BiggerPockets Podcast 311: 6 Rules for Investing in Real Estate in the Coming Economic Shift with J Scott

by | BiggerPockets.com

Are you a real estate investor concerned with the potential of a shifting economy? These concerns are understandable, and today’s guest has some great techniques for both protecting your money and taking advantage of deals in any market!

J Scott, author of The Book on Flipping Houses and How to Estimate Rehab Costs shares his valuable insight when it comes to predicting market changes, adapting to shifting markets, and changing your strategy to adapt to a changing economy! Don’t miss Jay’s 6 rules for flipping houses, what exact economic indicators he looks for to predict an upcoming recession, and his 6 rules for preparing for an economic recession.

J is one of the most respected minds in the real estate game, and today’s show is jam packed with the wisdom, advice, and knowledge you need to position yourself where you want to be in a shifted market to make big gains in your portfolio!

Want to learn more about flipping houses? Order completely updated and revised versions of J Scott’s The Book on Flipping Houses and How to Estimate Rehab Costs here!

Click here to listen on iTunes.

Listen to the Podcast Here

Read the Transcript Here

This is the BiggerPockets podcast show 311.

One, be certain of your numbers. Two stay away from long rehabs. Stay away from new construction. Three have a backup strategy. Four, avoid thin deal. Five, avoid leverage at all costs. Only borrow money when you absolutely have to and six, stay away from the high-end because that’s the part of the market that’s going to soften fastest when things start to turn the high-end market is going to turn first.

You’re listening to BiggerPockets Radio. Simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all of 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: What’s going on everyone? This is Brandon, the host of the BiggerPockets podcast here with my cohost Mr. David Greene. How are you doing buddy?

David: I’m doing great actually. I am just put a house in contract a couple of days ago that I’m going to be flipping with a partner, Mr. Mario Mazamuto. He’s kind of my partner in crime when it comes to flipping houses and we actually hold free seminars where we teach people how to hold houses and every time I get a deal and contract it’s a good day.

Brandon: That’s awesome. That’s awesome. Yes, Mario is a good dude. We got to get him on the podcast. I really like him a lot. We’ll make that happen.

David: Yes, he’s one of the best appraisers I’ve ever met, which really helps to have on your team.

Brandon: Yes.

David: When you’re trying to figure out an ARV. It’s like almost cheating. It’s really cool.

Brandon: Yes, that’s awesome.

David: And actually. It applies to today’s show because today’s guest is a big house flipper, J Scott is known for flipping houses.

Brandon: Yes.

David: He gives some really good advice on specifically when you partner with somebody. Asking the tough questions up front and spelling out what to expect rather than entering into it with some like naivete and just hoping it goes well.

Brandon: Yes, yes and today show gets really. I wanted to let everyone know a couple things about today’s show. First of all I’m working in. I am recording this in a construction zone so I’m actually getting air conditioning put in today so you’ll probably hear hammers and saws and whatever in the background. Just ignore that. Secondly we go really deep today into some economic things. Like if you don’t know what an inverted yield curve is you’re going to learn today. Now if you get to that point of that show. I mean the first probably 20 minutes of the show goes really deep into this stuff. If you’re like man this is just over my head just stick with it because it’s really really good to know and if it comes up later in conversations you’ll know where to go back to it. Then after that, J moves from how do we know the economy is bad or going to go bad at some point or going to shift to what do we do about it? It’s like just gold. He goes through like six rules for flipping or for buying rentals or whatever in today’s market and then also six things that he’s doing right now to prepare. It’s just solid gold. No it doesn’t mean don’t do real estate. Now is still a good time to get into real estate. It’s still time to do a deal. You’ll hear that today over and over, but it’s different. It’s a different market so just I think you guys are going to love today’s show, but we go real deep into this stuff, which is something I’m excited to do. Last thing before we go any further let’s get to today’s Quick Tip.

David: Quick Tip.

Brandon: All right so we’re not just a podcast. People often think we are that just listen to the podcasts, but BiggerPockets is more than that. We have an entire website. Millions of people on there every month devoted to helping you reach your real estate investing goals. If you’re not already a member join for free. When you do sign up. This is important and everybody even if you’re already a member. Fill out your profile and tell us about one deal that will inspire us or teach us something. Like you know how we do the deep and deal deep dive in the show we actually allow every member on BiggerPockets to be able to upload your own deal diaries. Like your own deep dive basically so people can see what you’re doing and they can connect with you and see what you’re up to. It only takes a couple of minutes to do it so definitely check it out. Again go to your BiggerPockets profile and look for the deal diaries there and tell us about your investments.

David: All right so before we get to the guests let’s hear a word from today’s show sponsor.

All right y’all know me. I love reading business books. I talk about them all all of the time here on the show, but I get so many great recommendations now. It’s really kind of hard to find time to read them all. This is where Blinkist comes in really handy. It’s an app that takes the need to know information from thousands of non-fiction books. It condenses them down into just like 15 minutes of reading or audio. I love using Blinkist when I’m on the go. Like I can visit some of my favorites like the 4-Hour Work Week by Tim Ferris or I can check out Seth Godin’s new book all while I’m working out or driving over to check on one of my rehabs. Hey right now for a limited time Blinkist has a special offer for you. It’s a free seven day trial. Just go to Blinkist.com/1Pockets to start now. That’s Blinkist.com/pockets.

All right well with that you know. Thank you to our sponsors always. You all rock. Make sure you guys are supporting our sponsors too because you know they make this show possible. Now with that let’s get to today’s show. Today we’re talking with J Scott author of many of you have read it, The Book on Flipping Houses and The Book on Estimating Rehab Costs. What you might not know is actually we are relaunching that today because J wrote an actual brand like we’ll call it an updated version so it’s version 2 or the second edition of the book. It’s updated for today’s economy right. Things are different than they were five-six years ago when the book was written. Again back in 2013 he wrote the originals. A lot of lessons still apply today, but a lot has changed so here’s the deal. Well talk about it late in the show like an hour in, but I’ll just give you the short thing now. Go to BiggerPockets.com/Flippingbooks, plural. Flipping book today, order both. You can get the book on flipping and the book on estimating. Get them separate, but I encourage you to buy them together. You can get the ultimate package. You get the physical, digital audio and a bonus book, which actually you all love. It’s called What Real Estate Investors Need to Know About the Economic Cycles. Anyway you get all of that together. Just go to BiggerPockets.com/Flippingbooks. All right so with that let’s get to the show with Mr. J Scott.

All right what’s going on J Scott? How are you are you doing? Welcome back to the BiggerPockets podcast.

J: Gentlemen nice to be back. Thanks for having me.

Brandon: Yes so the last time you were on the show was a while ago. I don’t know how long. How long ago was it? Do you even know?

J: It was a previous lifetime.

Brandon: It was a previous lifetime yes.

J: I know that David wasn’t on the show.

Brandon: Yes.

J: You did not have that beard.

Brandon: That is true. Okay so a lot has changed the last time. I know you were first on the show. I think you’ve been on twice before is that right?

J: Yes, I think the first time was 2012. I was number 10 so.

Brandon: Yes.

J: Right at the beginning.

Brandon: Crazy all right so a lot has changed in the market. A lot has changed in your own business and how you’re doing things, what you’re doing so that’s what we’re going to talk about today is a lot of like the changes and where you see things going, for those who don’t remember or haven’t listened to the other podcast could you just give like a you know a three four-minute like summary. Who are you? How did you get into real estate and why did you choose real estate and what did your career look like?

