:
I am happy that you exist and I know you’re, what’s the word? In place.

David:
Shelter in place.

Brandon:
Sheltering in place down there.

David:
Batten down the hatches. What’s all the other things that they say in the Midwest that are really cool that we don’t always hear out here? Duck and cover. That whole thing.

Brandon:
It’s rough. All right, so this show is going to be a little bit different. It’s kind of a round table discussion. Before we get into today’s show though, I want to get into today’s quick tip. All right. Today’s quick tip is brought to you by Scott Trench. Go Scott.

Scott:
Oh, you didn’t tell me about this. My quick tip today is invest in real estate from a position of financial strength.

Brandon:
All right. Good quick tip. I like to throw quick tips at David at the last second without telling him, so I thought I’d throw it at you today.

David:
I’d say like 40% of our quick tips are absolutely Brandon just hot potato, boom. There you go, what are you going to do?

Brandon:
Go. Yeah. We probably should do more quick tips that are prepared ahead of time from our users, listeners. That’s what we should probably work towards, but we’ll get there.

David:
That’s a great segue into today’s show.

Brandon:
That is a great segue. It’s a great segue guys, into today’s show. Again, we’re going to talk about the virus, what’s happening, and how that affects real estate investors, and all that good stuff. All right, J Scott is here. Hello J.

J:
Hey, how’s it going Brandon? How you doing guys?

Brandon:
Man, we’re good. J is one of the smartest people in this room right here, and also on Facebook in general. I say that because if you guys follow J on Facebook, his posts are intelligent. He’s a smart dude. We had to grab him today. He also happened to write a book, wrote a book. Yeah, he write a book called, what is it? Recession Proof Real Estate Investing?

J:
Yup Recession Proof Real Estate Investing.

Brandon:
All right, and so we’ll talk a little bit about that today. Hey guys, real quick before we get to this discussion today. I’m actually recording this thing right now, this second here, after we just got finished recording the show. I wanted to put this in here for a really important reason. This is a super long show, it’s like two and a half hours long, but the first hour we spend really talking a lot about what’s going on in the world right now, the economy from a macro level. We dive a little bit into the micro stuff, but really it’s a macro level.

Brandon:
The second half of the show though, starting at about an hour in, is where we dive into questions from listeners just like you. In fact, we actually asked people to send us messages, voicemails about their question, and so we’re actually going to play those questions and answer it for an hour and a half of just Q&A. Here’s the deal, if you don’t care about the macro stuff, you already know what’s going on in the economy, you understand what qualitative easing, is that the word I’m looking for, is, if you understand all that stuff, that’s fine, you can skip ahead to the hour mark. Right at about an hour, maybe hour one, hour two, an hour and a minute or so in, skip ahead there and just listen to the questions on how it affects real estate investors in today’s world. You can do that, or if you’ve got the full two and half hours, listen to the entire show because you guys are going to love this.

Brandon:
Let’s get to this meat of today’s show. We’re talking about the effect on the economy, on what real estate investors should be doing. I just want to start and kind of get an idea so people know who you guys are. In case you don’t know who J Scott is, you don’t know who Scott Trench is. Could you guys explain real quick just who you are, and where do you live, and we’ll add on what does the world look like around you right now? We’ll start with J, you’re down there in Sarasota, Florida.

J:
Yeah, I’m down here in sunny Florida. For those that don’t know me, I’m probably best known for flipping a whole bunch of houses, written a few books for Bigger Pockets, including the Flipping Houses book, the estimating book, negotiating book, and the recession proof book. I tend to be an economy nerd, so I think a lot of people think I’m really smart about the economy. I just read a lot, and I’m really good at processing data and regurgitating information. I wouldn’t say I’m that smart, I’m just well read, how about that?

Brandon:
Okay.

J:
I am in sunny Florida. Down here it’s kind of crazy. I’m in Sarasota, Florida. This is where kind of all the old people retire to. Yeah, this is just where all the old people retire to, so you would think that people down here would be taking tremendous precautions, because that’s kind of the at risk demographic. Up until a couple days ago, we weren’t seeing that. This is also a very, we’re the number one beach in the country, so we get a lot of tourism down here, a lot of people coming down here to-

Brandon:
Number one by population or by quality? That’s the real question.

J:
According to Tripadvisor Siesta Key Beach, number one beach in the country. Maybe it’s only contiguous lower 48 states.

Brandon:
We’re going to leave out-

J:
Trust me, I’d much rather be where you are. Maybe it’s that a lot of people come down here and they’re on vacation, and so they’re trying to get away from it, but it’s crazy. I mean, our bars are packed. Our restaurants are packed. We really haven’t seen the social distancing that I think a lot of other places are seeing, at least not until the last couple days.

Brandon:
All right. Interesting. I’d like to ask why that is, but before we get there, Scott Trench, tell us about yourself and what you’re like.

Scott:
Sure. You might know me, I’m the President and CEO of Bigger Pockets. I’ve written a book called Set for Life, on how to build a financial foundation capable of moving towards early retirement. I am a cohost of the Bigger Pockets Money Show podcast with Mindy Jensen, where we talk about how to build, again, that financial foundation capable of supporting investments like those in real estate. Excited to be here.

Brandon:
Okay.

Scott:
We’re here in Denver, Colorado, and Denver I think is probably one of the cities that is reacting pretty aggressively to this. All bars and restaurants have been shut down. There’s no dine in options anymore. Things evolved really rapidly last week, I think that was the week of March 9th. Monday, Tuesday of that week I was thinking, things are probably going to settle down into normal. We’ll see how this goes. By Thursday and Friday I had opted to actually shut down the Bigger Pockets office. I have all of our employees work remote, kind of following the timeline of the NBA there, in terms of my acknowledgement of the real impact this thing is going to have. Maybe a little slow there to kind of admit that was going to be the case, but then rapidly reacting from there.

Brandon:
Well, the hard thing is, I think for all of us, is that, I mean, how many times a month do we see these posts from CNN, Fox, whatever, that the world is ending? Something is going to kill the world every single month, and so it’s almost like the boy who cried wolf scenario. Where I think all of us didn’t quite believe it, even when this whole virus thing started coming out, it’s like, well I know it’s probably a bad virus, but so is global warming. I mean, that’s going to be rough too, and so was this thing and that thing. I feel like anyway most people probably didn’t take it as seriously as they should have. I don’t know, J, when did you first realize, oh this is bad?

J:
It’s interesting, because I’ve kind of been tracking this since January. Again, I read a lot of stuff, and so there’s been grumblings about this since January. Like you said, it’s very much media has sensationalized so much these days, and regardless of what your political viewpoints are, you’re going to get news that is going to pander to whatever your beliefs are. I haven’t known what to believe, and it’s one of those things that even to this day I see a lot of people on my Facebook feed who are, they’re questioning, and they’re doubting, and they’re skeptical about whether they should believe what’s going on.

J:
It certainly feels like the more news that we’re getting, the more data that we’re getting from around the world, that this is something that should be taken very seriously. It’s one of those things you don’t blame people for questioning. You don’t blame people for having some level of skepticism, because like you said, every day there is a the sky is falling, and generally it’s a pandering to whatever economic or political belief your source of media might have.

Brandon:
Yeah. I was just commenting the other day when I was watching the news, I realized I can’t remember the last time I turned on the news, this is years, and it didn’t say, “Breaking news.” On the news channel. Back in the day breaking news meant someone important got shot. Today it’s like, “Breaking news, Kim Kardashian did whatever.” It’s hard to believe that, but I think we all agree today we are in a, there is a problem today. I mean, things are rough. We’re not the conspiracy theorists on this panel here.

J:
Let me throw something out.

Brandon:
Please.

J:
I don’t want to, I’m far from an expert on anything medical or anything virus related, but there was, for anybody out there, there was a good article that came out, a study from Imperial College, that came out yesterday. Today is Wednesday, this episode’s coming out on Thursday, so the article came out on Tuesday, which kind of talks about the modeling that they use that led the government to kind of taking the precautions that they’re taking. For anybody that’s really interested in how did we get from maybe this isn’t that big of a problem to, we need to shut down the country, and I know a lot of people are skeptical because it feels like we got there way too quickly.

J:
This article, and we’ll put it in the show notes, I’ll send a link. This article does a really good job of talking about the models that have come out recently that have indicated that this really could be a huge threat. It talks about potentially up to 90, if we don’t take any containment efforts or procedures, this could potentially affect up to 90% of the population, up to about 1% death rate for the highest at risk category. Especially because without precautions we’re basically looking at a situation where there are 1/30th the number of ventilators we would need to protect people. People dying not necessarily because the virus is killing them, but because our healthcare system is overburdened. Potentially seeing up to 4 million deaths if we took not precautions whatsoever.

J:
It was a sobering article, and it had some really interesting models. It does a good job of explaining how we got from not really taking this seriously for a lot of us, including me not taking it seriously enough, to now we’re taking this tremendously serious. It answers some of those questions.

Brandon:
Yeah. On that note, just in case, because again, a lot of people are wondering what’s the point of the social distancing? David, can you actually explain the analogy, because you’re the analogy guy, you used about the restaurant industry? Remember that? We talked the other day?

David:
Oh yeah. Okay. When I worked in restaurants, one of the things that I remember was if tables, I was a waiter, as tables come in, if I had a five to eight minute break between tables, I had enough time to go get their drink order, put it in the computer, go do something else, go pick up their drinks, bring it out. Now they’ve had enough time to look at the menu. I can take their food order, put the next thing in, and then move on to the next table. When I would get four tables at the same time, I could handle four tables very easily, but not if they all came at the same time, because I can’t take all of their drink orders at the same time. I can’t put all of their cocktail orders in. The bartender cannot make all four of them at the same time. Boom, you get a delay, a bottleneck.

David:
A big piece of being successful in business, like J could probably attest to this, is managing those points where you bottleneck. If you have a whole bunch of employees that all need to get paid at the same time but you don’t have money coming into your business, even though your business is overall profitable, you can get in big trouble. You don’t have enough. Managing the flow of money, the flow of work. If I have seven people that all called me today and said, “David, I need to list my house.” I would be in trouble, because I have to go run seven CMAs and see what seven people’s houses are worth, and make time to go on seven appointments. Each of them has a bunch of fears that will probably take several hours to work through, and now I ran out of time in the day. If I had seven appointments over seven days, or even three or four days, not a problem. I wouldn’t even feel the impact of it.

Brandon:
Which is why 3 or 4 million Americans die every year anyway just naturally, but if they all die within the same two weeks-

David:
It’s spaced out. Right.

Brandon:
Yup.

David:
Hospitals can handle a lot of people, but not all at the same time. You come in, you need a bed, you get better, and you leave. What the government is worried about is that everyone’s coming at once, we won’t have beds for them. What I’ve heard is this is happening in Italy right now, and people are literally dying in the hallways because they can’t get to … The virus causes respiratory problems, they can’t get to a ventilator. They all came at one time.

David:
The point of the quarantine was to try to slow how many people are all coming in the restaurant and wanting a table at once. We’re trying to keep everyone home because we’re all going to get sick, I’m just planning on I’m going to get sick. Most of us are going to get sick. No one knows, but the numbers I saw were half the population is probably going to catch the virus, but as long as that happens over an extended period of time, the healthcare system will be strained, but they’ll be able to save a lot of lives. What we don’t want is everybody in the same three week period all rushing in there and having a panic. That’s the idea behind the quarantine, and where I live in the San Francisco Bay Area, they take that really serious. They’ve closed down basically seven Bay Area counties, and they don’t want us doing anything that isn’t essential.

Brandon:
Yeah.

J:
Yup. A scary number that I saw yesterday, and again, I don’t want to harp on this because I know we have other things to talk about. Apparently they tested everybody from five NBA teams, all players from five NBA teams, and in theory because NBA hasn’t really been, their season hasn’t started, or they haven’t been practicing, they haven’t all been together, in theory they’re relatively disparate groups of people who aren’t associating, giving the virus to each other. What they found was I think it was 9.7% of the players had been infected by the virus.

J:
This is kind of the first time that they’ve done widespread testing on a group of people that didn’t really think they were infected, and that weren’t necessarily closely related, and what they found was that we saw this, again, close to 10% infection rate. It makes us wonder if there’s a large percentage of the population right now that’s walking around infected. Luckily, the mortality rate for those under 60 or 70 is really, really small, but if all of us are walking around infected, even if we don’t know it, we’re potentially infecting others who have a much higher risk. Those that are older, those that have compromised immune systems. I thought that was a really good data point, and again, I’ll try and find a link to that, that we can put in the show notes.

Brandon:
All right. Let’s shift then a little bit and talk about what this means. First of all, J maybe we can start with you on what do you see in the economy? Then I’ll ask Scott the same thing. What are you seeing in the economy right now? Obviously, I mean most of us know the stock market has been rough, but what does that mean?

J:
Yeah. Let me start by, nobody has any idea. I get the question many, many times a day, where are we headed? What does this mean? What’s going to happen? I can throw out some data. I can throw out some ideas. I can certainly tell you what other people who are a lot smarter than I am are thinking and saying, but anything I saw now is likely to change next week, next month, six months from now.

J:
Certainly what we’re seeing is a whole lot of economic turmoil. Stock market is kind of crumbling, and a lot of people say that the economy impacts the stock market. The stock market starts tumbling when the economy kind of starts to shift. Ray Dalio, who is an economist that I highly respect, he likes to say that it’s actually the other way around. A lot of times it’s the stock market that impact the economy.

J:
Because when the stock market starts to shift, it changes our perceptions, our confidence in the economy. It changes how much disposable income we think we have, even though losing a lot of money in our 401k’s, or losing a lot of money in the stock market might not impact us day to day, it changes our perception of how much money we think we have, what our net worth is, what our retirement plans are. It gets us to start spending differently. The stock market in this case likely isn’t a reflection of where the economy was. The economy was pretty strong a couple weeks ago, but now the stock market is shifting, that’s likely to have a big impact on our economy.

J:
Additionally, we all know businesses are shutting down. Restaurants, bars, tourism, airlines, Disney World shut down. I posted yesterday that basically Las Vegas is shut down. All the casinos are closed. Just some personal anecdotes. I have a friend who runs a Hilton Hotel here in Florida, and their occupancy has dropped from mid 90s down to about mid 30s, and so they laid off 50 people yesterday. Hilton has told them that if it drops any further, they’re probably going to lay off the entire staff, save for one or two people to flush toilets and keep the building safe. That’s going on around the country.