J: Yes absolutely so I started in the corporate world. I was a tech guy, engineer by trade and worked out in Silicon Valley for a long time and met my wife. We decided to get married. We were both working crazy hours and just not conducive for a family. She and I got married, jumped on an airplane. Moved from California to Atlanta back in 2008 with the idea that we were going to have some lifestyle business where we could have kids. We could make our own hours. We could basically be good parents and not be stuck in the rat race like missing kids’ soccer games, missing piano recitals. We didn’t want any of that so 2008 trying to figure out what we wanted to do with our lives now that we were sort of grown up. We were in our 30s and my wife was watching a flipping show on HDTV back then before the big or during the last recession. That’s all you saw on TV and she said, “Let’s flip a house.” While we’re waiting to figure out what it is we want to do with our lives let’s flip a house. I thought she was joking, but she was serious. Long story short, three months later we bought our first house. Two weeks after that we bought our second house. A month after that we bought two more and while we were trying to figure out what we wanted to do with our lives we bought 14 houses that year. Before we knew it we were house flipping and it kind of just snuck up on us. It wasn’t something that one day we said we want to be house flippers in fact I never in a million years would have imagined that’s something we would do, but we figured out we were good at it. I could do the analytical side. She was good at the marketing and the sales side. She was good at the design stuff. Here we are. I guess it’s 10 years later we have done a couple of hundred deals. We’ve partnered on deals. We’ve done new construction. We’ve done a little bit of everything and finally getting to the point where I’m willing to call myself a real estate investor.

Brandon: Well finally. You know it’s.

J: Yes after 10 years.

Brandon: You’re figuring this out. Yes.

J: It was just last year that my wife and I stopped trying to figure out what we’re going to do next and realized that we’ve figured it out to.

Brandon: That’s funny. That’s funny. All right so what I guess I’m wondering the big picture because today you know people can listen to your last show like you said. It was on episode 10 and I don’t remember the other episode, but it was somewhere in there. I think what 60s maybe. I don’t know.

J: 63 maybe.

Brandon: Maybe okay. Take a listen to that for your actual you know full story. I want to know about the changes because like six years is an eternity when it comes to real estate cycles right?

J: Yes.

Brandon: What you did back in 2010 it’s probably very different than what you did in 2018.

J: Yes.

Brandon: What other people should be doing. Right so maybe you can explain. How has your business evolved in terms of changing through the market over the past 10 years?

J: Yes, absolutely so let’s start with I am really lazy. I’m probably the laziest person you know. In the way I look at it there’s two types of investors. There is a type of investor that figures out what they want to do. They get I mean they become the best in the world at it. They learned everything there is to know about it and they do that forever. I know people that do multifamily syndications that they could be in the middle of the biggest depression in history and they’re doing multifamily syndications. They can be up like during a hot economic market. They’re doing multifamily syndications. They can no matter what the economy, what the market, what the anything hands them. They’re doing multifamily syndications. I know people that do that with flipping. I know people that do that with mobile homes, with blending, whatever it is. They’re just world-class at what they do and that’s all they do. Then there are people like me who aren’t that smart. And instead of trying to be the absolute best in the world and try and do things when the market doesn’t want to allow me to do it. I prefer to take that path of least resistance. I look for the low hanging fruit so what I do is I let kind of the market and the conditions and where I am and all of that. I let that dictate where my business goes. I don’t say this is what I want to do. I say tell me what I can do. What I can easily do. What allows me to continue to be lazy, but still do a lot of deals and make a lot of money.

Brandon: You know what I love about that? Is it reminds me of that quote. I’m sure you’ve heard it before where you can’t control the waves, but you can learn to surf. I really like that a lot.

J: Exactly.

Brandon: Right yes you can’t control what the economic waves look like, but different waves make you want to surf a different way so. Yes keep going.

J: Absolutely.

Brandon: I didn’t want to interrupt you.

J: No that’s exactly it. I mean I remember back in 2008 my wife and I were doing REO deals, which are basically bank foreclosures and they get listed on the MLS and back in 2008-‘09-‘110 I mean literally there were hundreds of these on the MLS at any given time and we could throw a dart at the MLS and whatever it hit was probably going to be a profitable the deal.

Brandon: Those were the good old days.

J: Those were the good old days. They’re all good old days for different reasons.

Brandon: They all right actually yes. Because I couldn’t get money back then. There were dealers everywhere. I couldn’t get money.

J: Exactly. Exactly. Our first 50 or 60 deals were REO deals right off the MLS. 2010 comes around and my wife looks at me and says, “Hey I think these are going to, these are getting tougher. I’m seeing fewer and fewer deals, but I’m hearing people talk about short sales. Maybe we should investigate the short sale thing and see if this is there’s an opportunity here.” Me again being lazy I’m like, “Oh we’re seeing a lot of short sale deals. Great. I don’t need to do REOs anymore. Let’s do short sales and we knew a lot of people who were just make no, I’ve done a hundred REO deals in the last two years. REO deals are easy. I’m good at them. I know how to do them. I know how to find them. I have got relationships in the industry and they were just dead set on like not doing anything other than REO deals. They thought of themselves as REO investors and here we are in 2011 and ‘12. My wife and I are doing short sale deals. We don’t have much competition and just like REOs a couple of years earlier there’s hundreds of deals every day.

Brandon: Yes.

J: I mean plenty of deals. Meanwhile we look at our investing friends and colleagues and competitors and they’re still trying to do REO deals and none of those exist anymore. They didn’t want to modify their business based on what the economy and the market was handing them. We on the other hand we just were going to do what was easy so we went to short sales and a year or two after that we started seeing short sales dry up and everybody was talking about well new construction’s get hot. Maybe we should learn new construction so. 2014, my wife and I partnered up with a friend of ours and we started doing infill new construction and then 2017 came around then we started seeing that new construction was getting really tough. We started partnering on flips and we started doing some multifamily deals. Some midsized multifamily deals because there were some good opportunity there. That’s kind of been the evolution of our business over the past how many years is it? 10 years, we kind of we look for the low hanging fruit. We go where the market’s allowing us to go. We’re doing the stuff that allows us to continue to make money without having to fight the market without having to fight a ton of competitors etcetera. Yes, we’re just we’re very much, we try and be flexible. There’s the word. We try and be flexible.

Brandon: I love that.

David: Yes, flexible I think is the perfect word. What gets a lot of people messed up is they’re looking for the quick, easy answer, the silver bullet. Where do I find a deal? Okay that’s where I find a deal boom. That’s all I wanted to know and you’re in a competition when you’re a real estate investor with other investors and the thing about competition is there’s never ever going to be one thing that will always work because your competition figures it out too. You take like an MMA fighter and if his question is well how do I tap out my opponent there isn’t one way to tap out every single opponent because if there was everyone would do it and then they’d practice how to defend it. You got to learn to take what the defense gives you. That’s a sports terminology right. If you’re playing football and they’re giving you the run game then you run the ball and if they stack the box so that you can’t run it well then you got to throw the ball and something I’ve always admired about you J is you are very very quick to adjust. Like the best team is the best athlete. That’s what they do. I think we had 10 core seating on. Was that right Brandon? He talked about the same thing that.

Brandon: Yes.

David: He moves with the market right and it reminds me of Warren Buffett’s quote that you want to be greedy when others are fearful and fearful when others are greedy. Like you’re always going away from the crowds. This is really interesting because right now we’re in a hot market and it’s easy to get money. It’s very easy to get money. Money is cheap, but it’s hard to find deals so a lot of people are worried like oh it’s too late. The market’s at the top. There’s a correction coming. There’s a shift coming. Can you tell us J if that’s a concern someone has? What are some of the things you look for to know that yes, that’s the case. We’re headed into shift.

J: Yes, absolutely so first of all well step back. I don’t think I’m smarter than anybody else when it comes to changing up my strategies. For me it’s I am never so heads down focused on day-to-day activities in my business that I don’t take time to look up and keep a tab on what’s going on around me. I always like to know not just where the market is today, but I like to look at the signs of where the market’s likely to be tomorrow or next month or next year. We don’t know for certain, but markets move in cycles. The economy moves in cycles. The real estate market moves in cycles. Every market moves in cycles and people talk about well depending on who gets selected president this is what we can expect. It doesn’t matter whoever gets elected president, whoever is in Congress, whatever is going on in the world. We’re going to see ups and downs in our economy. It’s happened for 200 years now and it’s going to continue to happen and maybe the ups will be a little bit higher. The lows will be a little bit lower or the cycles will happen a little bit faster or slower. The given is that we’re going to see these cycles. The economy is going to go up. The economy is going to go down and what we need to be able to do is kind of recognize where we are in the cycle and recognize all the factors that influence us as real estate investors and how they change throughout the cycle. I know you guys mention stuff like lending so yes back in 2008 we could find a thousand deals, but finding money was tough. Interest rates were higher and lenders weren’t lending and there was no private money out there. I mean these days everybody and their brother has IRA money that they’re just like desperate to.

Brandon: Yes.

J: Put to work. Back then when you’d tell somebody, “Hey do you want to give me some of your retirement money for real estate?” They just looked at you like you had five eyes.

Brandon: Yes.

J: You’d go to a REA meeting and there weren’t hard money lenders there looking to give you money. I mean everybody was looking for money and there was nobody there with money. Yes, things change and no time is a good time or a bad time. If you know what you’re doing, if you can modify your business correctly. If you can change up your strategies correctly, every time is just as good, every time is just as bad. It’s just it’s the key is knowing where you are and what the market’s allowing you to do and not trying to fight that.

Brandon: Yes so what are some of those indicators? Like what are the things but you look for.

J: Yes. Yes so I’m again I’m no smarter than anybody else, but I like to do a lot of research and reading on this stuff and there are a few big predictors of like those big economic shifts. Like we’ve been in a bull market or a hot real estate and hot economy for about 10 years now-eight years now. Typical cycle I mean again I don’t want to bore people with this kind of these details, but a typical cycle lasts six or seven years. We’re 10 years into the cycle.

Brandon: Yes.

J: Statistically speaking there’s going to be a change coming. Is it next week? Next month? Next year? Or two years, we don’t know. Sometime soon there’s going to be a change coming. I mean just the timing of the market and I mean you look around you. We all see things heating up. We see like just real estate prices going through the roof and it’s really hard to find deals. There’s all this money out there that’s desperate to find a home. Anytime you have more money then you have deals that’s an indication that things are getting superhot. Then aside from like the timing thing and the observation thing there’s also this economic data that you can look at and there’s a lot of really good economic data that has predictive value. That if you look at this data you can say, “Hey these are kind of the shifts we see every time before there is a downturn.” There are a few pieces of economic data I like to look at that kind of allows me to kind of gauge how close we are to that that top of the market. One of them is just unemployment numbers so typical unemployment we expect to be in the 4% to 5% range and we all know that when unemployment goes higher then 5% that’s a sign of like the economy getting weak. What a lot of us don’t realize is anytime the unemployment rate goes below 4% well that’s a concern also because when unemployment goes below 4% that means that people are happy. People are good. Everybody has jobs. People are making lots of money. The problem with everybody making lots of money is that there’s a lot of demand for products in services so businesses are like ugh I need to produce more. I need to build more factories. I need to hire more people. I need to buy more equipment and the problem is if you have to hire more people and the unemployment rate is at 3.6% there’s only one way to hire more people and that’s to pay them more money. When businesses pay people more money.

Brandon: Yes.

J: We have inflation and when we information well things cost more. When things cost more that hurts the economy. Government is going to raise interest rates and bla bla bla. Any time and I know I dragged that out, but anytime you see an unemployment rate go below 4% that’s an indication that the economy is likely going to slow in the near future. We’re going to see inflation. We’re going to see a hike in interest rates to slow down that inflation so I like to keep an eye on unemployment. Right now that 3.7 number I think it is today is awesome. It’s not sustainable.

Brandon: Yes.

J: That’s the first thing I look at. Another thing and this is probably the most popular thing, but a lot of people haven’t heard of it. I know I’m hearing more talk of it these days. It’s one of those things that more people are starting to hear about with the economy where it is, but there’s a thing called the yield curve and government likes to borrow money. They’ll borrow money from investors by selling bonds and basically these bonds pay an interest rate. Just like a savings account, but the difference is that they have some maturity date, which means you have to hold these bonds for a certain period of time before you get your interest. If you buy by like what are called three month treasury bonds, you have to hold those for three months and if you do that they’ll pay you 1% in interest. If you’re willing to hold it for two years and buy a two-year bond they’ll pay you 2% in interest. If you hold it for five years, they may pay 4% percent. If you hold it for 20 years they may pay like five and a half percent so if you look at a chart of these bond rates where the shorter-term expirations, the shorter time you have to hold them lower interest rate and the longer time you hold them the interest rate kind of goes up. That’s what we expect to see. You expect to see that if you have to hold something for 20 years you want to get paid more to do it. The interest rate is going to be higher, but what we see when the economy starts getting really hot and investors start to get a little bit worried is that they want to put all their money in these long-term bond because it’s safe. They don’t have to worry about the market dropping out from under them. They can lock in a rate for the next 20 years so people start taking all their money out of other investments like real estate, the stock market, gold and they put them into these long-term bonds that the government offers. When a whole bunch of demand, when there’s a whole bunch of demand for these government bonds what happens is the government says okay well we don’t have to pay these high interest rates anymore on these bonds to get people to buy them because everybody wants them. They lower the interest rates. At the same time when investors start to get a little scared they pull money out of these short-term bonds because they’re like no I need security. I need to put my money someplace safer so everybody pulls money out of the two month and the two-year bonds and the three month bonds and when there’s no demand for those, the government says oh we got to raise rates on those to get people to buy them. When investors start to get worried about the economy what we see is we see those lower expiration, those two month and two-year and three-year bonds. The rates go up and on the other side we see the longer-term bonds, the rates go down so instead of seeing this curve that goes from like low to high we see this kind of flat curved so the two year bonds are paying the same as the 10 year bonds and that historically has been one the best indicators, that’s called the yield curve by the way. If anybody hears the term yield curve it’s basically this graph of interest rates for different bond expiration periods. When you see the yield curve go flat or even get inverted where the two and the 10 year or higher then like the middle ones, historically for the last 60 years that has been the absolute best predictor of an impending recession. What we’re seeing these days is that we’re seeing a flattening of the yield curve and in fact anybody that is on Facebook probably sell this big article they came out last year that we sell our first inversion in the yield curve. Meaning for the first time since 2007 I think, the curve kind of inverted a little bit and so now everybody’s starting to yell recession recession recession. That doesn’t mean we’re going to have a recession next month. Generally speaking when you see that first inversion in the yield curve we’re generally within about 18 months from our next recession so.

Brandon: Interesting.

J: That’s been a really reliable indicator so do we know that we’re 18 months? Of course not. Things change, the cycles, the cycle could be different than all the previous cycles, but they say history is the best predictor of the future and in this case history is telling us that we’re probably within a year or two of a recession just based on that.

Brandon: Do you have any indication if that’s true? Do you have an indication first of all like how bad it’s going to be. I mean are we looking into another 2007 and some of those is just opinion of course, but are we looking at another 2007-2008 or what do you think?