J:
I’ve read that we could potentially see short term unemployment rates spike to up to 20%, which is just unheard of, one out of five people literally being out of a job. That’s just employees. If you think about it, a lot of us are also business owners. A lot of us are small business owners. I’m certainly not saying it’s worse for small business owners, but they face their own challenges. Small business owners can lay off their employees and not have to pay their employees, but a lot of times still they have inventory sitting on the shelves, it might be perishable inventory, especially if you’re a restaurant. They’re paying their property costs. They have to lease their buildings, or they’re paying their mortgages on their buildings. They’re paying for their cars. They’re paying for their insurance. We talk about 20% potentially unemployment rate, that doesn’t factor in the employers, the small business owners who are getting crushed as well.

J:
Certainly short term I think what we’re seeing is going to be a tremendous shock to the system. We often talk about the health of the economy being measured in what we call GDP, gross domestic product, and that’s kind of a measurement of the entire output of our entire economy. What we like to see is we like to see that grow quarter over quarter. Our economy grows a little bit every quarter, and generally 2%, 3% is kind of a nice normal number. If we see negative growth, if we see that economic output contract for two quarters in a row, we typically refer to that as a recession. That’s the technical definition of a recession.

J:
These days we’re talking about in Q1, which is basically January, February actually had some very strong numbers, but March is going to have some extremely rough numbers. In Q1 we may see 0% growth, we may see a little bit positive, a little bit negative. Talk is in Q2 we could literally see -5%, -7%, -8% growth, which is akin to what we saw in 2008, and it’s akin to some of the worst times that we’ve seen. Back in the ’80s we saw -10% growth for a quarter.

J:
The big question that everybody kind of asks is, okay it’s pretty clear we’re going to see some really negative short term impacts here. Unemployment, wages, people not having enough money, businesses potentially going out of business, GDP growth slowing. The big, big, big question is, is it going to be short lived, or when we get kind of over the hump of all this virus stuff, whether it be July, August, or later in the year, are we going to see a quick recovery? That’s the question that everybody’s asking. Are we going to see that quick recovery?

J:
I think it boils down to one of two things. One, and we can talk about this, it boils down to what the government and our “central bank” does to try and alleviate the strain. We can talk about what they can do. The second piece is, how are consumers going to react? Right now we have the highest consumer debt in history, at somewhere around I think it’s $9 trillion or $10 trillion, and we have the highest corporate debt in history, somewhere around $14 or $15 trillion. Is this going to cause people to start not being able to make mortgage payments, not be able to make car payments, not be able to make credit card payments?

J:
If the answer is yes, does that snowball? Does that missed car payment or credit card payment lead to additional financial struggle that causes the next month missing it, and the next month missing it? Does that whole thing have a domino effect that kind of pulls the entire economy down, or can we stabilize things enough and do something so that we’re helping Americans not miss their mortgage and car payments and credit card payments? If they are missing them, that it doesn’t domino, and when we actually come out on the backside of this whole virus thing, can we start to grow again quickly without seeing that domino effect or that snowball effect downwards?

Brandon:
You know, Scott and I actually interviewed Annie Duke[inaudible 00:21:53]on the Bigger Pockets Podcast.

J:
She’s a friend of mine, by the way. Very smart lady.

David:
Yeah, Annie’s awesome. What her basic philosophy was, if you didn’t hear that, is that life is a lot like poker. There’s a lot of lessons you can take out of poker that you can apply to life. I think that’s very applicable to right now, because poker is a way of being successful in a world of uncertainty. You do not know what cards you’re going to get. You do not know what cards the other person has. You do not know what cards are going to come after this round of betting, and what’s going to come next. You don’t know what other people will be betting. You are forced to operate in a world of uncertainty, using odds, and reading different scenarios in order to be successful.

David:
That’s an incredibly good skill to have, because as we’re all seeing right now, the markets do not respond well to uncertainty. Why is the stock market falling? Well, it’s not that the CEOs of the major companies in the world are all just going to get sick and die. It’s because everybody thinks, well the stock market’s going to go down, and that causes everyone to sell, and then everybody else has to sell. Like J was saying, the market psychology is a huge piece of what drives the economy in the short term.

David:
What I’d like to talk about is not just, because what I’m getting at is we don’t know what cards are coming. Like J said, it could be kind of a snowball thing that gets really bad. It could just shore up in a couple weeks and it’s not that big of a deal. We don’t need to know what cards are coming, just like Annie doesn’t need to know what cards are coming. What Annie has to know is, how do I play the cards I have? How do I know when I bet bigger, and how do I know when I pull back?

David:
I’d like to kind of steer the conversation in a direction where we talk about, when you get these cards this is the right move to make. These are principles that work no matter what, when you’re investing in real estate, or when you’re playing poker, because there’s always a move to make. Brandon and I talk about this all the time, we mean it. In any market there’s a way to structure deals. We’re going into a change, could be long time, could be a short time, there’s a way to do it. One thing I was thinking about today is right now is a great time to get seller financing because the sellers are going to be scared. I don’t know if I can make my payment. That asset that they had that we all wanted could very quickly become an anchor to them that they don’t want to have anymore because they’re worried that their client isn’t going to be able to make the payment. Great time to say, “Hey, I can make the payment for you, if you can give me the property.”

David:
On that note, Scott, can you talk to us a little bit about what the members of Bigger Pockets concerns are, what questions are being asked out there, and how we can start addressing some of those?

Scott:
Sure. Yeah. You have to remember when you’re thinking about a Bigger Pockets listener, you guys who are listening, and everyone’s different, everyone’s got an [inaudible 00:24:18], but typically our users are making between $50,000 and $200,000 a year in household incomes, that upper middle class earner. Typically, they’re investing in things like 401k’s, stocks and real estate investments. Very few people are actually in that. There’s a lot of small business owners, those types of folks that are in that kind of category.

Scott:
When you think about the first people to be impacted by what J was talking about there, I think it’s going to be your hourly employees. They’re the ones who are going to begin missing rent payments, which obviously could impact investors on Bigger Pockets, and that’s a major concern and topic you’re seeing going on in the forums. For a long time I thought, and I still continue to think that if they’re hit first and hardest, the second most hit folks are going to be your homeowners who do not own substantial other assets, like investments and stocks or real estate. They’re going to be the ones that are going to be the first to get hit by foreclosures and those types of things.

Scott:
Then the third group of people impacted downstream I think are real estate investors. Most of our users I think are reasonably well capitalized. You’re not seeing a lot of folks out there that have no reserves whatsoever, otherwise they haven’t been listening to the Bigger Pockets Podcast or the Bigger Pockets Money Show Podcast. There is a lot of talk about, how do I handle a situation around where the government steps in and prevents evictions? Do I then begin to work with my tenants there? There’s a lot of, uncertainty is the word of the day.

Scott:
We have no idea what’s going to happen going forward, so there’s a lot of uncertainty around a lot of new investors, or people buying their first, second, third property, wondering, should I close? Should I continue closing, or should I try to find a way to back out? Should I begin getting aggressive right now? I think that those are really the big concerns that are going on in the community, and there’s a lot of really good feedback on these discussions. We’ve got a post that’s really enlightening around how the coronavirus will impact real estate that has 600 posts over the last 12 days. It’s kind of interesting to see the rapid evolution of thought in the community around, this is going to be no big deal, to, okay this is here and it’s going to have major impacts. How do we prepare for that?

Brandon:
That brings up a good point. This is a rapidly evolving thing, and so even, I mean we should make the disclaimer right now. This show right now, if you’re listening to this two weeks after, we’re recording this on March, what is today’s date? I don’t even know.

J:
18th.

Brandon:
Yeah, okay, the 18th you said?

J:
Yup. 18th.

Brandon:
I don’t even know the date anymore. March 18th. A week from now, two weeks from now, a lot of what we’re saying here might be changing. I actually would encourage people to go, and this is not a selfish thing, go to the Bigger Pockets forums, because that’s going to be up to date. People are engaging every single minute of the day on there. Get involved in that discussion as well as listening to podcasts and stuff. For up to date stuff, make sure you guys are checking out that, because again, this stuff might be outdated.

Brandon:
Just five minutes before starting the recording of this, we get this news article, Josh Dorkin sent it to me, and it said that Donald Trump’s having HUD shut down all foreclosures and evictions for the next month. It’s like, well what is that? We don’t even know what it means. We were just talking about, should we even talk about it on this show? Because they haven’t even defined what that means, does that mean only HUD foreclosures, or does that mean everything? It goes back to David’s point of we don’t know what cards are coming, but we can play them however. I don’t mean that in a, we’re going to profit off of this collapse necessarily, though I’m sure there are ways that we can invest, and we’ll get to that. Just careful.

Scott:
On that point with the cards, we can control our cards. We’ve had that power over the past 10 years, to control the position that we’re entering today with. J, you’ve written a book on recession proof real estate investing. My kind of, I would say passion in life and my career, is helping people build a strong financial foundation. If you have reserves, if you invested for cash flow, if you have diversified, if you have built a strong financial foundation, you spend much less than you earn, all things I’m sure we’re going to talk about, there are a lot of options for you to work through these things.

Scott:
For example, with the eviction front. If I’ve got a great tenant who loses their job as one of that 20% unemployment rate, if I’m not well capitalized my only option is to evict as soon as possible, which is terrible business, and terrible. There’s a moral consequence there as well in some capacities. Versus, a well capitalized investor with reserves understands that this is all relative, and how do I play this hand appropriately and work appropriately with tenants in certain situations? Those types of things.

Brandon:
Yeah, that makes a lot of sense. Let’s talk about this real quick. At Bigger Pockets, like you said Scott, we are pretty big on having reserves, being careful about what we’re doing. Now we’re seeing, you’ve gotten a little bit of feedback from I think it was one person was saying, “Well, this is why the BRRRR strategy is just a terrible idea. And this is why you shouldn’t do no money down deals, because we’re in this position because of that.” Scott, can I ask you first? Is that an accurate criticism, or is this why we’ve been talking about that stuff?

Scott:
Yeah. Well first of all, I think the beauty of Bigger Pockets is that you can absorb the perspective of a lot of people, and learn about what works, and what people are doing, and kind of make the decisions you want for yourselves. As a whole, the folks that represent Bigger Pockets officially, the four of us, cohosts on other podcasts, The Rookie Show, those kinds of things, I believe we are very conservative.

Scott:
I have harped for years, if you’re going to buy real estate, make sure you’re investing for cashflow, and long term appreciation. Make sure that you are bringing your down payment, that down payment by the way can be 0%, 3.5%, and I’ll talk about that in a second here. You can bring a low down payment, but make sure you bring your down payment, any closing costs, any rehab costs that you need, and have $10,000 to $15,000 in reserves in addition to any credit lines that you might have. Run the numbers. You built our calculators, and have harped on that for a long time. Then Josh, our founder, has been harping about a bubble and recession since 2013. We love Josh, right?

Brandon:
Yes.

Scott:
I think there’s a lot of conservatism in the community, and I think that our community as a whole is going to be largely reasonably well capitalized and prepared, with a couple of people who may not have those things. If you don’t have those things and you’re listening to this show, time to stock up and build up that reserve and shore up your financial position. You may still have some time here. I’m not sure if that’s answering your question.

Brandon:
I think it is, and I think to go to the equity thing. We talk a lot about the 0% down. I’m often known as the no money down guy because I wrote a book called The Book on Investing in Real Estate with No and Low Money Down. The point I have always made in there is the same one David makes in the BRRRR book. Let’s say there’s a $100,000 house, and you go and put a $30,000 down payment on that house. Now you have a mortgage for $70,000. It’s worth $100,000, you owe $70,000 on it.

Brandon:
The beauty of the no money stuff is get that deal for $70,000 all in with no money down. I would never say, “Go buy that $100,000 house for 100 grand no money down.” Necessarily. I’m not saying go and over leverage, like we did back in ’08. The idea with creative investment, or creative strategy, is to get a better deal so that you have the equity, so the economy could drop 20% or 30%. Now if it drops 50%, sure, we may be under, but none of us really expected that. If you have good cash flow, if you have good reserves, we can weather that. If you’re just a good business owner, make good business decisions, we can get through that.

Scott:
Yeah. Well I’ll chime in there. This is not, no one has been saying this entire time, I can’t emphasize this point enough. It’s not smart to buy the $100,000 house with no money down.

Brandon:
For $100,000.

Scott:
If you don’t have any money, and you have bad credit.

Brandon:
Yes, agree. Yup.

Scott:
If you don’t have any money, right, and you have bad credit, right, it can be a very reasonable thing to do [inaudible 00:32:07]I’ve got 30 grand. Instead of putting 30% down, I’m going to keep that 30 grand in cash and put no money down to finance the property. Now, I’ve got a much more conservative position than if I’d put the 30 into the property and kept no reserves back.

Brandon:
Assuming it cash flows at that point because then you’re not not paying money every single month out of pocket just to survive on a property, right?

Scott:
Absolutely. And this brings us to house hacking, right? So house hacking, some people talk about this as a risky strategy, right? And what I want to point out though is who’s going to lose in a recessionary environment? Your first person to lose is going to be the tenant who can’t make rent. The second person’s going to be the homeowner who loses their job and can’t make their mortgage payment. Your house hacker, right, is buying a house and is in relatively the same position as the homeowner, but has the potential for that income to offset that rent. So going into a recessionary environment, I think that house hacking is still one of the most conservative ways to go about your living situation, financially, right?

Scott:
And so I think there’s a lot of concerns out there about, “Oh, is it risky?” Well, everything, has some form of risk. Which is the least risky way to go about these things going into a recessionary environment? I think those are the questions that we’ve got to ask and answer.

Brandon:
That makes sense. And by the way, guys, we’re going to get into it in a few minutes here. We’re going to actually get real, actual calls from real estate investors who are listeners of the show and BiggerPockets members. We’re going to bring that in a little bit, and we’re going to go very specific on like what should I do in this case? And we’re all going to chime in. I want you guys to know that that is coming, but first we want to get a little bit more of a bigger picture here.

Brandon:
So before we jump into the specifics on how real estate investors should handle this stuff, a couple of quick questions. First of all, J, I want to touch on the recent changes to the federal reserve. So they just announced a couple of big things recently like quantitative easing and all these big words that I don’t even know what half of them mean, but I know you do. So what’s been going on with the federal reserve, the government, what have they been doing and what do you see coming over the next week?

J:
Yeah, it’s funny, I’ve been having this conversation with people for a couple of years now, and previously, it’s always been, “Hey, here’s some good information so you can sound really smart at a cocktail party,” but these days, it actually matters. So stepping back, basically, and this is just kind of big picture stuff, essentially, the government has three ways that they can kind of help the economy when the economy is faltering, and actually, can also slow down the economy when the economy is doing too well, which actually happens sometimes.

J:
But the number one way is, or the first way, not necessarily the number one way, but the first way is that we have this kind of, what we refer to as, the central bank. You’ve probably heard them called the federal reserve, and most countries, most big countries have this, but they can play with our interest rates and everybody’s heard kind of the last couple of days, last couple of weeks, actually, last couple of years, that our interest rates have been going down again. We got up to three and some percent last year, and now we’re, as of last week, as of, I think, Sunday night, interest rates which we refer to as the federal funds rate, and this is kind of like the rate that banks can lend to each other and the government lends to banks as the lowest rate, is essentially zero now. So money is kind of flowing back and forth between the banks and between the government at 0% interest rate.

J:
This is good, in some respects. The reason playing with interest rates can impact the economy is that it allows the federal reserve and the government to kind of incentivize people to do one of two things. It incentivizes people to save or it incentivizes people to spend. When interest rates go up, what do we do? We throw our money in a savings account because we’re getting decent money from a savings account. We don’t spend the money. Secondly, when interest rates go up, it gets more costly to borrow money to buy a car, or to buy a house, or to pay on credit cards, so we don’t spend. So moving interest rates up basically encourages people not to spend, but to save instead.

J:
When we lower interest rates down, it does just the opposite. We don’t want to put money in the savings account anymore because we’re not getting any interest. So low interest rates, we’re going to spend that money because we have no incentive to save it. Secondly, we can get mortgages for 3%, we can get car loans at 5%, we can get cheap credit, so low interest rates, that encourages us to go out and start spending money. That’s good for the economy.

J:
So the first thing we do, or the first thing the federal government does when it wants to spur the economy on is lower interest rates. Well, interest rates are now at 0% and we could go to negative rates and that’s a whole separate discussion that we’ll have on a different podcast, but right now rates are about as low as they can reasonably go without doing weird stuff. Now, some people would say that’s a really good thing, and in general, it would be, but it’s weird to be lowering interest rates to zero now. A lot of people are concerned that the government did this because they were worried about doing too little, too late.

J:
Ray Dalio, again, an economist that I highly respect, has recently come out and said that lowering interest rates now has kind of been the opposite. It’s kind of done too much, too soon because consumers really don’t have the opportunity to spend right now. Brandon, you can’t really go out and buy a car because most of the car dealerships near you are closed.

J:
David, your homeowners, your buyers probably can’t go out and buy because they’re having trouble actually getting to the closing table because title companies are shut down. So even if we wanted to take advantage of these low interest rates right now, people don’t have the opportunity to spend. So we could talk about whether 0% interest rates are good or bad, but the first kind of lever that that the government has to impact the economy is interest rates, and we’ve kind of exhausted that lever now at 0%.

J:
The second one is what we … It’s basically the money supply. It’s how much money is floating around out there in the economy. And the benefit of this is, when there’s more money floating around in the economy, there’s more money that we have to spend, businesses have to spend, consumers have to spend, so a larger money supply stimulates the economy. And there’s this thing I think David might have mentioned or no, you mentioned, quantitative easing and we’ve heard that term a lot since 2008. We did a lot of that in 2008. And that’s basically the federal reserve saying, “We need to stimulate the economy. We’re going to do that by flooding the market with money.”

J:
We often refer to that as printing money, but essentially, the federal reserve says, “We’re going to put a whole bunch of money in the hands of these big banks, which will then encourage the big banks to make loans to businesses, to consumers, to really large industries.” So by putting money out there, quantitative easing is that that printing of money and putting money out there, by doing that, we’re encouraging banks to kind of spread this money around the country, to give it out in terms of SBA loans, to give it out in terms of mortgages, to give it out in terms of big business loans. So QE is kind of the second way that the government can put money out there and stimulate the economy.

J:
Sunday night, again, when we announced going to 0% interest rates, or the government announced that they were going to do 700 billion dollars in quantitative easing. In other words, they’re going to put 700 billion dollars more money out in the market for banks to kind of give loans and keep the economy going. To put things into perspective, between 2009 and 2014, we put 4.5 trillion dollars into the economy. So it’s a significant percentage of that. What’s that? That’s a one sixth, one seventh of what we did back in 2008, so it’s a decent percentage, but on a total scale, we could be flooding a lot more money into the market to even get to where we were in 2008, 9, 10, 11, 12 levels. So we’re kind of at about 700 billion now. We’ll probably see that bump up over the next couple weeks and months.

J:
Then the third piece. And so those are the two leavers that the federal reserve has, interest rates and money supply. The third is one that is more the government’s control. This is stuff that often has to go through Congress, we have to pass legislation to do this, but this is the more direct stimulus stuff. So this is, people have probably heard recently the government talking about bailing out airlines, bailing out Boeing, potentially giving $50 billion to Boeing over the next couple of weeks to keep them solvent and keep them from going out of business. But this also involves potentially giving bailouts and direct stimulus to consumers. So yesterday, the president announced that they’re thinking about giving $1,000 to every American, or maybe it’s every adult, I don’t know the details, to basically allow them to continue to make their mortgage payments, to buy food, to live their lives.

J:
And so this is a level of direct stimulus that, as far as I know, we’ve never seen in this country. I’m not even sure what the mechanisms are to do that. Do they have a check? Do they stick it in your bank account? Do they send you a prepaid Visa? I don’t know. And these are the kinds of things that the government is so concerned these days that we need to keep things going, that they’re starting to about, not necessarily for the first time, they probably thought about it in 2008, but it may be the first time that we actually see the government handing money directly to consumers to allow them to continue to make their payments and to continue to survive until we get to the other side of this.

J:
So that’s kind of the third piece that the government has to work with. The bailouts, the direct stimulus, and again, interest rates, we’re probably past that. There’s not much more we can do there. Money supply, I suspect that we’re going to see a ton more money flooding into the money supply over the next couple of months. You’re going to hear that term, quantitative easing a whole lot again, and we’re going to start to see a lot more bailouts and stimulus aimed towards both big businesses, small businesses and probably directly to us as consumers as well.

Brandon:
Yeah, wow. The thousand dollars, I was just hoping that they would just load up all the thousand dollars bills in a plane and just fly over the country and just let it go. That’s what I would do if I were the government.

David:
That always works.

Brandon:
Yeah, well, that’d be fun. They’re just grabbing … It’s like one of those machines where everyone’s-

David:
Have a lot more investors moving to the Midwest the.

J:
The funny thing is, they often refer to it as helicopter money for that very reason.

David:
Oh, no, that’s funny. Like When we drop aid into other countries.

Scott:
Yeah, exactly.

Brandon:
I envision, you know those machines where you go inside this tube, this glass tube, and they throw a bunch of money in there, and then the fans come on. You got to try to grab the money in the air. That’s about how I’d envisioned that going, so …

David:
Can I speak to the fears of what’s going on in most people with just this, “I don’t know what’s going to happen”?

Brandon:
Please.

David:
Okay. In one of the last episodes that Brandon and I just put out, we talked about the zoom factor, that when you zoom in on any situation, any deal, any problem, and all you see is the problem, your emotions are like, “Ah, this is scary.” But when you zoom out and you look at that same situation from 30 years, you don’t even remember that you had an issue during escrow. The stuff that caused so much emotional turmoil disappears when you zoom out. And we are in a zoom in phase. Everybody is rapidly consuming as much information as they can possibly get and focusing on it and then panicking. And what J’s talking about gives us a really good opportunity to zoom out a little bit and recognize this is a pattern.

David:
In my short time on earth, at 37 years, I have seen this happen. I remember George Bush did something very similar to this where it was like a tax incentive where they push money out and said, At your taxes, you’re going to get a bunch more money coming to go spend in the economy.” I remember president Obama did this when we had the whole, if you buy a house, you get like a credit back of 7,500 bucks if you bought a house during this time. I don’t remember, we had some fancy name for that. This is normal stuff. Whenever people start to freak out, the government recognizes the negative impact on market psychology and they do something like this that’s very basically ceremonial. Like, this thousand dollars a month they’re giving everyone is not going to change everything, but it will make you feel better, and that’s what they’re trying to do. They’re trying to stop a panic.

David:
What will affect everything is what J’s talking about with quantitative easing, okay? This was a huge and not often talked about impact on our economy in general that we went through during the too big to fail phase, okay? The government did not want to have to go. It’s the equivalent of printing money. They’re not actually doing it. What they’re doing is pushing paper money or electronic money into the economy by buying bad debt that never should have been bought, but it has the same effect as printing money.

David:
I watched real estate prices almost double from the point where they did that to where they are now, and we all rode this crazy, awesome wave of watching real estate go up, up, up, up, up, and we just thought this is the way it’s always supposed to go, but that was not normal. That happened because we put so much money into the economy, it had to find somewhere to go. A lot of people bought apartment complexes because raising money was really easy. A lot of people invested in angel investors, and venture capitalists were able to raise a lot of money because it was all over the place and go put it into companies. It really did help prop our economy, but it comes with a price, right?

David:
Inflation eats into a lot of this and it gives you this false sense of security because you’ve got extra money that’s very easy to get your hands on. At the same time, J talked about interest rates, they kept them really low. So now there’s no reason to keep your money in the bank, so you need to go lend it to someone to get some kind of yield and there’s tons of money to be lending, raising money. This is why Brandon and I talk about it. This is the best time ever to raise money because it’s everywhere. It’s not hard.

David:
Well, when there’s a lot of capital, it needs to find a home, and where there’s more demand than there is supply, like the real estate, we saw prices rise. This is a big reason why real estate’s done super good, okay? And the reason I’m pointing this out is we’re about to go do it again, okay? It’s, as a cop, we would see people that would be on a methamphetamine bender, and they would go for seven days without sleeping. There was just a ton of energy and they would just stay up all night taking apart lawn mowers and riding their bikes all over the place and going on runs in the middle of the night because they’ve got to burn off all this energy. And then at the end of that, they’d crashed and they would sleep for three days.

David:
Well we’re getting to a point where, oh, my gosh, there might be a crash happening and we’re putting more energy into the economy. I’m expecting that when this entire temporary scare kind of passes over, you’re going to have another big wave of stuff becoming more expensive because of quantitative easing. And for anyone who doesn’t quite buy into what I’m saying, what I would recommend you do is you Google US money supply and you just look at a graph of at what point when the dollar was tied to gold, how many dollars were floating around, and then, what was it, J, like 78 or so where they got rid of the gold standard?

J:
Yeah, officially, early 70s, yeah. No, it was late 70s, you’re right.

David:
Late 70s. So they said, “Okay, now the dollar is not tied to gold at all. The government can print as much as they want. It’s backed by the faith and credit of the US government, not by gold. And how quickly we started printing more money.” And then in 2010 when they started quantitative easing, that charge, it just spikes like almost completely vertical. That’s going to lead to prices going up, okay? So for the people that are really worried, what if this, what if that, it’s hard for me to see this turning into something that could throw us into a depression when we’re probably creating the opposite problem. We’re putting a lot of money into the economy. It’s going to make things seem like they’re more valued than they really are. J, do you any objections with the way that I’m interpreting it?

J:
No, no, no. I 100% agree. I think that, and I know I’m probably going to be a little bit more pessimistic than a lot of people here, but I think that in this particular case, we’re going to have to see the government literally flood the market with quantitative easing. I think it’s going to make a 2008 look like kind of just a trickle of cash into the money supply. Now, don’t get me wrong, I don’t necessarily think that’s a bad thing. I think that we’re going to see such a cliff that we’re falling off in terms of GDP, in terms of unemployment, in terms of just money not flowing around the country over the next couple of months because everything’s shut down that it’s really going to require it. I hope the government does this because I really think it’s going to be necessary. I hope the government floods the market with a ton of money.

J:
The nice thing is, we often talk about the gut reaction there is, well, if you do that, you’re going to cause inflation. More money means people have more money to spend, more money to spend means more demand, and then businesses start to raise their prices because there’s so much demand. The nice thing is, during a recession, you could have as much money as you want out there. People are still scared to spend their money, so you’re not going to see the inflation. You start to see the inflation when things improve, when the economy starts to get better. That’s when inflation becomes a concern. So the big question now is, is the government, assuming when they put in four trillion, five trillion, 20 trillion dollars, whatever that number is, into the economy in quantitative easing, are they going to be able to take it back out before we start hitting massive inflation?

J:
That was the issue we had under the Obama years. We put 4.5 trillion in and we weren’t really keen to try and get it out because we were scared that it was going to hurt the economy. My best case scenario here is we put a ton of money in to kind of stabilize the economy, and then we start pulling it out so that we have more of a controlled downturn. I don’t think we’re going to avoid a downturn here. I don’t think it has to be a 2008 or 1929 type downturn, but I think we’re going to have some type of downturn, and I think the government’s going to play a large determining factor in how bad and controlled that is.

David:
And don’t assume that that’s terrible. Anytime there’s a downturn, that’s unacceptable, right? Like there’s times where you need a small forest fire, like a controlled one to keep a rampant one from coming over. Scott, I’m curious, you kind of study macroeconomics. What are your thoughts on what’s going on and how this might affect VP?

Scott:
I think that J and you kind of have really good opinions on the economy there, and I don’t like to offer opinions on the economy. I don’t think … It’s not relevant to me. It’s not a part of my strategy. I invest for the very, very longterm in appreciating and cash flowing assets, and I capitalize my business such that I will never have to sell, never have to commit more capital to the business and can weather any storm, right? So if in 30 years, right, just like you said earlier, David, I’m going to zoom out and I’m going to say, “Is Denver real estate going to be worth more than it is today? Are rents going be higher?” And if I don’t believe that, I shouldn’t be investing. And if I do believe that, I should be investing for the very long term and capitalizing my business appropriately, right?

Scott:
So what I do is I invest in real estate. I put a $15,000 reserve on my first property. I add 10,000 to that reserve each time. I invest such that I can produce cashflow. For earlier mortgages, I have continued to remain flat, even as rents have grown, giving me a natural cushion of my overall portfolio. And I’m just going to continue holding and dollar cost averaging like I have for the very, very longterm. So I completely agree with your sentiments about the market, and I could never have predicted that a virus was going to hit that was going to force me to potentially consider the possibility of working with my tenants to subsidize or forgive portions of rent due to their job loss from an hourly wage. But I’m capitalized for exactly that purpose, without having to predict it specifically.

Scott:
And so I think that’s the big takeaway for me is, hey, we know this is going to happen. None of us who are listening are investing for five years, planning to sell, build up a pile of cash and move on from this business. We’re all planning to invest probably for life in this business or other asset classes, and how do you capitalize your portfolio appropriately? So I think that’s kind of how I’m viewing the situation here, and I think it all comes back to good and sound investing habits, a strong financial foundation, and a very longterm outlook.