J: I’ve heard people say and when I say people I’m talking about economists that are well-respected. I’ve heard some say yes this isn’t going to be much. It’ll be a little downturn. It’s not going to look anything like 2008. I’ve heard other people say that this could be like bigger than 2008. We talk about the economy going in cycles and we have this what I was talking about this like six year cycle it’s called the business cycle where the economy kind of goes up and down and up and down and for the last 200 years it’s averaged about every six years so we saw it in 2001. We saw it in 2008. We saw that in the early 90s, whatever. There’s also these longer cycles and so there’s this really long cycle that lasts like a hundred years, 50 to a hundred years in its called the long-term debt cycle and so anybody that’s read guys like Ray Dalio or Peter Shift who are to some degree pretty well-respected have probably heard this long-term debt cycle. Some of these guys are saying that like we’re due for like the 75 year downturn, which the last one was the 1930s, the Great Depression and so there are a lot of people who were saying that the next one could be the big one. Like the biggest downturn since the 30s so nobody really knows. Another indicator I really like though is something called the Buffet Indicator. This is kind of a cool one for anybody that’s into the stock market. Warren Buffett likes this and that’s why they named it after him, but basically they say that like you can look at the total value of all the stocks in the stock market, what we call the market capitalization of all these companies and you compare it to the gross domestic product basically the total output of our entire economy. You do a simple division. You take the market capital of all the companies. You divide it by the gross domestic product and you get a percentage. That percentage is generally somewhere between 50% and a 150%. What they say is if it’s between like 80% and 90% those companies in the stock market is fairly valued. If it’s under 80%, the stock market is under valued. If it’s over 90% the stock market is overvalued. Typically over again the last 200 years what we’ve seen is the stock market kind of always comes back to that that average number, that 80 to 90% number. Well today if you look at the Buffett indicator, the Buffett indicator says the stock market is overvalued by about 40% to 50%. If you believe that metric, that says that we’ve got 40% to 50% to fall in the stock market before it gets back to what would be considered a reasonable valuation based on our entire economy. Based on the GDP so that’s another indicator that hey we could see a 40% to 50% drop in the stock market before things get back to where they should be. Now again, this is all historic. Who knows what is going to happen in the future, but it’s another good indication of what could potentially happen. There are a lot of these indicators.

David: I think it’s important to note to people listening we don’t need to live in fear of a recession happening. What we’re not saying is, “Oh my God the world is going to end. Run and build a bomb shelter right.” It’s more about preparing for it so that you’re in a position to take advantage. Like things are going to change. They’re always going to change. The people who adapt to change are the ones who build their wealth the fastest. That’s kind of where we started off this podcast with flexibility right? We know the stock market could be affected. Other things could be affected. Right now you’re not getting much money if you buy bonds because everybody wants them. That’s where everybody his running to.

J: Yes.

David: In my opinion that’s one of the reasons that you make money with the real estate is because like it isn’t affected nearly as much by this stuff. When there’s inflation prices go up and rents go up, but your payment stay the same. When you’re in a bad economy everybody else loses their house and so there’s more stuff to buy. Like there’s always a play you can make no matter what the economy it is with the real estate so J I’m going to let you comment on that and then after can you follow that up with what are some actionable things people can do right now to prepare for this shift that we think could be coming.

J: That’s great because it’s funny because my next my very next point was going to be when I look at where we are in the market. When I take that time away from heads down on my business and I’m kind of looking at the bigger thing, I’m asking myself two questions. One, what’s working now? What should I be doing now to make money? Two what should I be doing now to prepare for the next part of the economic cycle. The next thing that’s coming because once you get there a lot of times it’s too late. Yes, you asked the question and said, “We were thinking the same exact thing.” Let’s start with and I know a lot of people look at me as a house flipping guy so let me talk about what I’m doing from the house flipping perspective in terms of making money now. A lot of people are saying to me, “Hey you can’t make money in flipping now and the economy is getting ready to turn. You got to do something else.” No that’s ridiculous. You can make money in flipping. Again if you want to be that person that like wants to be best in class, world-class, you can flip any time. It doesn’t matter. Me again I like to take the path of least resistance, but even now I’m still flipping houses and if you take some precautions if you do things, if you modify your strategies a little bit you can still be successful so flipping. Here are my six rules for flipping right now knowing that we’re getting near the top. First I like to be extra sure of my numbers so five years ago I could go and do a flip thinking okay I think the rehab cost is going to be this. I think the ARV is going to be this. I think I’m going to be able to sell it in three or four months whatever the timeframe is and I knew that if I was off on a couple of those numbers the market was going up. The house was going to be worth if it took me six months to sell this to the three months I’d probably make more money because values were going up and so I wanted to have a general idea of my numbers. I wanted to know about how much I was expecting to make, but I didn’t care that I knew down to the penny. These days I want to know down to the penny. I don’t want there to be a lot of margin of error because there are too many external factors like the market that can come in and affect me as well. These days I make sure that I do due diligence two or three times before I buy any property and I know my numbers cold. I make sure I get quotes from contractors. I don’t just assume I know what they’re going to charge me etcetera. Second, I’m staying away from any deals that are going to take me more than three or four months. For several years I was happy to do new construction projects that would take eight-twelve even 14 months and we were doing some big rehabs where we were doing what are called pop tops where we put it on a second story or add square footage and between the zoning and the permitting cycle and all of the work. I mean we’re looking at six-eight-ten months. These days who knows where the market is going to be in six or eight or ten months and I don’t want to take the chance that we see a big downturn while I’m holding five properties that I am building. We’re pretty much sticking with shorter projects these days. We’re trying to only do things that are going to take three or four months to buy, renovate, and resell. Third we’re making sure that we have Plan B, Plan C, Plan D on all of these properties. We have backup exit strategies so again two- three- four- five years ago I knew that if I bought a property to flip there was a 99.9% I’m making that number up, but I knew there was close to a hundred percent chance I was going to be able to flip it unless something crazy happened I was going to be able to flip it. These days, who knows? If I hold a property for three or four or five months and the market starts to change and the buyers go away or the buyers start looking for a different type of product I could get stuck holding that property so I like to know that if I can’t flip it that I have reasonable backup strategies. Those backup strategies could be hold it as a rental. Do a lease option on it. Turn it into some type of commercial space or a short-term rental or even like with some of my small multis. Perhaps I could turn parts of them into warehouse space. Whatever it is having a backup strategy where I can either get rid of it and not lose a lot of money or I can preserve some cash flow on the deal so that I can hold it for the next two or three all four years until I can eventually flip it. Number four, I’m avoiding thin deals so I like to tell people, people tell me what are you looking for in terms of profit margins these days? What I like to say is figure out the biggest drop you could imagine the market taking right now and make sure that’s your minimum profit target. If you think the market could potentially drop 20% then go into all your deals with the goal of making 20% so that way if your worst-case fears are realized you’re still going to breakeven.

Brandon: I love that.

J: Yes so my numbers have always been about 15% cash from cash return on these deals and we’re cash flowing ARV so for me I think 15% is kind of like where I see the most drastic scenario of a downturn in the near future. I don’t think that’s going to happen, but if somebody said, “What’s the worst case scenario in the next 6 to 12 months?” I’d said, “Ah I don’t think we’re going to see this, but worst-case I could see being 15%.” If I know I’d go into all my deals expecting to earn 15% worst case I should break even on those deals. Number four is I’m trying to avoid thin deals. Five think about leverage more. I know a lot of flippers for the last few years they haven’t really thought about borrowing money for their flips. They were trying to get a hundred percent financing on the purchase, a 100% financing on the rehab. Trying to be out-of-pocket as little as possible. The problem there again is the same thing. If you think the market could drop 15%, you have 15% built in and the market drops 16% you’re not just losing your money now. You’re losing your lender’s money. What I like to tell people is don’t leverage any more than you absolutely need to. It also gets affected by the fact that if the market starts to soften, which we’ve seen in some markets you’re going to be holding those properties longer and when you hold properties longer you have more holding costs. You have mortgage payments every month so reducing your holding cost is important and generally the biggest contribution to holding costs is your mortgage so approach leverage a little bit differently. Don’t borrow the money just because you can.

Brandon: Sure.

J: Only borrow as much as you need to borrow. Then finally number six, I am telling people stay away from the high end. Typically what we see is that when the market slows down the first types of property that slow down are the higher end property so if average property in your area is selling for $300,000 don’t flip $900,000 properties. Because when the market starts to soften those are the ones there are going to slow down first. Yes.