J:
Yeah, and just to add to that, I kind of look at it as investing in longterm cash flowing assets like real estate is the same as making a bet on capitalism. It’s making a bet on the longterm viability of our country and our economic system of of capitalism. Basically, if capitalism survives, if our country survives for as long as capitalism and our country survives, cash flowing real estate is going to go up. Same with the stock market.

David:
A bet with an inflation hedge.

J:
A bet with an inflation hedge. Exactly.

Scott:
Yeah, explain what that means, inflation hedge, if you would.

J:
Yeah, so real estate tends to be a good hedge against general inflation. Basically, this country in general sees prices of things go up year, after year, after year. We often talk about it going up 2% or 3%. so if you take a dollar and you stick it in a savings account next year because everything is 2 or 3% more expensive, that dollar is going to be worth less than it is today because it can buy 2 or 3% less. keep that in the savings account over five years or 10 years or 50 years, that dollar may only be able to buy you the equivalent, in today’s money, of two or three cents worth of stuff. So that’s what inflation does to dollars.

J:
Inflation doesn’t necessarily do that to certain other asset classes. Inflation doesn’t necessarily do that to real estate because real estate is very good at keeping up with inflation at growing with inflation. So the value of your real estate going to grow every year because the price of things going up, because the price that your tenants are paying for your rent is going to go up with inflation. So it’s a good way … Real estate is a good hedge against inflation.

David:
And because our mortgage payments are …

J:
Fixed.

David:
Fixed, usually. Fixed and dropping, meaning not the payment dropping, but the balance is dropping, and you have flexibility to refinance when rates go lower, but they can’t make you refinance when they go higher.

Scott:
Correct, yeah.

J:
As a landlord, if the cost of your milk goes up 3% next year, well it’s also safe to assume that your tenants are going to be paying 3% more in rent, so that will offset your costs.

Brandon:
And this goes to Scott’s point, it’s like 30 years down the road. I mean, I talk a lot about the four wealth generators of real estate, right? Number one is cashflow, meaning extra money in your pocket every single month. Over time, on average, your cashflow should grow every single year because like David said, you can refinance in the lower rates if you want it to. Well, also rent goes up, but your mortgage payment usually stays the same. So your cashflow goes up over time.

Brandon:
Appreciation, or you could say equity growth, but appreciation, like the property values, tend to go up over time. Same thing we just said, as milk goes up and inflation goes up, real estate tends to go up, which means your mortgage payment is going down, which is the third wealth generator, loan pay down. Loans get paid down over time, so now your equity's growing there, and then the tax benefits. You own real estate, you get a bunch of tax write offs and stuff. So really, it's hard to lose. I'm not saying it's impossible to lose, but it's hard to lose on a 30 year timeline, as long as you're taking advantage of those four wealth generators. You're getting cashflow, you're in an area that appreciates, you're paying your loan down with a fixed rate mortgage ideally, and you're taking advantage of all the loopholes the government gives us. Scott?

Scott:
I love it. You’re absolutely right and I completely agree with everything you said, except for if you go bankrupt in the period, your entire portfolio goes to zero, right?

Brandon:
Yeah, so you just can’t [inaudible 00:22:35].

Scott:
Which is why you buy conservatively and have that reserve, right? It’s the same stuff we’ve been talking about for a very long time, but that is part of your overall longterm return. You never can be forced to sell or have to commit more capital to this at the worst moment because that’s the way you lose.

David:
You guys want a good analogy for this?

J:
Of course you do.

David:
All right. People that are just purely invested in the stock market, like imagine building wealth is like climbing up a mountain, okay? You can literally go to work, make a paycheck and that’s like grabbing a hold and pulling yourself up. It takes effort, but you can move upward. Then you’ve got winds that come from underneath you that make that climbing easier, okay? That’s like when the economy’s doing really good and it’s pushing you upwards. If you invested in the stock market, when the economy crashed, you fell. You just lost your grip on that mountain and, boom, you plummeted and you couldn’t do anything to stop that. There’s nothing that you can do, and until the winds come right back up and carry you, you’re kind of helpless.

David:
Why I love real estate, why, even though I’m a conservative person, I invest somewhat aggressively in real estate is I have a belay that you don’t have if you’re investing in stock. Belay is the part of you that attaches to the mountain and then to your waist, so if that you fall, it catches you, and that is my reserves and that is my cash flow. When my asset drops in value like the stock market does and my $200,000 house goes down to 100,000, I don’t care because I still have rent coming in that catches me and allows me to weather that storm. And I control how much reserves I keep so I can survive that. Other asset classes do not have that. You’re at risk when you fall.

David:
The reason real estate’s different is because it’s generating money, and just like Scott said, if you focus on having money in reserves, creating cashflow, those are two defensive metrics that keep you from losing wealth. It might be possible to build wealth faster with real estate if you’re super good at picking stocks or invest in the next Uber or whatever, but you don’t have a belay to protect you on the downside.

Scott:
Yeah. And then two additional belays that investors have, a lot of us, not everybody, but if you’re in your local market, you can self manage, right? That’s a way to inflate your cashflow or offset some of the costs and preserve that temporarily if you need to. And then second, you can DIY construction, right? This is a skill that you can learn. So there’s a couple of things that you can do as well in a practical sense, or at least prepare to do going into a situation if you’re a typical listener owning a couple of rental properties.

Brandon:
Yeah, I’ve actually said that before, where if rents do drop, and actually, I want to talk about rents potentially dropping or just not coming in at all here in a second, but if rents do drop … Now, I don’t want to manage my own properties. I don’t like that idea. I like having property managers and people, but if I have to, I’m like, “Great, okay, rent’s dropped by 100 bucks. All right, well, sorry, property manager, I’ll take that,” if I needed it, if I needed the cash. “I’m going to have to manage myself right now because I need it.” Like, I’ll do what I have to, right? Rent’s dropped another a hundred dollars a month. “All right, sorry handyman. I guess I’m going to go pick up that book from Home Depot.” So like you said, there are a couple of things we could do potentially.

Brandon:
Now, if you’re not local, if you’re like David, long distance real estate, or like J and I buying bigger stuff out of state, then that’s not quite as applicable. But yeah, I think that’s a really good point, Scott, especially for most of our listeners who do just own a few rentals within 20 miles of themselves, it’s another just protection against that you don’t have in the stock market.

J:
And just to reinforce David’s point about cash flowing real estate being a belay, if David were going to come to me now and say, “Hey, J, can I borrow $100,000 to put in the stock market?” I’m going to laugh at him. If he were to come to me and say, “Can I borrow $100,000 to do a flip?” I’m going to laugh at him. If he comes to me and says, “Can I borrow $100,000 to buy the Mona Lisa?” I’m going to laugh at him. If he comes to me and says, “Can I borrow $100,000 to put into a piece of cash flowing real estate?” I’m going to say, “Yeah, give me the numbers.”

J:
So I know, even as a lender, that cash flowing real estate is protection, and so, yeah, there are a lot of things in real estate, and I’m not saying everything, and we can talk about this, there are a lot of things in real estate that aren’t going to work well right now, but cash flowing assets, cash flowing real estate are going to work well, whether you’re in a recession, whether you’re in an expansion, or anywhere in between.

Brandon:
That’s really good. Why don’t we shift gears a little bit here and headed into some specific questions, because that’s actually one of the first questions here that I have on the list that we’re going to talk through now. And as we go through this, keep in mind, everybody, we’re going to offer our opinions on this. This is not professional, investment advice, so every situation’s unique. Make sure you guys are doing your homework, thinking this stuff through, and we do encourage you, jump into the forums, ask questions of the community, get other people’s advice on this, and definitely check that out.

Brandon:
In fact, this week on the BiggerPockets, the Real Estate Rookie podcast with Ashley and Philippe, they actually talked to like long time investors who have been through multiple recessions. So listen to that stuff, listen to other people, get other people’s opinion. But with that, I want to jump into a few specific questions from some people who called in. All right. The first question here is from Michael from Orange County, California.

Michael:
Hi, guys. My name is Michael. I’m from Orange County, California. And my question I have for you all is given the current state of our economy and factoring in the global impact that this virus has, would you purchase a buy and hold investment property now or would you wait a little longer to see what happens to the US economy and the global economy as a whole? Thanks.

Brandon:
All right, so that’s the question from Michael. Yeah, would you buy a rental property right now or would you just wait a couple of months and see what happens here? And I want to actually add a little bit to Michael’s question and ask the three of you not just the rental thing, but would you also do any flipping right now? Like, if you’re in the middle of buying a flip, like, for example, if you’re me and you’re in the middle of … You’ve got to flip under contract, would you continue with that right now? So either flip or rental? J, you want to start that one?

J:
Sure. Let me start with the flip because I think that’s probably what people are going to be looking at me to address. So I have several flips in process right now, and I am not thrilled about that, but I would not pick up a flip right now. I like to say that there are a lot of strategies that work in a lot of different markets, but honestly, flipping is one strategy that doesn’t work well in a market that is falling or potentially falling, and there’s a lot of risk in doing flips right now. Now, I know I’m going to hurt my book sales by saying that, but that’s the honest truth. Actually, I’m not going to because what I’m going to say is, if you’re interested in flipping, now’s the time to start learning about uplifting. So go pick up the book on flipping houses and spend the next six months, or 12 months, or 18, or 24 months studying, so that you’re prepared when the market starts to come back.

J:
But for anybody out there that isn’t an expert on flipping, if you’re looking to me for my opinion on flipping, you’re probably not enough of an expert to be flipping right now. I’m not enough of an expert to take on new flips right now because I don’t know where the market’s going.

Brandon:
All right, David, what do you think? Would you buy a rental right now? Would you-

David:
I’ve been in a similar situation.

Brandon:
Okay.

David:
I have a lot of clients that are trying to figure out that same question, “Should we sell my house right now? Should we buy a house right now? What’s going to happen? What are we doing?” The way that I’m advising my clients is the same way I would do it. That’s kind of how I run my team. This is what I would do, so I tell people that’s what they should do. It’s okay to put stuff under contract. In fact, in my specific market, this is a good opportunity. We needed this. I have like 30 buyers that we are trying to put into contract, and every house is getting 20 offers. It’s incredibly hard to get into contract. This is actually a good thing when the brakes go on and it gives the right people the right chance to get in and buy something that they couldn’t have before.

David:
But what we’re doing is we’re creating our contracts with very long contingency periods and lots of ways out for the clients. So I’m talking to listing agents and saying, “Hey, I want to get this appraisal done as quick as I can, but if I can’t find an appraiser that’s willing to leave their house and go to the appraisal, we’re not going to waive our appraisal contingency. I need to have a 60 day period where you can’t keep our earnest money if we can’t get the appraisal.” There’s always a way to structure the deal that’s going to keep you safe. And that’s what I’m telling people, is if you’re going to buy real estate right now, one, I wouldn’t buy luxury real estate right now. That’d be something. And by luxury, that’s different by market, right? $1 million in San Jose is not luxury real estate. But in Sarasota, Florida, that very well could be. I’d probably avoid that market.

David:
But if you have an opportunity to flip a property and if it doesn’t work, you could rent it out, and you know you have plenty of capital, and you really like this deal, you really like this area, I’d go for it. I’d just write your contract with ways that you can back out, like have extended escrow periods, maybe a 60 day to 90 day escrow period just in case things go wrong and you need more time to get the deal put together.

Brandon:
In my area, we just created an addendum, basically, like a Covid 19 addendum that says a bunch of extra ways that buyers and sellers, if they both mutually agree to back out, they can. Even if there’s no contingencies in place, the buyer can still back out if they’re unable to close because of Covid 19 related reasons. So it’s just here you go, here’s your solution. What are you worried about? Okay. Now you have a way that if you can’t record with the county, if you cannot find an appraiser, if the lender won’t work and you can’t get money, that’s not your fault, then you don’t have to work. That took a day for that thing to get put together.

David:
There’s a lot of smart people that are moving really, really quickly, and I know I’m kind of harping on that, but I want people to hear it. I know there’s a lot of uncertainty, but most of these, what are we going to do are not problems that are too hard for determined human beings to figure out.

J:
That’s why those things that if your first buyer isn’t able to perform because an appraiser can’t get into the property, or the lender can’t do their job, or the title company isn’t available, a second buyer, a third buyer, a fifth buyer isn’t going to make any difference. So hold holding your buyer to something that no other buyer could perform is-

J:
… holding your buyer to something that no other buyer could perform is just-

David:
That’s exactly what I’m telling the sellers when they’re like, “Well, what if we don’t? What if they can’t do it?” Well, do you think someone else is going to be able to find that appraiser that they can’t? We’re all in the same boat here together.

Brandon:
Scott, what do you think?

Scott:
I think, I invest in both stocks and real estate. What you’re seeing in the stock market, this is a lot of stuff we talk about in BiggerPockets Money. Is people are cautious. They’re not acting right now. They’re waiting and seeing. And so, what should you do and what are people are going to do? I think those are two points you got to discuss here.

Scott:
What people are actually doing is I think your newbies, people buying their first or second property, those types of situations, I think that they’re pumping the brakes largely. There’s a great thread on BiggerPockets on the forums right now. If you want to go check that out and get a diversity of opinions on that, but that seems to be the consensus among our newer investors. The folks who are more seasoned, they’re seeing this as an opportunity to potentially get deals under contract and terms to David’s point, that they weren’t able to get previously on that.

Scott:
For a long-term investor, if you buy into my approach to investing over a very, very long-term in real estate, this doesn’t really change anything because I’m effectively already dollar-cost averaging into real estate.

Scott:
So I’m going to continue my search and keep looking. I am not under contract and I’ve not submitted offers recently. That may change in the coming weeks if I see something that I like and that I think makes sense, but I think that that’s the reality that’s going to take place in the market, and so kind of do with that what you will.

Brandon:
Yeah, that’s good. Just to throw my thoughts real quick. Yeah, I’m with you guys. Especially like you said Scott, I would not be opposed to buying necessarily the way down, like kind of dollar-cost averaging my investment thing, as long as the cash flow is there, as long as I believed in the economy long-term here, as long as you know everything lined up.

Brandon:
I’m a little worried about what the banks are going to do. I mean, I know they’re getting money pumped in, but it doesn’t mean they’re going to lend it out necessarily. I think they will. But this also affects more on the commercial side, which I’m buying these mobile home parks, which I still think mobile home parks are cool investments at this point. But what happens if the banks are … the commercial banks are like, “Yeah, I know we were quoting you guys at four and a half interest rate, but we’re actually at nine now”?

Brandon:
I doubt it. I doubt that’s going to happen. But that’s the biggest fear I have, which goes to David’s point of making sure those contingencies are in place to be able to handle those things. That worries me. I don’t love the idea of flipping right now. I’m in contract on a million-dollar flip right now and I’m like …

Brandon:
I am going to go through with it, but I’ve got a lot of reserves right now. I mean, I’ve been stocking cash for quite a while. So I can weather that if you are a brand new investor and you’re putting new your entire life savings into the down payment on a flip right now [crosstalk 01:06:40]

J:
You should have never done in the first place.

Brandon:
Yeah, correct. Yeah. You shouldn’t put your last dollar into any deal no matter what the economy looks like because it could drop at any point.

J:
And just to address that, a couple things. One, if you’re in contract for a flip or I’m in the middle of a few flips. Hopefully, if you’ve been buying flips in the recent past, knowing that we were … mean again, recessions happen historically every five and a half, six years. So nobody should be surprised after 12 years.

Brandon:
Correct.

J:
Nobody expected this event, this kind of black swan event, but nobody should be surprised that a recession was coming at some point in the next couple of years. Hopefully, you are buying with a Plan B, a Plan C, a backup strategy. Hopefully, that property could either make a … you could turn a single-family into like an assisted living facility or you could rent it long-term, or you could do something else to kind of tide you over until the economy returns and you can sell it as a flip. Hopefully, you’re doing that.

J:
I also want to address the whole question of buying cash-flowing assets because yes, I agree with Scott. Absolutely. Well, I agree with all three of you. Always good time to buy cash flowing assets even if you’re a dollar-cost averaging on the way down, but there’s another thing to consider and that’s class of property.

J:
Historically what we’ve seen is that not all residential properties act the same. Not all of them react equally to a downturn. Typically we refer to properties by their class. There’s A class, which is kind of luxury housing. There’s B class, which is kind of the above-average housing, there’s C class, which is more worker class housing. Then you have things like manufacturing and mobile home parks.

J:
Typically what we see is the higher up in class that you go the more rent compression we see. What that means is in class A properties, we tend to see rents fall further than we do in class B. In class B we see rents tend to fall further than in class C, and the reason for that is pretty much common sense.

J:
I mean people that are paying for luxury housing, if they’re losing their jobs, if their businesses aren’t doing well, they’re going to downgrade and they’re going to go from that nice luxury penthouse maybe down to B class housing. People in B class housing, they might be losing their houses or losing their jobs or seeing their wages cut or their hours cut, so they’re moving down to class C housing.

J:
But everybody needs a place to live and most people aren’t going to go homeless. Most people aren’t going to move back in with their parents. So that C class housing tends to be pretty resilient because that’s kind of the baseline housing, that’s the most common type of housing.

J:
So if you own C class housing, historically during recessionary events you’ve probably seen your market rents go up. You’ve probably seen your occupancy go up because there’s more demand for your housing. So if you’re looking for something to buy during a recession or leading up to a recession, my recommendation is stay away potentially from class A housing, even potentially stay away from class B housing and focus on that class C housing or like Brandon has been doing, and big high fives to Brandon focus on mobile home parks because those tend to be even more recession resistant than all the other classes of housing.

Brandon:
Yeah, I’ve been putting that in my pitch for the last six months to investors in my fund, is exactly that. But that said, nobody expected quite this. And so I want to actually go to the next question here because it’s actually my response to what you just said, Scott. So let’s hear from Jack [Repkey 01:10:05] from Charleston, South Carolina.

Michael:
Yeah. Hey, my name is Jack Repkey. I’m in Charleston, South Carolina. My question is in regard to tenants paying rent. We are looking at a property where some tenants are in the food and bev industry, which obviously is taking a big hit, and we have concerns around their ability to continue making rent payments. So I’m wondering what other investors are doing out there to A, mitigate that risk and B, work with the tenants in these tough times? All right, thank you very much.

Brandon:
All right, so I think that’s a fantastic question from Jack because although like I mean I’ve been the mobile home park thing, I’ve been loving the C class thing. I love, I don’t think any of us expected that the economy would flat out like go from … I mean I expected rents maybe to drop a little bit in some areas, but I never thought tenants won’t pay rent period.

Brandon:
Rent decline is one thing. My tenants don’t earn money anymore period, is a whole different thing. So I want to address that issue of rents dropping. So why don’t we start I guess with Scott Trench. Yeah. Why don’t you explain, what are your thoughts on what do we do?

Scott:
Yeah, so I think that this comes back to again, I always harp on the financial foundation. But like as a real estate investor, investor for a very long-term I’m not living hand to mouth. I am not going to be going belly up after one or even two or three, maybe four months of any of my tenants paying rent. Right?

Brandon:
Yeah.

Scott:
That’s the well-capitalized position. When you have a situation, there’s two things going on. One is the law is changing. There’s almost like martial law or absence of enforcement of evictions right now in certain cities, and the federal government may impose something like that. So what this is, is this is not an excuse for tenants who are otherwise capable to just not pay rent indefinitely and hold your property hostage.

Scott:
Some might do that in that circumstance and that’s on them, but you as a landlord do have recourse in that situation downstream. You will eventually sue a tenant who’s doing that for unpaid rent and create eviction, and there will be consequences to any tenants who do that.

Scott:
The discussion I think has to center around, “Hey, I’ve got an otherwise responsible tenant who’s in the food and beverage industry. He’s been there for a while and is now not paying rent. What do I do?” Well, you’ll work with them I think. I think you say, “What is reasonable and how do I apply my judgment there?”

Scott:
I texted my property manager this morning addressing this very issue. I said, “I want you to keep an eye on the tenants and if anybody’s having issues, let’s discuss, and I will eat some of that cost, some of my profit there in order to maintain that.” That is both the right thing to do to help certain people that are otherwise good people who are coming on hard times and it’s good business because it allows me to retain great tenants in the long-term. They will remember that downstream. That’s my opinion on this.

Brandon:
All right. David, what do you think, and then I’ll go to J.

David:
Very similar to Scott. I just asked myself, “Well, what’s in my own best interest? Does it make sense to pay for an eviction because somebody was a month or two late when they literally just couldn’t work? It’s not that they chose to be irresponsible,” or does it make more sense to say, “Okay, I’ll take what they can give me half the rent,” or even if it’s no rent and a month or two goes by and I don’t get rent, but I have money in reserves, I can make the payment. Then I see what we can do to catch them up once they’re back.

David:
Or if worst-case scenario, I had to go for two months and I didn’t get that rent, it’s not that big of a deal when you look at it from a 30-year perspective, it becomes actually a pretty simple question.

David:
Another thing to point out is the system’s kind of designed to absorb a lot of this. When you miss a rent payment foreclosure does not start on you right away. It’s often like four to six months of late payments before banks are actually starting the process of saying, “Okay, I’m going to go foreclose on your property.”

David:
So if you had no money in the bank and you were just playing this thing like by the skin of your teeth and you need that rent payment literally to make your mortgage and you miss a mortgage payment or two until the rent starts coming in, well guess who’s working overtime when this whole scare goes away and you got to go start pouring coffee somewhere or work in a side hustle, drive an Uber to make that payment that you didn’t save up money for? Then just let that be a good lesson for yourself that you shouldn’t be living like Scott said, hand to mouth.

Brandon:
Yeah. Yeah. The government may step in at some point. I mean if the government’s going to make it so that tenants don’t have to pay rent, my hope is that they’ll step up and somehow help with the mortgage thing as well because not just for landlords but for every homeowner in America, 20% of them who may be out of work who aren’t …

Brandon:
What’s the quote? “40% of Americans don’t have $400 in their checking account,” or something like that or, “Couldn’t survive one paycheck”? We are going to see that in two weeks ago. Like all of us who are landlords are going to see in two weeks from now. We will have tenants who are not working at this very moment right now and will not have rent two weeks from now. So I think the most important thing, and I’ll go to you as well Jay, I think the most important thing is to have a plan.

Brandon:
If you’re shooting by the seat of your pants when a tenant calls you and says, “Oh I don’t have rent money.” And then you’re trying to decide then what to do, that’s always a scary position to be in. So my wife and I have been actually I mean texting back and forth all day today and yesterday. I mean talking obviously, but what is exactly our plan?

Brandon:
If this happens, then this, if this, then this. For example, we are going to first of all, tell tenants, “Rent is still due.” That’s our first words, say, “Rent is still due.” Second, we’re going to say if they just literally can’t do it, because there’s some people, “Who can you borrow it from?” Third, “Here’s some government aid.” World research and right now government assistance programs in our various counties, do have to do some research.

Brandon:
That is your job landlord. Do some research, find out what the government programs are helping your tenants if there are any. Then four, if we really, really can’t, like, there’s no government, there’s no family help, we’ve really exhausted it. Then yeah, we’re going to work with our tenants and we have a plan in place for that.

Brandon:
One thing I don’t want to do with my tenants is say, “Hey, let’s just postpone your rent for a month and you can just pay two rents next time.” That never works for tenants. If you let a tenant get behind, they will never get caught up in that. I’ve never seen it happen because like I should say a low income tenant because it’s not like they’re suddenly going to have more money in two months from now.

Brandon:
So what we’re going to do is structure payment plans, which I generally never do and I’ve always advised against payment plans. But in this case, we’re going to do that. “Hey, we’ll spread out your payment over a 12 month period. And so your rent goes from 600 a month to 700 a month after this is over. But you can take two months off,” or whatever. So that’s my advice is have a plan in place for what you’re going to do because it’s coming. Jay, what do you think?

Scott:
I like Brandon’s response a little better than mine.

Brandon:
Thanks.

J:
So I think you guys covered it well. I will throw in one additional thing and I know this isn’t the right time to be throwing out, “I told you sos,” but I have been saying to people for many years, and we all know this on this panel I imagine, that this is why it’s so important to have good tenants in your units. This is so important. This is why it’s so important when the times are good that we’re not making exceptions for tenants, that we’re doing the right thing and we’re keeping them accountable and we’re screening them well.

J:
Because think about it right now, if you have two tenants, let’s say you have two units, in one of those units you have a tenant that has always paid on time. They’ve never been difficult. They’ve treated your property well. They’ve been there for a couple of years. They’ve been respectful, everything is great, and they’re at risk of missing a payment next month or maybe the month after, or the month after, or the month after.

J:
Then you have another unit where you have a tenant that has always been late on payments. They’ve missed payments in the past. They’ve treated your units like crap. They’ve treated you like crap. They’ve taken advantage of you and you know there’s a potential that they could miss a payment or two, or three, or four. Which tenant would you rather have right now?

J:
You know with that good tenant, they’re going to do everything they can to make things right, to make things whole. They’re going to do a better job than any other tenant would be out there. And so, you’re going to be a lot more comfortable saying, “Okay, let’s work on a payment plan or let’s skip a month or let’s double up next month.”

J:
With a bad tenant, you don’t trust that they’re not going to try and take advantage of you. You don’t trust that they’re going to say, “Well, it’s not my fault I can’t pay for the next six months.” Now’s not the right time to be going out and looking for new tenants. So this is why it’s so important during good times to make sure that you’re very selective about your tenants and to make sure that your tenants are the right tenants and being very picky.

Brandon:
Yeah.

Scott:
And you’re not going to be able to kick out the problem tenant unrelated to rent at this point in time. So it’s going to be another part of the issue. Yeah, loved everything you just said J.

David:
I want to very quickly just address the mindset of if there’s anybody out there who just feels resentment, like, “Nobody should ever miss a rent payment. Why do they not have money saved up?” A big reason that there’s opportunity to build wealth in real estate is because it’s other people don’t understand the value of it or don’t manage their finances well and they become tenants.

David:
Now, not everyone that’s a tenant is doing it because they have no choice. Some people choose it, but a big percentage of them, if they could save up $20,000 in reserves, they would just go buy a house and you wouldn’t be renting to them. This is part of how the system works and you should be prepared for the fact that the whole reason there’s a person who’s renting your house is because a lot of people don’t live fiscally responsible lives, which means you’ve got to be double responsible.

J:
It’s a whole argument of why isn’t everybody out there a business owner making lots of money? Why are there people that complain about working minimum wage jobs? But these are the people that allow other people to be able to get their food inexpensively and their goods inexpensively because they’re willing to work these jobs. If everybody were a business owner things wouldn’t be that great.

Brandon:
Yeah. All right, next question from Hal Jones in San Diego.

Michael:
Good evening. My name is Hal Jones. I’m from San Diego. My question is this, if the economy does a quick downturn, like many of the signs and experts are predicting what are some creative ways that liquid investors can still hustle in that kind of economy?

Brandon:
I’ve already got some things. I guess we could take that both from a how to make more money on the side or how to hustle in real estate? Still, you kind of take either approach there.

J:
Well, one thing to point out is as is often the case, BiggerPockets has a book for that-

Brandon:
Yeah, it’s [crosstalk 01:20:14]

J:
… so for anybody that’s on video, watching this on video, here’s a copy of Brandon’s books, The Book on Investing in Real Estate with No (and Low) Money Down. So just a little pitch for that book. Great book. But it talks all about … and this is really important now, it talks all about creative financing, it talks all about seller financing and there’s going to be a huge opportunity for this.

J:
For anybody out there that doesn’t know what subject-to is, you might have heard that term but doesn’t know what it is. It’s basically you taking over the payments for a homeowner, an investor that just wants to get rid of a property. They’re happy to just give it to you for you taking over their mortgage payments with their lender.

J:
Certainly, there are some details there that are important, but that whole idea of subject-to was huge between 2008 and 2012. I have a feeling it’ll be huge again. Another term to investigate there are what are called wraps. A wrap is very similar to a subject-to where you’re kind of taking over the loan from the lender, from the investor, you’re taking over their loan, plus you’re also wrapping another loan around it, so you might pay them a few extra dollars every month.

J:
So subject-tos and wraps and seller financing, creative financing, these are all things that now’s a great time to start [inaudible 01:21:22]BiggerPockets and read about those things. Pick up Brandon’s book and read about it.

Brandon:
Love it. Cool. I love that answer.

Scott:
In the short-term, I think that everyone’s routine is getting reset right now. Everyone’s working from home. It’s hard to go out and do those kinds of things. And so I would caution against adopting a routine that is going to be unhealthy or unproductive or whatever and say, “How do you continue that aggressive self-education? How do you continue to stay fit in the confines of your home or wherever it is that you’re able to go out?” Just do not adopt that lazy routine that could be tempting to devolve into here. Get those habits right away going into this.

Scott:
Then the second thing more broadly about how to take advantage of it, understand that marketplace power is going to shift in a variety of real estate related markets. So we would shift potentially from a seller’s market to a buyer’s market in a recession. What are the implications of that in terms of getting loans?