David: J on that note what do you feel about investors who are completely 100% dependent on the Air BNB model that they’re targeting those tourist happy places that get tons and tons of people that are staying and they don’t have any vacancy and that’s what they’re betting on.

J: Yes so definitely not my area of expertise, but I do have a couple thoughts. One and this isn’t from the real estate perspective, but just from the economic perspective that when the market turns, the first thing we see is we see less tourism. We see people traveling less. We see people taking fewer vacations and so I have a feeling that they’re going to be a lot of people who are running their numbers on these Air BNBs assuming today’s occupancy or vacancy rates depending on how you look at it and they’re going to get caught with their pants down when the market turns and they suddenly find that people aren’t traveling as much. People aren’t taking as many vacations. Number two with Air BNBs consider that when the market turns and if it’s anything like it was in 2008 and I’m not saying it will be, but if it’s anything like it was in 2008 a lot of homeowners start to rent out their houses because they can’t afford their mortgages. They’re moving back home. They’re doubling up with friends, moving into other places and they do their best to like hold on to their houses until the values come back up so they start renting them. With this new Air BNB model that’s just taking hold the last few years I have a feeling that when the market turns instead of renting their houses to retail renters they’re going to be a lot of homeowners who think hey maybe I can do this short-term rental thing. I think there’s going to be a lot of competition for Air BNBs.

Brandon: Yes.

J: From just regular homeowners looking to rent and then finally there’s a lot of regulation coming down the pipe with Air BNB. I know both local municipalities and at a national level there are some people that find the short-term rentals to be threatening to other industries and so they’re trying to pass regulation that’s making it a lot more difficult for short-term rental owners to stay in business. Again not my area of expertise, but I’d say always be familiar with the legislations that’s out there that can.

Brandon: Yes.

J: Hurt people.

Brandon: Yes, yes I love that. Okay so can you recap real quick like just you know one sentence each what those six points are in case people are taking notes then want to jot it down and missed one.

J: Yes absolutely so one be certain of your numbers. Two, stay away from long rehabs. Stay away from new construction, anything is going to take you an extended period of time. Three, have a backup strategy. Have a plan B, plan C, plan D. Four, avoid thin deals so know how, know what you think your worst case drop in the market is and make sure that that’s your minimum profit target. Five, avoid leverage at all costs. Only borrow money when you absolutely have to.

Brandon: Yes.

J: Six stay away from the high end because that’s the part of the market that’s going to soften the fastest when things start to turn the high end market is going to turn first.

Brandon: Yes, I love that. I love that you said all those six points so like last week I went and looked at a flip. There was an auction.com property here in Maui that I was looking at and it just like the numbers appeared at first glance to be really really good. Actually a BiggerPockets member brought it to me and she’s fantastic and we had a great some great conversations about this deal, but like at the end of the day like there was just something I didn’t like about that. It was like those six points right. Like the property was a $900,000 purchase supposedly.

J: Yes.

Brandon: ARV of 1.5 million, but like I looked at that the first rule like you know how sure am I on those numbers? Well 1.5 is definitely pushing it and like a year ago sure 1.5 made a lot of sense in terms of like I think we could stretch to the top of the market. Secondly, it was a huge like almost 3,000 square-foot house that needed a hundred percent gut. Pretty much right so I’m in 250 probably 250K of just rehab.

J: Yes.

Brandon: That’s going to take 6 to 9 months so now I’m holding it.

J: Yes.

Brandon: Too long right? At the end of the day like the profit margins looked good. It was like $175,000 profit, but if I’m off on my ARV it’s not 1.5. It’s 1.4. If I go $50 grand over.

J: Yes.

Brandon: My rehab all of the sudden now I’m broke even. If the market drops I’m going to be at 1.2 potentially.

J: Yes.

Brandon: Right like that just like that sucks right. Those like six points altogether and it was a highend flip. It was a high.

J: Right.

Brandon: It was going to be the highest priced house of the ARV in that neighborhood. For all the reasons like yes.

J: You probably didn’t have backup strategy.

Brandon: There was no backup. Yes. I always said like if I’m going to flip a house at that level I want to make sure especially if it’s here in Hawaii or in a nice market. Like I want to make sure it has we called them Ohana units. Like an extra unit like a you know duplex or whatever some extra space that if I had to now I can rent out both of them, hold it as a rental. I might only make 2%- 1% on my money or breaking even. Maybe even losing a little bit, but I’m not under. I can hold it and that’s fine. I’ll hold it through a five-year you know downturn so again for all like I’m glad to hear you say that because that’s what was bugging me is it kind of violated all six of those points. I’m glad I didn’t go forward with it, but at the same time it went up for auction you know on auction.com and nobody ended up. I think that the highest bid was only $800 and it didn’t meet the reserve so other people looking at the deal too like I mean the highest anybody else wanted to pay was $800 and it didn’t work out. It’s an interesting point too where I don’t think that the banks who put this it’s a foreclosure I don’t think they’ve realized that the market is changing quite as fast as investors are realizing. Wait like this is. Yes this is actually the third time it came up when auction.com and it’s going to go back on again in a month so.

J: Yes.

David: I think that perfectly illustrated J’s points in a real-world example. Like we could not have planned that any better because a lot of people they’re just so hungry to do something that if the minute they see.

J: Yes.

David: I can make $175,000 they’re like they can’t let go of that $175 number.

Brandon: Yes.

David: They think that they’re losing $175,000 if they don’t do the deal, but when you look at it practically and like a few things adjust a little bit.

Brandon: Yes.

David: Your rehab goes a little over the market goes down a little bit. Interest rates go up during your rehab and that corrects the market a little bit. Boom you’re losing a lot of money.

Brandon: Yes.

David: It’s not just the end number. It’s the percentage of.

J: Yes.

David: What you’re putting in so I love that. Like if everybody who is listening to this starts using these rules when they analyze every deal the right decision will become much more clear.

J: Yes.

Brandon: Yes, I love that. You mentioned estimating being good on your numbers so speaking now I think it’s a good transition real quick. To mention we have a brand. Oh go ahead.

J: I didn’t get a chance to tell you what I’m doing to prepare.

Brandon: Oh okay fine. We’ll go there before we talk about your book. What are you doing to prepare?

J: Yes, see again.

Brandon: Look at that.

J: Everybody is thinking about how to make money today. Nobody is thinking about how to prepare for tomorrow.

Brandon: Okay what are we doing to prepare?

J: And you.

Brandon: Go tell me, tell me.

J: I’ll make it quick. Here’s six things I recommend people do to prepare. Here are the six things.

Brandon: Ooh, okay.

J: How to do it. One, I’m moving assets to cash. People hear this, this phrase Cash is King. It’s a pithy little phrase that we throw around.

Brandon: Sure.

J: Let me tell you something. When the market turns anybody that was around in 2008-‘09-‘10 they know that lending was really tight and the people that were getting videos were the ones that had the cash so I’m a big believer in right now hoard any cash. Don’t spend cash on things you don’t have to. Don’t buy thin deals just to have money out there. I’d rather have the money sitting in a bank account waiting for a great deal to come along than to put it into a marginal deal right now so hoard cash. Two, now is a great time to open credit lines. I’m not saying people should take out credit. I’m not saying people should run up their credit cards or open a HELOC and take out the money, but have the money available because the next best.

Brandon: Good.

J: Thing to cash is a credit line so I went out. I own my house outright. I’ve never had a mortgage on my house, but I went out about six months ago and I got as big a credit line against my house as I possibly could. I want to know that I have that cash available in the case that some awesome deal comes along and banks have decided they don’t want to lend to me anymore.

Brandon: Yes.