Scott:
We just talked about The Book on Investing in Real Estate with No (and Low) Money Down, and create a financing subject-to. Find ways to understand, hey, you as a borrower had all the power over the last 10 years, that is going to go away and the lenders are going to have the power and what’s going to happen there?

Scott:
The capital raising markets. The sponsors, Brandon, you’ve had a lot of power over investors in the past couple of years because it’s so easy to raise money recently, that could change. And so, the power will be shifting back into the limited partners. You’re going to have to get on the phone with some of these guys and guide them through the problems and walk them through things going forward.

Scott:
Contractors, they’ve had all the power in the last 10 years. There could be a shift in that market. Property management. So all of these markets are going to just have a natural shift that I think is pretty predictable in a lot of cases about if not to the specific degrees, just generally speaking, who’s going to have the power in the relationships in these various markets and how do I use that as an opportunity?

Brandon:
That’s really good. Can I add a tweak to that question? So let’s say from a non-real estate standpoint, how does somebody earn more money in this economy if they’re losing their job right now? They’re in the service industry, they’re in a hotel, they can’t make ends meet anymore. How would you guys advise someone else? I’m with David because you’re really good with this question, David generally, is how do you just hustle to earn more cash to survive?

David:
Yeah. Well when you’re in a situation that you’ve lost your ability to earn money the way you’ve been doing it, there’s always going to be a transition period in between how you learn a new skill, get acclimated into a new environment and then start converting that into revenue. It’s not realistic to think you’re going to lose a job and immediately become productive enough in a completely new thing or a semi-new thing to be earning revenue.

David:
So first off, just understand and expect my revenue generating is going to go down either way. So what I like to do when you get into a situation like that is say, “Well, where’s the job that I would have loved to have or a skill that I would love to have or an opportunity with more upside than what I have right now?” If I’m going to have a learning curve where I’m not making money, at least be doing it into an industry that is going to be better for me in the long term.

David:
So in every market, like what Scott was just saying, there’s opportunity for somebody somewhere. In buyer’s markets, buyers get opportunities. It’s been really tough to be a buyer for the last couple of years, especially where I live. Sellers have just been in a ridiculously strong position, that could shift.

David:
Well, what’s the same thing in the business world? If you’re someone who’s like, “Well, I’m not going to have a job. My whole hotel closed down and I’m not going to work in that anymore.” Are there people who are still buying properties that you can go work for an intern for them or maybe make a little bit of money? Can you get on the phone and start pounding out phone calls to find sellers that … or sorry, owners of real estate that don’t want to own it anymore?

David:
They’re like, “You know what? I only bought this thing because I needed a return for my money. It doesn’t make sense anymore. I just want to get rid of it and go work for somebody else.” It’s going to be tough to be you if that’s the situation that you’re in. I’m not trying to sound unsympathetic. That sucks when you lose your job, but oftentimes those are the emotional hits that force us to kind of like have those life-changing moments. You rarely ever hear about a person who did something amazing that didn’t go through one of those, “What am I going to do now?” type experiences.

Scott:
Yeah, I agree. I think it’s going to be … I don’t know the answer to it. But I do think that exactly what you guys have just said, and I also wonder, this idea just occurred to me, if there’s an opportunity for folks to work for equity in potential deals. Is this a time where if you can figure out a way to cashflow your situation and you don’t have a lot of liquidity, is this a time where cash is going to be very dear, is equity going to be cheaper and a lower risk for some people and is there an opportunity for that? I don’t know. That’d be a question I’d pose. The four of us have a privileged position here where we’re not having to worry about this going into the next couple of weeks.

Brandon:
Yeah.

J:
Then this might not be something that really answers the question of how can people stay involved making money in real estate? But for those who are out there that are just looking to make money and scrape up a few extra dollars, on the BiggerPockets Business Podcast earlier this week we had a business school professor who talked a lot about in order for businesses to stay viable over the next several months and even into the future, even when things get better, it’s going to be important for them to change their business models.

J:
So for example, restaurants getting better at doing carry out or doing delivery, things like that. If you have any skills or ideas or the willingness to hustle to help businesses figure out how they can stay in business if you can help others figure out how they can continue to make money in this market that’s something that can be very valuable.

J:
Maybe you have technical skills and you can figure out how to take a business that is basically brick and mortar, people coming into an office, and helping them get home offices set up, get the technology setup, get Zoom or video conferencing set up. Maybe you can deliver food for a restaurant that wasn’t previously delivering food.

J:
I run a remediation company, fire, water, mold remediation company. We’ve started doing coronavirus cleanup and we’re literally hiring housekeepers from hotels that are very good with the cleanup piece. They know how to do clean up, and teaching them the biohazard remediation piece, so we’re keeping them employed. So get creative and figure out how you can go support other business owners or other people maybe outside of real estate to help you continue to bring that cash in.

Brandon:
Yeah. You know, one thing I’ll add here is that … and this might sound a little bit cocky, I want to be careful how I say this, but I have never worried about my ability, no matter what the economy will do, I’ve never worried about my ability to succeed because I know that my work ethic is better than 90% of other people in the world.

Brandon:
So you don’t need to be the best in the world. If you’re in the upper half, the other 50%, and I know people are going to say, “Well, I have a lot of things going for me.” I’m healthy, I’m young.” All those things that are good. That’s true. But I have zero problem crawling under a house with spiders and fixing a plumbing leak. Zero problem with that. I will do that all day long to put food on the table.

Brandon:
So what I would encourage people is to adapt or ask the question, am I willing to do what it takes to put food on my table for my family? If you are somebody who is struggling right now, don’t get in a victim mentality of, “Well, I was working at that hotel and I lost my job. The government sucks because they’re not bailing me out.” But ask the question like, “What am I willing to do to make sure that my family makes it through this okay.”

Brandon:
I know that I will dig ditches. I will get dirty. I will do this. I’ll work 20 hour workdays if I have to make sure it gets done. If you have that attitude, no economy can take that away from you. No government can take that away from you, nothing can take away just solid good worth at work ethic and continually trying to improve your position.

Brandon:
Always asking, “How do I make more? How do I do this more streamlined? How do I make this more effective?” And if you’re that person you’re never going to have a problem. It doesn’t matter what economy you find yourself in.

David:
Yeah. I just had a conversation with my real estate team about that yesterday because everyone gets worried. What I said is the reason I'm actually not worried at all, my confidence is higher is I know, the real estate agent world that just got hammered.

Brandon:
Yeah.

David:
We had 26 houses in escrow and a ton of them are probably going to be having second thoughts or dropping out and you won’t be able to stop that from people. I don’t have a lot of control over it, but I’m not feeling fear because like what Brandon said, I’m like, there’s no way that with my work ethic I won’t go find a situation and work in somebody else’s business and do really, really good. In fact, when the economy is going well, a strong work ethic is less valuable because you can get by without one.

David:
Lots of companies are having a hard time hiring good workers with good work ethics because there’s so much money floating around, but when the economy goes bad, that’s when a good work ethic is actually more valuable. When nobody else can get a job and you can or nobody else can get a raise and you can because you’re working really hard, you should feel better.

David:
I love Brandon’s point, if you’re feeling, “Okay, I work in the hotels, my hotel is going under, I’m screwed. There’s nothing I can do,” and you’re negative. That’s an inner problem. That’s a problem with your mindset, with your attitude and this can be a positive thing if it forces you to look at that and become a better version of yourself.

Brandon:
Very good. All right, next question.

David:
I didn’t really leave anywhere for us to go with that, did I

Brandon:
It’s good. It’s like my job. All right. Next question comes from [Cavelle 01:30:42] from Brooklyn, New York.

Cavelle:
Hi, good evening. My name is Cavelle and I’m calling from Brooklyn, New York. Now I was wondering what impact do you think does pandemic is having on the ability to access capital via a line of credit or even a cash out refi? Thanks a lot. Have a good night. Stay healthy. Bye.

Brandon:
Jay, you want to start? Kick that one off?

J:
Yeah, I think this is the $64,000 question or the million dollar question, depending on how much money you need. We don’t know. I mean right now the government is implying that there’s going to be lots and lots of money out there for businesses and people and everybody that needs money.

J:
So right now I’m kind of optimistic. I mean interest rates are low and the president has talked about funding $50 billion for SBA loans. I have to imagine real estate investors are going to be high up on the list of people they want to keep happy because we kind of push the economy forward pretty well.

J:
So right now I see no reason not to worry, but I see no reason to worry about access to capital. That said, we look back at 2008 and we saw that lines of credit were being shut down. Some were being called due. People that had money out that like were just, “Hey you have to repay us right now. We don’t care about your situation.” It was hard for our buyers to get loans.

J:
So I would say right now optimistic, but don’t put things off thinking that they’re always going to be good and access to capital is always going to be easy. So if you’ve been thinking about refinancing, don’t say, “I’m waiting for another eighth of a point drop before I refinance.” I mean, if an eighth of a point is going to make …

J:
I’ve been telling this to people a lot, they’re so excited that rates are down, and what I’m telling people is if an eighth of a point or a quarter of a point really makes that much of a difference to whether or not it’s a good deal for you, it’s probably not a good deal.

J:
Your deal should not be that sensitive to a small drop in rates, and rates have actually been up. I mean it’s counterintuitive, we think of mortgage rates as being tied directly to that federal fund’s rate, that 0% now interest rate, but actually that’s just one component of mortgage rates.

J:
Mortgage rates are also controlled by US Treasury rates, and we don’t need to go into that, but suffice it to say that treasury rates have gone up actually over the last week or two. It’s also controlled by the banks and the lenders themselves to say, “Hey, we want more money. We want higher margins. We’re going to charge more.”

J:
Over the last week or two, there’ve been so many loan applications going in that lenders have said, “We can’t keep up, so we’re going to raise our rates.” So over the last week or so, David talked about these 26 houses that he has an escrow that he’s having trouble closing because of title companies and inspectors and appraisers. We’ve actually had two buyers back out because their rates have gone up over the last week and they now aren’t getting the deal they thought that they were going to get.

J:
So don’t wait to refi because we’re not positive which direction rates are going. They’re likely to go down a tiny bit more or stay stable, but we don’t know. Don’t hesitate and hold off on getting a HELOC or a line of credit if you want to do that because who knows, in a couple of months you may not be able to. Move forward now. Be optimistic but be cautiously optimistic.

Scott:
Love it. Yeah. I would just also kind of add in there, hey, again, a lot of the home loans that you, our listeners are probably going to be getting are Fannie Mae fixed probably 30-year mortgages. So they’re Fannie Mae insured and that ability to access that type of financing is probably going to dry up at a much slower rate, I would imagine than commercial financing or business financing and those types of things.

Scott:
And so, that is kind of the big advantage here. But there’s no reason to wait if that is critical to your business strategy or you haven’t done it. For me, hey, rates just dropped, so I’ll probably refinance. Not because I haven’t been prepared for that, but because there’s no reason not to refinance when I can just lower my payment.

Scott:
So just kind of think through those things and understand, hey, if you’re well-capitalized and you’re in a good position, there’s no need to rush, rush, rush to go do it. But if you haven’t shored up your position, then I think that’s the time to react immediately per J’s point.

Brandon:
Yeah. Good stuff. All right next-

J:
Hey, Scott. I have a question for Scott before we go on, and this is something I’ve been thinking about a lot recently. Historically I never ever, ever, ever, ever because ultra-conservative would have recommended people getting an ARM, a 7/1 or a 10/1 ARM as a loan, but these days what we’re seeing is some pretty big spread differences, rates for 7/1 and 10/1 ARMS are a good bit lower than 30 year fixed.

J:
Typically you’re getting some lender credits or you’re saving on points and given that rates likely aren’t going to go up anytime in the near future, do you have any particular thoughts on whether anybody should even be considering ARMS now versus fixed-rate loans?

Scott:
You know, I use fixed-rate loans. Let me just preface this discussion with that. But here’s the advantage of an ARM. If you hold onto a property for a very long period of time. And it looks like we’re going into a recession. That’s why we’re recording this podcast. I think that’s just generally the consensus is we should be wary of that.

Scott:
Recording this podcast. I think that’s just generally the consensus is we should be wary of that. But if you’re thinking, if you’re zooming out, right? If you hold onto a property for a long period of time, 10 plus years, right? You’ve now amortized that loan pretty significantly. It’s probably your return on equity is beginning to drop over that hold period. So it’s probably time after seven to 10 years in most average market conditions to refi or sell the property after a 10 year period anyways. Right?

Scott:
So an ARM actually I think has a lot of advantages for a lot of investors and I… J I don’t know the spread difference right now. But that is something that now that you’ve mentioned it. I’m going to go consider when I look at This learns. Sure, you’re assuming that interest rate risk over time may arise, but that may not matter in the context of a refinance unless rates go up a ton. Because you’re going to have to pull up money somehow at some point if you want to keep a strong return on equity over the longterm.

Brandon:
Well, I think there is also some fine print we need to think about when it comes to the ARMs. So I have an arm on a actually two different investment properties. The reason why I was okay with it. Is because they changed a lot of stuff back in 08 and 07 when the ARMs were like, “Your payment’s going to go from eight or 3% to 29% overnight. Now all these people got lost their self, right?

David:
Yes.

Brandon:
They changed a lot of stuff. So today’s ARMs are a lot times different. My ARM that I have. For those that don’t know, it’s Adjustable Rate Mortgage, it can go up and down, it generally goes up, but it can go up and down a little. Fact I actually just got a letter the other day from my bank, saying my ARM dropped. Which I, was awesome, my payment went down $40 a month, but on one of my properties.

Brandon:
Anyway, the thing actually says though. It can only increase by 1% per year with one of the stipulated… I don’t know if it’s a federal law or that was this in my thing. It only would go a 1% per year and it capped at 11%. now that sounds a lot. But I ran the numbers at 11% on that investment property and it changed. I mean it was a pretty cheap mortgage. It changed the payment by $120 that property cashflow 700 bucks a month. So worst case scenario over the next seven years, it could bump from four to 11% over the next seven years if every year was the worst increase possible. At the end of that, I’m only $120 more in payment. Do I care? Not at all.

David:
You can refinance that-

Brandon:
I can refinance that if I need to, yeah.

David:
Unless your property decreases in value by a large amount.

J:
Yeah.

David:
Resulting in a lower LTV or whatever, but in a large point. So, I think there’s a lot of good reasons to use ARMs and I think that the big… But the fact of the matter is most people will use fixed 30 year mortgages because they liked the idea of lock into a low interest rate. So how’s that-

Scott:
ARMs hurt people for a long time. They became a dirty word.

David:
Yes.

Scott:
Like HELOC was a dirty word because in the last recession a lot of people lost their properties. What I love about this conversation is I guarantee you a large percentage of listeners just went, “Oh really? There’s a cap?” Yeah, “I didn’t rea…” The difference between seven and 11% for Brandon’s only $120. I can manage that. They had no idea that, that’s how the thing works. But yet they had very strong opinions about the fact that an ARM is bad or a HELOC is bad.

Scott:
There is so much bad information going there from people that were just fear mongers that would say, “Never use an ARM! Don’t ever do anything! Don’t [fur 00:01:39:04]! Don’t flip! This is terrible!” Because people use them irresponsibly or didn’t look at the fine print and ended up getting in trouble. Then you hear information like this and you say, “Oh wait, I’ve actually isn’t terrible at all. Scott just made a really good point. If my house is going to go up in value, which they typically do over a seven year period, I probably need to sell it and reinvest that money anyways. What do I care if the rate could start to reset?” “Oh, I could just fix it at a Fixed Rate Mortgage so that I don’t have to worry about it.” Okay, so the downside is not really that bad.

David:
[Crosstalk 01:39:31] what do you think? You didn’t, you pose the question.

J:
So again, I’m tremendously conservative and I’ve without any good data behind me. I’ve had this attitude for the last several years that ARMs are bad. Fixed Rate Mortgages are good. I just had a good friend of mine who was actually in the Bay area. David, who questioned me on this and challenged me on this a couple… I guess about two weeks ago. He forced me to actually confront the data and actually get rid of just my biases that ARMs are bad Fixed Rate Loans are good.

J:
Basically the data said to me exactly what you said, Scott. As you get to seven or 10 years, build up more equity in the property and so your return on equity, which is an important number that we can talk about at a different time. But return on equity drops. So it’s generally a good time to refinance in the seven to 10 year time frame anyway.

J:
You do get some good benefits. A lot of times lenders will charge fewer points so there’s less money out of pocket upfront. You can get lower interest rates, so there’s less money out of pocket every month. There’s a lot of talk that we could be in a low interest rate environment. I mean over the last 60, 70 years interest rates have been going down so it’s possible we could end up in a low interest rate environment for the next five, 10, 50 years. Typically there are caps on how much rates can go up.

J:
So there are a whole lot of good reasons to be considering an ARM right now. I’m not telling people, “Don’t do your own research, make your own decision based on your own situation.” But I’m no longer, and this is the reason I’m posing this. I’m no longer in that mindset. That one is necessarily always better than the other.

Scott:
It reminds me of when I was a kid and I was told by everybody, don’t eat eggs. Eggs are terrible. They raise your cholesterol, you’re going to get killed. Don’t eat more than three eggs a week or you’re going to die. Now you have all these fitness-

Brandon:
That’s back now as of like a month ago. Like, “Oh God, I know it’s bad [crosstalk 01:41:22].”

J:
I’m going die pretty soon [crosstalk 01:41:22].

Brandon:
Yeah.

Scott:
Low fat was the thing like “Don’t eat fats!” Now, “It’s don’t eat sugar and don’t eat carbs.” You just get this idea like, “Okay, people said don’t eat eggs, eggs could kill me.” Then you find professional fitness people that say, “Oh, 80% of my diet is scrambled eggs with a little bit of kale.”

Brandon:
When I was a kid, I asked my mom one time what that was and I pointed to that blue line at the top of a car windshield and it’s meant to be a little bit darker or usually it’s blue bit, it’s usually like a… It’s a darker part of the windshield, right? It keeps the, from getting blinded by the sun. She said, “Don’t look at that. You can go blind!”

Brandon:
She thought I meant the sun. It wasn’t until high school, I’m not kidding, it wasn’t until high school that I began looking at the top of a windshield because I thought all that time. My whole childhood that I was not supposed to look at the shaded part on a windshield. T.

Brandon:
There’s so many things that we hear in life, right? That we hear and we take as gospel truth. But it might’ve been a specific case or an example. So the question I got for everybody listening right now is what is that shaded windshield in your life right now that you’re not looking at and maybe you should be?

J:
Question authority.

Brandon:
Yeah. Question it, mom, chief. All right, next question. Oh, let’s go. Emily from Long Beach, California.

Michael:
Hi, my name is Emily and I’m from Long Beach, California. Super new, haven’t even my first deal yet. But I am actively looking. I’m investing so much of my time and learning what I need to learn. I have relationships with investors who are ready to give me that other half of the deal and what’s required with work and any leverage that they have and I have combining both.

Michael:
So I’m driving around, I’m looking for deals, I’m using Zillow, any free local MLS. But given the virus and given the way everybody is now just keeping their space and not really going out in public. What do you suggest for someone as fresh as me in finding a deal, contacting owners, agents and making that first offer?

Michael:
I am ready. I have created a list of actually homes that are for sale in my area. I have a script that I’ve kind of pulled together based off of listening to different, BiggerPocket Podcasts actually. So I’m just wondering how you would suggest or recommend or what you would recommend for somebody that’s in the early stages like I am? Thanks.

Brandon:
All right. So I love this question from Emily because I’m dealing with the same thing. I’m teaching some wholesalers out here in Maui. How to do driving for dollars and how to contact sellers. Should we just back off for a while at this point, do you think right now? The same question I go David, if you’re an agent, the same thing applies. I mean if you’re a door to door salesman for meat sticks, I don’t know, whatever. The same question, should we just hold off for a while until the settles? What do you guys think?

David:
I’m a big proponent of the Warren Buffet philosophy. Be greedy when others are fearful and fearful when others are greedy. Doesn’t mean be foolish. Okay? Don’t just go buy everything just because and assume that because where we are in a recession, you’re already in a place where you get great deals. But this is making all my long distance investing formula look really smart.

David:
That’s literally we’re using with our clients. Hey David, what do you think about this house? I want to go see it but I’m not supposed to leave. You know what I’m going to do? I’m going to get the seller to make a video of the house and we’re going to send it over to you and you’re going to look at it and you’re going to give me the questions and I’m going to ask the seller. There’s very little that can’t be done remotely if you’re focused on it.

David:
We just held our team meeting via Skype and everybody had… Well we just picked up a Slack Channel. I know that’s really big for you guys at BP. Business will still move if you’re determined to make it move and everybody else is going to be sitting on the sidelines. Now that doesn’t mean this works in every market, okay.

David:
In my specific market, a slowdown is a blessing. Right now there’s a chance to get just a person who wants to own a home, the actual chance to get it. Because there’s not 20 other offers coming in. There’s three other offers and my clients are more prepared. They understand the options of the contract because I’ve talked to them. So they’re looking really good. But I’m looking at this whole thing like, “Nope, you got to see the house at some point. If you’re going to live in it.”

David:
I’m definitely advising them. If this is an investment property, you don’t have to see it. But if it’s a house you’re going to live in, you probably do. That’s something you want to make sure you feel comfortable with. But you don’t have to see it in the next two or three weeks. What if we just write the contract to be over 60 days and when the shelter in place is lifted. Then we go look at it and we’ve already got your appraisal, we’ve already got your loan, we’ve already got all the paperwork done, we just did that last little box checked and boom! We moved to the finish line.

David:
This is one of those things where I didn’t even realize that you could do that. This is just, I thought you were supposed to do this and then this. Now you question why it’s that way. That’s usually where efficiency is born. One of my favorite quotes is necessity is the mother of invention. That’s exactly what you see in times like this.

Brandon:
Yeah. So Scott, what do you think? I mean, should we be out there hustling and working to find deals still right now?

Scott:
Well, I think for when you, what do you mean by hustling, right? You shouldn’t be out spreading the virus, right? That’s the whole point of what we’re doing here. It’s not about your health, it’s about the health of the people that are particularly at risk in addition to your health, right?

Scott:
But should you be buying real estate deals in those kinds of things under safe conditions? Yeah, I think if you’re a newbie and I haven’t done my first deal yet, but I’m actively looking. I think it’s a question of assessing reality, right? The reality is I think a lot of newbies are not going to actually follow through on deals in the next two or three weeks, right?

Scott:
If you’re one of the exceptions to this rule and know yourself and you continue to going about things. But I would say it’s also fair to say, “Hey, I’m a newbie. I’m looking to get into real estate. It’s uncertain right now, so I’m learning, I’m looking, I’m waiting, whatever.” If that’s your reality and contact people in that context. But don’t mislead people if you’re not going to be seriously interested in buying or you’re going to be scared of the current economic situation. Now’s a great time to read, learn, network over Skype or Zoom or whatever it is and-

Brandon:
Analyze a lot of real estate deals, through this time.

Scott:
[Crosstalk 01:47:41] analyze lot of deals. Yeah.

Brandon:
Yeah.

Scott:
It’s also potentially can be a good time to continue your longterm investing strategy. But know if that’s you and if you’re seriously going to go through with it. How’s that?

Brandon:
J, do you have any thoughts on,

J:
no, I think you guys have covered it. I mean I think now is a great time to practice.

Brandon:
Yeah.

J:
If nothing else for those people that are scared to make offers, well this is your opportunity to kind of make offers that might be low, might be… What’s the saying? If it’s not insulting, it’s not low enough. Basically this is your opportunity to kind of practice in situations where you might have a built in out, where there’s probably not going to be a lot of transaction volume anyways.

J:
So you use this as an opportunity to kind of keep moving forward. If you’re not an experienced investor. Use this as an opportunity to put together your plan to kind of think through, “Hey, when this all passes, what am I going to do?” Create that marketing campaign. But don’t deploy it yet. Start writing those sellers scripts or practice your negotiating. Start thinking about what your SKU list is going to look like for your flips. Start thinking about how to run an analysis on a rental property or a multifamily. If you want to do that. This is a great time!

J:
Too many people I think are going to be sitting around not doing anything. Then we’re going to get to the other end of this. Either things that are going to get better, things are going to get worse. But there’s going to start to be opportunity and a lot of people are going to say, “Oh, okay. What do I do now?” Well, spend the next six months deciding when that day comes, what you’re going to do so that you can start executing.

J:
My wife just shut down her business. She basically… Well, one of her business. So, She shut down her staging business. Basically, she got to the point where she either needed to make a big investment in inventory and furniture or she had to stop. Basically that industry right now is at a standstill. People aren’t, they don’t want furniture in their houses, especially if they’ve been in other houses. So she stopped, but that doesn’t mean that she’s just going to go and not think about it for the next six months.

J:
It’s still a very viable business model. It’s a business model and a business that she wants to be in. So she’s going to spend the next six months figuring out where she can get the best deals, building systems and processes for the business, figuring out how she’s going to market and start sowing those seeds or planting those seeds for marketing. So that when six months from now, when the business becomes viable again. She’s going to hit the ground running and she’s going to beat everybody else that’s just starting. So if you’re a real estate investor, do the same thing. Use this as an opportunity to really prepare yourself and be ready for when the time comes.

Brandon:
That’s really good! On that note J, I want to talk about this real quick before we get out of here. A few months ago, we’re going to look like we are psychics here. But the reality is we just know that recessions happen. Like you said earlier, whether or not we knew that this Black Swan Event was going to happen and just destroy everything we, it doesn’t matter.

Brandon:
We knew that it was just coming at some point because that’s what happens. So we did an episode about a year ago. Early 2019 it was episode 311, 3-1-1. Where we talked about six rules to prepare for a recession. I think those actually, are adequately applied to today’s potentially being in a recession or one that’s we believe potentially might be coming. Can we just review that real quick? Again I want people after this episode. Go listen to 311 and because still applicable today, in fact more so. But what are those six rules to prepare for a recession?

J:
Yeah. Just to give a little bit of context here. That episode we talked a little bit about the book the BiggerPockets release, Recession-Proof Real Estate Investing. Basically the book lays out for every piece of the economic cycle. We break the economic cycle into four pieces for each piece of the economic cycle.

J:
There are things that you should be doing, there are things you shouldn’t be doing. Then there are things that you should be doing to prepare for the next phase of the cycle. So back in January of 2019, I think it was when we did that episode. We were well into the expansion. I was thinking probably close to the top of the market. We’d be hitting in the recession within a couple of years. So we talked about the things that we should be doing to prepare for the recession.

J:
I think the six things that we talked about. Number one, hoarding cash. So during a recession, having cash is really important. We talked about the fact that in 2008 credit lines were tightened, HELOCs were called. It was tough to get loans. Right now we don’t have that problem, so that’s great! So right now we’re not facing that issue. We still have the opportunity to kind of build up cash and we still have the opportunity to use credit lines. So, that’s something that we can still continue to work on. We can still continue to cash in investments that aren’t performing well, selling off things. Maybe just go on eBay and sell all the things that you don’t need or don’t want and save that cash.

J:
Number two, we talked about opening up credit lines and again. For the same reason when we get into a recessionary period, a lot of times lending tightens up. It’s harder to get credit, it’s harder to get loans. So luckily again, we haven’t seen that yet. It’s still a good time to be opening credit lines. If you have equity in your house, if you have equity and an investment property, if you have good personal or business credit. Now’s a great time to go open credit lines. Because if things start to get bad, you may not be able to get access to credit. But things won’t necessarily get bad enough that they close those credit lines. So having access to that cash, even if you don’t need it right now is really important. So go open those credit lines if you can. Don’t necessarily take the cash out, but have it available for when the opportunities come.

J:
Next we talked about building credit. So if you have bad credit or if you’re young and you have no credit. Now’s a great time to be building credit because, lending isn’t necessarily going to stop. But the criteria for those getting loans is probably going to go up. Back in 2008 I remember before the crisis, we were seeing FHA loans. I think you could get at 640 or 620 I mean credit scores, at pretty low credit scores. By 2009, 10, 11 I think you needed a 720 credit score to be able to get those FHA loans.

J:
So your credit worthiness is going to need to be better if you really want to take advantage of lending in a recessionary period. So go out and build credit. Go if you’re young and you don’t have a credit card. Go get a credit card or two. Go buy some things in that credit card. Pay it off every month. But using your credit and paying it off every month is the best way to build credit. Don’t wait to do that.

J:
Number four, we talked about getting rid of properties that can’t sustain a worst case hit. So if you have flips that you don’t have a backup plan for them. Try and sell them now, even if you have to sell them for less profit or even a small loss. Don’t chase the market down. Cut your losses. If you have rental properties that aren’t cash flowing well and you’re thinking, “Yeah, I was probably going to sell those in a year or two.” Well maybe now’s a good time to be selling those or thinking about selling those. If you have other assets that you’re thinking about getting rid of because you’re not comfortable holding them three or five or 10 years. Now’s a better time than getting a year in and saying, “I really wish I would’ve sold that a year ago.”