J: I don’t ever have to use that. It cost me nothing to have it sitting there waiting. I’m telling people raise your credit card limits. Get your HELOC. Get your personal line of credit. Get your business line of credit, just have that money available in case you need it. Along the same lines, build credit. Now is a great time for anybody that doesn’t have great credit start building your credit because right now you can go to a bank and you can get a loan with a 660 credit score or a 680 credit score. Again anybody that was around in 2008-‘09-‘10 knows that you are probably looking at 720 or 740 to get loan and it takes six months- 12 months- 24 months to build your credit back up if your credit isn’t good. If your credit is not good now is a good time to start focusing on that because by the time you get it to the point where it’s 750 you’re probably going to need it. I like to say if you again going back to the assume the worst case scenario you can think of in the market. If it’s 15%- 20%- whatever it is get rid of anything that can’t handle a drop of that amount. If you are holding a flip that can’t handle a 15% drop. Figure out how to wholesale it or get rid of it now. I like to say the same thing on the rental side. If you can’t handle a 10% drop in rent or a 10% drop in occupancy and you think that’s the worst case scenario, get rid of that property. Don’t ever go in thinking the worst case scenario is going to blow you out of the water because you don’t want that. Restructure short-term debt. I’m a big fan of interest rates are relatively low right now. Low right now. In two years not only could interest rates be higher, but you have a loan that’s coming due. If the market’s bad, the lender may be hesitant to try and restructure that loan. They’re just going to say pay me off. I don’t want to.

Brandon: Yes.

J: Extend this. If you have any loans that are come in due in the next year or two see if you can workout something with the lender where you extend it for three or four or five more years. Even if you have to pay an extra quarter-point or whatever it is. Having longer-term debt will help you weather any big storm. Then finally and this is a big one especially for house flippers if you see the market start to turn in your area cut your losses. I see way too many people. I saw way too many people during the last downturn who basically chase the market down. They bought a property and one day they realized oh this sucks. I’m going to have to breakeven on this property because of the market. I don’t want to break even. I’m going to wait a couple of months. I’m going to keep marketing it and see if I can make just little bit of money and then a couple of months go by and they’re now down 1% and they’re like ooh I don’t want to lose money. I’m going to hold on to it and wait for the market to like get me to breakeven and before they know it they’re down 5% and three months later they’re down 8% and they basically chase the market down because they don’t want to lose a little so they end up losing a lot. Big piece of advice for any flippers out there. Once things start to turn you’re going to lose buyers, you’re going to have people that can’t get lending. The market’s going to continue to drop. It’s not just going to jump back up so don’t chase the market down. If you see you’re going to take a little loss, nothing wrong with a little bit of a loss. It’s better than a bigger loss after more time. Those are my six piece of advice on how to prepare.

Brandon: Nice I like that so we got six rules for investing in this market.

J: Yes.

Brandon: We got six things to prepare. I love that. I think that’s smart stuff so all right now can you run over that list of six again. Real quick to sum up real quick.

J: Yes.

Brandon: One line each of them so people can take notes go ahead.

J: Yes, number one hoard cash.

Brandon: Okay.

J: Move as much as you can to cash. Number two open as many credit lines as you can that you’re comfortable opening. Three, build credit so if your credit is bad get it good. Four, get rid of anything. Figure out what you think the worst case drop is in values, rents, occupancy and if you have anything that can’t handle that, get rid of it now. Don’t hold onto it. Five structure, restructure short-term debt. Negotiate with your lenders to basically extend any that out further than a year or two at this point. Then number six if the market starts to turn don’t chase your losses just get out.

Brandon: Perfect. I love it. All right now you’re going to let me talk about your book?

J: Yes, books.

Brandon: All right so we are going to go to the deal.

J: If you must.

Brandon: Yes I must. We are going to go today deal deep dive in a second and actually I’m really really fascinated by your deep dive topic tonight. I know what were going to talk about and I’m.

J: Yes.

Brandon: I’m super excited to talk about it, but before we get there I do want to mention that you know as you said you can still invest in today’s market. It’s just like surfing right. We got to learn how to ride the wave and right is that why we are publishing a new edition of your two I guess groundbreaking landmark books, The Book on Flipping Houses and The Book on Estimating Rehab Costs.

J: Yes, thank you for bringing those up. I’m very proud of those books so for those that don’t.

Brandon: You should be.

J: Know I published these two books, these were the first two BiggerPockets Publishing Books ever been published.

Brandon: They were. Very first. Yes. It was actually your idea. I mean your idea. You came to us and you’re like, “Hey I wrote some books. Would you guys like to publish them?” “We’re like I don’t know is that I thing? Can we publish books?” It started the.

J: I think we have to give Josh some credit there.

Brandon: Oh okay okay Josh gets some credit too. Yes, I mean like that started the entire thing of what has become the largest you know like I don’t know most of the top real estate books now are BiggerPockets books including yours and now we got a second edition so tell us about that.

J: Wow I get credit for the whole BiggerPockets publishing empire. Yes so yes I wrote these books. The first edition of these books back, I started in 2011, wrote to 2012 so with the flipping book it was very focused on the way the market was back then. Everything we’ve been talking about back then things were different. It was very much a buyer’s market so as a house flipper you didn’t know need to know how to find properties. That was easy. You needed to know how to find buyers, how to market houses, how to stage houses, basically everything on the back end you needed to be a really good at because the hard part was selling and so the book was very much written from the perspective of somebody that was investing in that market. As we know over the last four or five years things have changed. It’s no longer a buyers market. It’s now very much a sellers market and the key is figuring out all the upfront pieces, the acquisition, the finance, all this staff that’s a lot harder now, the scaling. I took this as basically an opportunity to go back and revise the book to kind of focus on the other part of the market. The sellers market side of things and so basically focusing more on acquisition strategies and things like that. Also I’ll be honest I wrote the first book and I didn’t send it through a professional editor and so I think the biggest piece of negative feedback I’ve gotten over the last five years and the biggest thing that I was disappointed and was there was just a whole bunch of grammatical mistakes and things like that. I’ve kind of been embarrassed about that for five years so. I’m very glad we got the opportunity to rectify that and so very proud of the new addition. On the estimating side everybody knows the price is now are a whole lot different than prices were five- six- seven years ago so I literally reached out to it was about 50 investors across the country in all the big markets and I sent them a survey basically help me figure out what prices are in your markets so I can get a idea of the ranges for. I think I said it was 128 or something data points.

Brandon: Wow.

J: Gave me an idea of like ranges that other investors were seeing in other markets. That allowed me to basically update the estimating rehab costs book with accurate prices from around again it encompasses about 80% of the country. Yes, another 20% that are markets like Northern California and LA and New York and Boston that are going to be just whole worlds by themselves. The prices, the price ranges we have in the book now kind of encompass like today’s prices across about 80% of the country.

Brandon: That’s awesome. I’m super excited so that’s very very cool. Again the books are fantastic. I mean I read them the first time around and I’m super excited to be able to update them. New content, all that stuff and also there is a bonus book that you put together like an e-book called what every real estate investor needs to know about the economic cycle so if today’s podcast interests you at all. Is that more of that? Is that what’s in there?

J: Yes, absolutely. It talks all about the topics we’ve been talking about today, but it goes into a whole bunch more detail. It goes into a lot more history of the cycle and what affects the cycle and then jumps into if you’re a real estate investor today not just a house flipper, but any type of real estate investor today here’s what you should you be doing to make money and here’s what you should be doing to prepare.

Brandon: I love it. And one thing I don’t thing I don’t think we talked enough about it, but you know there’s a lot of flippers on this site, but there’s a lot more rental property owners around BiggerPockets. Like that’s little bit more of a popular topic it. A lot of people listening to the show are like well I don’t care about flipping. The truth is the best deals generally in today’s market are rehabs. Like these books actually help me a tremendous amount on my what I do with the BRRRR Strategy. I know David does it as well. Likely by nasty properties. We fix them up. We rehab1 them. Rent them out right. The exact same thing applies. I mean maybe one or two chapters in the flipping book, maybe not it doesn’t apply. Everything else applies perfectly, the ARV, the figuring out all the rules, the analyzing, dealing with contractors all of that stuff still applies to anybody who’s looking for a good deal in rental properties today as well. I know estimating is obvious.