J:
For anybody that has short term debt, if you have debt that’s going to come due in a year or two years, usually even three years. Now’s a really good time to restructure that debt for a couple of reasons. One, we talked about interest rates being really low. If you’ve got debt anytime prior to the last month or two, you can probably restructure that debt for less. I’m not saying you should refinance just something that you bought six months ago.

J:
But if you have anything that’s going to come due in the near future, you would prefer to be in a situation where you don’t have to worry about a loan coming due during a recession. Because during a recession you may not be able to refinance. So restructure that debt. Now, if you have private debt, if you have lenders, private lenders, go talk to them and say, “Hey, if we get to the point where this loan is due, will we be able to renegotiate? Can we restructure now or can we put in place a plan to restructure when that comes along?” So be prepared.

J:
Then finally, and I mentioned this a little bit just a second ago. But cut your losses. The biggest mistake that I saw a lot of investors make during 2008 was they chase the market down. They said, “Oh, I’m not getting the profit that I was expecting two months ago. So I’m going to hold out for that perfect buyer, I’m going to hold out for that profit.” Then the market drops a couple of percent and they say, “Ah, market dropped a couple of percent. Okay, I’ll drop my price a little bit, but I’m still not ready to sell it a fire sale.” They drop with the market instead of getting ahead of the market.

Brandon:
I did that. I went from a 170 sale price on a flip and just every week would drop it by a few 1000. I chased it for nine months, no 10 months something like that. Till I sold it 110 or something. It was, [crosstalk 00:20:04].

J:
Yeah. I talked about the fact I used to work for eBay. I remember when eBay wanted to buy PayPal back in the early 2000s. They made an offer of $500,000,000 and PayPal said, “Nope, we want 800,0000,000.” eBay was like, “Nope, not interested.” So a couple months later, “Oh, they’re doing well. Okay we’ll give you your 800 million.” “Nope, we want $1,200,000,000.” “Nope, not interested. We want $1,500,000,000 uh-uh (negative).” They chased it up and eventually eBay ended up paying over $2,000,000,000 for PayPal. Because they refuse to get ahead. They kept trying to play catch up. Don’t do that with your real estate. If you need to sell, get ahead of it. Even if you have to take a small loss. Better to take a small loss now than a big loss later.

J:
So just that’s my, those are my six tips. Again, let’s see hoard cash, open up credit lines now while you still can, build your credit now. Because you’re going to need it pretty soon or potentially needed pretty soon. Get rid of any properties that can’t sustain a worst case hit by the market, restructure any short term debt, any debt that’s coming due in the next year or two or three. If you see the market’s starting to fall, cut your losses, get ahead of it and just lick your wounds and move on.

Brandon:
I actually have a number seven I want to add to that is, and this is totally a self-interest of BP. Pick up a copy… Well, then I shouldn’t say total because it should help you as well. Pick up a copy of Recession-Proof Growth Investing that Jay Scott wrote. Because this is just a sample of what’s inside that book and with a recession coming, we should be looking into that, so.

Brandon:
All right guys, well we’ve got to wrap this thing up here. So kind of some closing thoughts here. I’m wondering can you guys offer just one piece of advice from each one of you on the next steps we should be taking? Like what, what should we doing next?

Scott:
Sure, I’ll, start my one tip, which encompasses a few things is. Just continue to do your longterm work on your financial foundation, right? The goal that we’re all trying to work towards in one way or another is financial freedom and the ability for our portfolios generate enough wealth to replace the dependence on other types of income, right? So continue to spend less than you earn, track your spending, build up a cash reserve both for your real estate business and your personal life and invest for the longterm from a position of financial strength.

Brandon:
All right, J.

J:
I’m going to take a page from David’s book and give a little analogy. Any of you guys ever drink alcohol? A couple of you, maybe?

Brandon:
I’m not a sinner. Thank you very much J, Scott.

J:
Okay, you are not a sinner. Okay, well then I’ll assume David and Scott. Are anybody out there that’s ever drank too much? I remember my college days, there were a couple of nights that I drank too much. I remember stumbling home and climbing into bed and the room’s spinning and I’m feeling nauseous, I’m feeling horrible.

J:
I say to myself, “I will never ever do this again!” The next morning I wake up. I still got that visceral feeling of being hung over and I’m like, “Yeah, I’m never going to do this again.” A couple of days later, I’m probably… The memories kind of fading and a few weeks later. I’m just like, “Oh, time to go out and drink again.” Because I forgotten what that visceral feeling was. I’ve kind of lost it. You can’t maintain that feeling of pain longterm.

Brandon:
[Crosstalk 01:59:11] I do that when I to a buffet again. I will never go to a buffet again. Mm-hmm (affirmative).

J:
Yes. Unfortunately-

Brandon:
Six hours later am back in the buffet.

J:
… I can make every day. Yeah, exactly! I see a lot of people who are doing the same thing with real estate investing in 2008. I remember getting out of 2008. A lot of us talking, licking our wounds and saying, “Wow! That was rough and we made a lot of mistakes. I’m never going to make that mistake again. I’m going to keep perspective on what can happen and how bad things can be.” Here we are 10 years later and I fall victim to this myself. We’re forgetting how bad things can be and we’re forgetting that things can be a lot different.

J:
I talked to a lot of people, this is interesting. I talked to a lot of people who didn’t live through 2008. We talk about this impending downturn. What I realized is there are a lot of people who when they imagine it in their mind, it’s exactly like today. When I say today, a couple of months ago when everything was great, they’re happy, their business is going well, their investing is going well, everything’s good. They imagine a downturn, a massive downturn is exactly like that. Except that real estate is half price. They don’t get that during a downturn. It’s not just real estate prices that are going down. Everything feels different, everything feels bad.

J:
So I guess this kind of leads me to my actual tip. Which is things are never as bad as they seem when you’re in the middle of them and things are never as good as they seem when everything seems great. So if things are going well, plan for when things aren’t well. When things are going poorly, keep in mind the perspective that things are going to get better. Don’t ever assume that your situation… It’s too easy to fall into a situation, forget about the past and think whatever’s going on today is going to last forever. It’s never going to last forever. It’s never as bad as it seems. It’s never as good as it seems.

Brandon:
Good stuff! David Green. Do you think?

David:
That echoes my point earlier that you need to zoom out. When you feel emotions are up and down. We were just talking about this, with every piece of news, “It’s, Oh, it’s not that bad.” “Oh wait. It’s worse than I thought.” “Oh wait. It couldn’t be that bad.” “Did you hear this?” Your emotions are all over the place and it’s not a healthy way to live.

David:
If you zoom out, you will then get clarity on the best move for you to make. You should be assuming that recessions will come. For a lot of people, this is a very good scare. If it isn’t a bad problem where they realize I didn’t have enough money in reserves. I was depending on zero economic vacancy. I mean there’s a lot of multifamily investors that are putting a lot of money into deals. Assuming they just won’t have vacancy because you haven’t had it for eight to 10 years now.

David:
Rents have gone up every single year. Then they build their model based on that and that is not realistic. You have to expect things to go wrong. We’ve had a wonderful rising tide. You shouldn’t expect it to continue. So zoom out, think about worst case scenarios and prepare for them. But don’t plan on it always being a worst case scenario. That don’t use that as an excuse to not take action. But I think Scott’s given really good advice. If you just continue to get the fundamentals right. You’re still going to build wealth, the real estate.

David:
Then the last thing is when you’re trying to figure out what is going to happen with our economy. Because who knows when this era is what’s changed since when we were talking. You can’t know. But what you can do is ask yourself just wise, prudent, pragmatic questions. If you were the coach of an NBA basketball team and you had a player who was doing really well and then for two or three games in a row, they started to perform very poorly? You wouldn’t be freaking out saying, “Should I pull him? should I keep playing him? I don’t know what to do.”

David:
You would start to ask yourself, why did their performance change? Is this a person who just aged out, their athletic ability is decreasing? Are they suffering from an injury that they’re not going to come back from? Did they lose interest in playing the game and I need to substitute a new player for this person or trader or wave this person? Or are they somebody who didn’t get enough sleep last night because they partied too hard and they drank too much? Like what J was saying, and they’re not focused, are they fighting with their boyfriend or their girlfriend and so they’re not focused on what they’re doing and that’s a temporary thing that will pass.

David:
I’m asking myself the same thing about the economy are the fundamentals of our economy in the United States right now. Terrible to where we’re not going to recover from this. Are jobs being lost? Remember the.Com bust that we had in the 90s. Where all of the sudden everybody that they were working making websites and then nobody needed a website anymore. That really affected the economy. There was jobs that were there, people did not have to go back to. Or is this a temporary thing where people are not able to go to work, they’re going to stay home. We’re going to have a decrease in performance, but those jobs will be there when they want to come back.

David:
Ask yourself questions like that when you’re trying to figure out what moves should I make? What is causing this problem? Is this a temporary problem? Is this a permanent problem? Give yourself something to think about from that perspective. Don’t just respond to every new piece of news and let yourself get jerked from one side to the other side and live in chaos like that. Zoom out look at the big picture. For most people that really helps bring clarity on the right move that they should [crosstalk 02:04:07]be making.

Brandon:
Good stuff! All right, my final words for the day-

J:
So, Brandon what… That one out, we need to get your tip.

Brandon:
Okay.

J:
What’s your tip?

Brandon:
All Right? My tip-

David:
You’re not sneaking out of this one.

Brandon:
… My final tip is what I, I’ll just reiterate what I said earlier. The economy cannot change your work ethic. The economy doesn’t change what time you wake up in the morning. It doesn’t change whether you go to the gym or not. Are you a workout or not? Can change whether you go to the gym. It doesn’t tell you whether you work out or not. It doesn’t change whether or not you make those phone calls. It doesn’t change any of that.

Brandon:
So regardless we are playing a game of poker, like we said earlier, there are cards being dealt right now and every card changes what we can play with our hand. If you’re thinking a game of poker, right? You have a few cards in your hand and then as cards get dropped one at a time on the table, that affects your game. So, but it doesn’t affect what we do in terms of our lead measures and what we as people do. So just remember that and you’ll be fine. That’s all I got.

Brandon:
All right guys. Well let’s get out of here. I hope you guys enjoyed today’s show. I hope you learned a lot. I hope you feel a little bit more good and secure about what you can do going forward. J and Scott, thank you guys for joining us today. David and I here on the show. So you guys are rock stars. Thank you.

J:
This was awesome! Thanks guys. Have a good week everybody.

Brandon:
David Green, you want to take us out?

David:
Yes, this is David Green for Scott Entrenched in real estate trench. Jay the Professor Scott and Brandon the DIY guy Turner signing off.

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In This Episode We Cover:

  • BiggerPockets members’ top questions right now
  • How to control your emotions when people around you are panicking
  • Which strategies do and don’t work well during downturns
  • How to approach tenants who have lost income and don’t pay rent
  • The importance of “buying right” and keeping cash reserves
  • 6 ways real estate investors should prep for a recession
  • How power dynamics in the marketplace will change
  • Whether you should still be out there looking for deals
  • How to productively use your time while confined indoors
  • Adjustable rate mortgages today
  • COVID-19’s effect on the overall economy
  • The effects of quantitative easing and 0% interest rates
  • And SO much more!

Links from the Show

Books Mentioned in this Show:

Tweetable Topics:

  • “Cashflowing real estate is protection.” (Tweet This!)
  • “Real estate investing tends to be a good hedge against general inflation.” (Tweet This!)
  • “Business will still move if you’re determined to make it move.” (Tweet This!)

Connect with J

Connect with Scott

Real strategies that work for real people seeking to build wealth through real estate investments. Co-hosted by Brandon Turner and David Greene, this podcast provides actionable advice from investo...
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    Kevin Leonce Investor from Atlanta
    Replied 11 days ago
    Thanks for this fantastic podcast. Value upon value!!
    Jake Charles Rental Property Investor from Bath, ME
    Replied 11 days ago
    Thank you BP guys. I have been looking forward to hearing your take on the current situation we are in, and this show was a great watch during my lockdown, and honestly could have been 4 hours long! Scott Nails it at 1:12:00! If you are not willing or financially prepared to work things out with your tenants then you shouldn't be a landlord. We take on the responsibility of caring for our properties and tenants when we become landlords. We should always be prepared (financially), understanding, and kind when dealing with any situation, especially one this impactful! We are all in this together and we need to work with each other to make it through.
    Jason C. New to Real Estate from Tulsa, OK
    Replied 11 days ago
    Who is the economist that J Scott referenced?
    Carlos A Polanco New to Real Estate from Rockland, NY
    Replied 11 days ago
    Ray Dalio https://www.principles.com/
    Jason C. New to Real Estate from Tulsa, OK
    Replied 10 days ago
    Thanks!
    Brandon P. from Joplin, Missouri
    Replied 11 days ago
    It’s not money, it’s currency. Anyone ever heard of Robert Kiyosaki?
    Carlos A Polanco New to Real Estate from Rockland, NY
    Replied 11 days ago
    Great discussion. I appreciate the broad overview speaking about how the economy works especially with all the talk saying we are past due for a down turn prior to our current state of affairs.
    Doug Koch Investor from Kenai, Alaska
    Replied 11 days ago
    Cool and calm, that's what I saw and heard on the podcast. Great insights on what to do. Thanks for showing people how to think with your head and not your emotions.
    Joe M. from Erie, Pennsylvania
    Replied 8 days ago
    I think the original BP podcast has lost some of its value as of late due to "getting too big" for most of the listeners. Thanks being said, this is one of the most valuable podcasts I have ever listened to. I listened to it twice. Jay gave so much value in explaining the economy and how it functions. All gave very good tips on how to handle business during this time. I cant say good job enough on this one
    Tom O.
    Replied 8 days ago
    A tip I've shared to potentially avoid Covoid 19 for landlords and tenants Finally, some personal advice to all. I've sent this message to all my tenants. I've been listening to hours of interviews with doctors and the epidemiologist expert at Johns Hopkins. He said the common cold/flu is a type of corona virus, just not this one. Based on that, and knowing the common cold is seasonal and correlated to low D-3 levels in the body, it is obvious that having high or at least normal D3 levels could prevent the Novocorona Virus. Covoid19. My brother is a doctor who has been in a decade-long-term Vitamin D-3 research project. Take 5,000 IUs of Vitamin D-3 a day. If you have not been supplementing with D-3 (your multi is too low, only 4-800 IU) previously take 50,000 IU a day for 5 days. Then drop down to 5K a day. He also said that all the docs he works with take 50K a day when they feel a cold or flu coming on and it seems to knock it right out. I've done that as well with some success. Not always.