J: Yes.

Brandon: It applies to everyone.

J: Yes.

Brandon: Cool, all right well everybody go BiggerPockets.com/FlippingBooks. BiggerPockets.com/FlippingBooks. No spaces just flipping books, plural. You can get it there and you can get either book individually or you can buy them as a package. I highly recommend one because it’s cheaper, but we have an ultimate package that includes both books in physical and digital form and the audio version and the bonus book and all of that’s like I don’t know I think it’s like $59 bucks or something like that so again. Yes.

J: A whole bunch of spreadsheets.

Brandon: Yes.

J: The checklists and documents, all basically everything I use to run my business.

Brandon: Yes, there you go so get the ultimate, the ultimate package. It’s totally worth it. I mean it’s one of those things that’s a hard not to see that in making you a thousand times a return on that so check it out. BiggerPockets.com/FlippingBooks. With that we have got to move over to the next segment of our show, which we call the Deal Deep Dive.

David: Deal Deep Dive.

J: Deal Deep Dive.

Brandon: All right so we all put off things that we know we need to do all the time right. I mean that’s like the story of my life. I mean we know we have to organize the garage or weed through our closet or something whatever, it gets in the way right? I know I need to send out direct mail letters. It gets in the way right? Funny how home security can actually be like that as well. I mean we all know it’s a good idea right. We have things and people we want to protect, but there’s always something that’s in the way or holding us back. Like maybe the idea of paying a middleman to you know handle the whole thing or scheduling some six hour installation window where you have to sit around. Who has time for that right? Well fellow procrastinators of home protection Simpli Safe Home Security has gotten rid of all those reasons for you not getting a home security right. Because they believe nothing should come between you and protecting your home. We’re talking no contracts, no markups, no complicated installations. It’s professional grade home security that’s engineered to do one thing quickly and brilliantly. That’s why I have it. I love it. So yes you could add this to your epic to do list or hey you could just get started right now right. Just go two simplisafe.com/pockets. There’s no time like the present. That’s Simpli Safe, SIMPLI, simplisafe.com/pockets.

All right let’s get to the deal deep dive. These are or this is the part of the show where we dive deep into one particular deal that the guest has done. Today we’re going to talk to J about I believe a multi family property that you bought I don’t know if we call it you flipped it, but you bought it. We could call it maybe flipped it. All right tell us about it.

J: Yes, yes absolutely.

Brandon: Yes first of all what was that property? Like what was it?

J: This was a 38 unit property in what we referred to as a tertiary market so small-market. It specifically it was Columbus, Georgia. I would call it a C- property when we bought it. Maybe even a D property when we bought it. Rents were in the 4 to 550 range, a number of section 8 or the equivalent of section 8 renters down there. People getting government assistance so 38 units we purchased this last November so just over a year ago, a year and a month or two ago.

Brandon: How did you find that? Before I get to the price I’m going to how did you find this deal?

J: Yes, this was great so I had two partners on this deal. One of them we had been looking at multiunit. We had been looking to buy a multiunit for like a year so he’s talking to people in some of the bigger markets we’re talking to people in Raleigh, North Carolina. We’re talking to people in Atlanta. I’m looking up here in Maryland and we’re realizing that the primary markets and the secondary markets just aren’t really going to work out for us.

Brandon: Sure.

J: He’s talking to somebody in Atlanta who said, “No, no you got to go to some of the smaller markets. I’m a big fan of Columbus Georgia. You should look down there.” Basically, he hops on the Internet and he types in apartments for sale, Columbus Georgia. The very first thing that pops up is an expired Loopnet listing from like four years ago, from four years before for this 38 unit deal and he was like, “Ah well, it’s expired. It’s been four years. I wonder if this guy still has it. Maybe we can put something together.” He calls the guy and the owner and the guys says, “Yes we sold that thing four years ago, but I just took it back in foreclosure. We did an owner financing.”

Brandon: Oh nice.

J: I just took, I took it back a month ago. I haven’t figured out what I want to do with it yet and so are you interested? I mean if you can save me from having to like do any work on it for whatever. Let’s talk and so I flew down there two days later and we went down to see the property. We negotiated a deal so essentially we found it by doing apartments for sale, Columbus, Georgia and that’s how we found this deal. Crazy.

Brandon: Yes, that’s awesome. I love that and that’s actually kind of a cool strategy. Again like to find properties that sold in that number of years ago and go that route. Go that route.

J: Yes.

David: Okay so how much did you pay for this deal?

J: We paid $609 for 38 units. You can do the math. It was about.

Brandon: Cool.

J: $17 or $18,000 per unit so it was.

Brandon: J didn’t trust you to do the math, David. You can do the math let me tell you what it is. That’s right he’s a cop.

J: I saw the smoke coming out of his ears.

Brandon: Yes yes.

David: He said you can do the math. Oh God David looks terrified. I need a generator and save him. Before he embarrasses himself on the air. Cops don’t do well.

J: Long story short. Well under 20 K a unit, which gives you an idea of the types of units it was. Although let me tell you something we met every tenant in the property and these were some of the nicest people that you could have imagine. Like if I had to imagine the type of tenant’s I’d want living in my properties whether they were A class or D class, these were the people. That’s kind of what sold for me. Like I was a little scared going in to buy a C- or a D class property.

Brandon: Yes.

J: Once we the renters we were really happy.

Brandon: That makes sense all right so how did you negotiate it? Any fun negotiation strategies in there?

J: Yes so this was interesting. We negotiated seller financing and so the seller was going to provide about $450,000. We were going to provide the other hundred and whatever this, $170,000. I mean you include closing costs and everything. Day before closing turns out that the seller was planning. He had a, he had bought it owner financing and he wanted to do a wrap with his.

Brandon: Yes.

J: Lender. His lender got wind of the deal and said, “No, I just want to be paid off. I’ve had this loan for like 20 years now. I just want to be paid off so seller financing went out the window. We scrambled. We found a bank that we had worked with in the area a number of times before and because of our relationship with the bank they basically said, “Yes we can get this done.” They got the deal done in two weeks so we had to extend closing a little bit, but basically they lent about the same that we were going to get the owner financing for so. We were out of pocket about the same amount.

Brandon: All right. Cool.

David: What did you end up doing with this property once you actually bought it?

J: Yes so management’s definitely the most difficult thing for these mid size properties. We’re not making enough money. In general these properties don’t make enough money that you can hire full-time managers to be on site.

Brandon: Sure.

J: And, but they’re making like they require more management than like single-families do obviously.

Brandon: Yes.

J: It’s always a tough problem. What we did was we reached out to a couple other apartment owners in this area that own very similar properties like somewhere in the 20 to 50 units and we said, “Hey we want to hire a manager. Do you want to do like a time share? Do you want to do a time split with a manager?

Brandon: Yes.

J: We ended up negotiating a deal with two other apartment owners where we hired this person who had a small team around him and basically we shared them.

Brandon: That’s cool.

J: We got him about a third of a time. They got them about a third of a time so we could afford them, but we also had somebody that was pretty much dedicated. It was kind of the best of both worlds.

Brandon: That’s awesome.

J: Oh and so you asked what we’re going to do with the property? Basically we decided that we were going to instead of putting a ton of cash into it, we were just going to be let the cash flow because it was mostly. It was about 90% occupied at the time and we were going to do some cleaning house. We were going to evict a bunch of tenants that weren’t paying, but we were basically going to use the cash flow from the property and just put it in back into the property to renovate it over a year or two.

Brandon: Okay.

J: We’re generating about 12 K a month of that I think about 6K was profit and so we were rolling 6K a month in and so doing some longer-term stuff like some cap X stuff like rubes and siding as well as fixing up the units and taking care of the tenants, all the maintenance issues that had collected over the previous couple years.

Brandon: All right so J what was the outcome of this property? Like what happened with it? Where are you at today with it?

J: Yes so our goal was to hold it long term, but it turns out that one of my partners decided that he wanted out of real estate, which was kind of crazy because he was. I’ve been working with these guys for 10 years, but he decided he wanted out of real estate and was looking to sell off his holdings. He asked the other two partners, me and the other guy if we wanted to buy it from him and basically we said “We’d consider that, but let’s see if we can put it back on the market and sell it for a premium because we bought it at like 12 cap.” We thought that it was probably worth about a 10 cap and we had raised income a little bit so we put it back on the market. Ultimately we couldn’t get a good offer because there was only about a year her less than a year’s worth of financials in the property. We bought the property without any financials because it was a foreclosure.

Brandon: Sure.

J: Lenders just didn’t want to lend on it without financials. We got loans because we had a good relationship with the bank, but none of our buyers could get a loan so ultimately we had a buyer come to us and say, “Hey, I’ll give you your price.” It was around $780, which was a nice profit for us. He said, but I need seller financing for two years so that I can build up some financials to get a loan. Ultimately what my partner and I did, the way we structured it was we said, “Okay we’ll give you seller financing on about the same that we had our bank loan on.” We provide seller financing. I turned around and we charged them I think it was like 8% for two years. I turned around and basically sold my half of the note to a friend of mine who I knew was looking for some cash flow, who had extra cash and basically I turned around and I sold him the cash flow so I sold him my half at the same 8%. Basically every month for the next two years I’m getting income in from the note that we originated. I’m handing it off to a friend of mine who I have a note with so I’m breaking even on the cash flow. I got all my cash out and now in two years I’ll basically get all the profit.

Brandon: That’s clever. All right.

J: Yes so I’m deferring my—I’m deferring the profit for two years, but I got all my cash back right away. It was a good deal for me.

Brandon: You know we.

David: Those are the tool belt. Right Brandon.

Brandon: That’s what it is right? The more tools you have.

J: Yes.

Brandon: In your mental toolbox, the more things you can put in there. That’s why I like, you know we published a book note investing, you know from Gary VanHorn.

J: Yes.

Brandon: Right. things like that.

J: Yes.

Brandon: Like they’re just good tools to have in your toolbox.

J: The crazy thing is Dave actually was the one that suggested it to me that I should be doing that. I actually considered doing this with the property when I was trying to figure out what to do. Yes, great book and Dave is a great guy.

Brandon: All right, all right last question then. Lessons learned.

J: Lessons learned. I think the biggest lesson on this one is make sure you go into deals when you go into deals with partners and I’m always skeptical of partners, but just make sure everybody is on the same page. In this case we pretty much did, but it was kind of a curveball when eight months after we bought this property our partner said, “Hey I’m looking to get out.” I’m not sure if we could have foreseen it, but it was just a really good reminder that anytime you’re going to work with partners just to have these tough conversations like what happens if and what are your plan? Long-term plans and things like that. For me the biggest learning besides just it was our first multifamily so there was a ton of learning there, but the biggest take away for me is just be careful with those partnerships.

Brandon: All right. We are headed to the Fire Round.

It’s time for the Fire Round.

David: All right next up is today’s Fire Round. Now these questions come directly out of the BiggerPockets forms asked by you, the members. J we are going to fire them at you and you’re going to answer. Okay.

Brandon: Well done.

David: Okay, first question. I’ve been working to find oh this comes from Jackson Howell in Georgia by the way. I’ve been working to find to make my first deal happen. With the number still working, but tighter are you willing to pay a higher price to make the deal happen?

J: Jackson, hey how is it going so that’s a good question and I would say that these days again five years ago my answer probably would’ve been different. I would’ve said, “Yes if your numbers are tight most likely the market’s going to kind of help you out over the next few months and you’ll probably sell it for more than you were planning to.” These days I’d say, “Don’t do a tight deal. Better to do no deal than do a deal that’s really tighter, a deal that’s going to put you at risk.” You don’t want that first deal to go south and then you never do your second so I would say as painful as it is to hear go look for a better deal.

Brandon: All right good answer. Next question, this one comes from Ricky Wiley, he recently had a nightmare experience with the general contractors and he asks what are the top things to look for when choosing a dedicated reliable contractor?

J: Yes, if I knew the answer to that question my life would be a whole lot easier. If you’re looking so here are some things to look for. One get references and don’t just call the references. Don’t just email the references. Say to the references, “Hey can I come look at the job they did on your property?” Cause one you have the risk of yes he’s just giving you the name of his best friend who’s going to tell you he was a client, but really wasn’t. Two if you could actually see the work that they did, you can get idea of like their quality. You can get idea of the scope of the job. Is it the same scope that you’re looking to do on yours and also when you’re face to face with that reference you can ask the tough questions. You can ask things like so did he show up on time and was he on schedule and was he on budget? These are things that if you’re doing it over the phone people can lie to you over the phone. You may never know. People are going to be less likely to lie to you in person and it’s a lot easier to tell if somebody’s lying to you or kind of hedging when you’re in person. These days when it comes to especially for big jobs I have no qualms basically saying, “Give me some of your references.” Calling those references and saying, “Hey can I bring you a coffee and let’s meet at the property and talk about it there.” Two I always like to get my references from other investors so don’t just call somebody off of Craigslist or some other social media site. Find another investor that recommends this person and then three the best way I found to get contractors and I’ve been saying this for 10 years is good contractors hang around with other good contractors. If you have a great contractor that you’ve worked with he’s not going to recommend somebody who isn’t going to make him look good. I’ve never had a good contractor recommend a bad contractor to me. Generally if a contractor is going to recommend something somebody it’s just the opposite. It’s like I’ll give you name, but I can’t vouch for the person even if he loves the person knows he’s great. They’re always going to hedge because good contractors don’t want their reputation to be hurt by somebody they recommend.

David: Yes.

J: The best way to find contractors is find one good one and ask for  references. They’re going to be good. Ask them for references and just build your network like that.

David: David always says rock stars know rock stars, RKR.

J: Absolutely. Yes.

David: That’s RKR.

Brandon: There you go.

J: Okay I need to not be so verbose.

David: Good principle, I love it. Okay last question. When it comes to rehabbing what are some ways to save money? I’m thinking along the terms of using less thick countertops, smaller trim in the bedrooms, not painting the garage. Cheaper cabinets. Lower in vanity, stuff like that. Where are the areas where you can make cuts?

J: Yes so funny I think I answered this question on the forums.

Brandon: Oh funny.

J: Here’s the thing. There is a direct relationship with how much you spend on the rehab and the resale value, the ARV and so you can cut anything you want. You can use thinner countertops. You can use all white paint instead of using multitoned paint. You can use cheap doors and cheap light fixtures. You can not replace the stained carpet, you can do whatever you want. You have to factor in the fact that that’s going to impact the ARV. There’s nothing you can do. There are no shortcuts you can take in the rehab at least ethically where it’s not going to impact the ARV. Ultimately what I tell people is run different scenarios. Run a scenario where you use cheaper countertops and you use cheaper flooring and you use cheaper paint and this and that. Model out what your profit would be with that ARV. Then figure out the ARV would be if you used marble countertops and nice hardwoods and whatever. Then model that out, model that scenario out with that ARV and then model out 10 more scenarios where you add square footage or where you tear the whole thing down. You can run lots of different scenarios, but just keep in mind whatever work you do is ultimately going to impact the ARV so just do the model. Yes, if it turns out that you can make more money by using thinner countertops great. Just don’t expect that you’re going to sell it for the same price.

Brandon: Yes, that makes sense.

David: I would add that if you’re inexperienced and you don’t know how to tell if it’s going to affect the ARV, you don’t need to know. Ask someone who would know.

Brandon: Yes.

David: Ask the agent who’s going to be selling it. Ask another investor who flips a lot of houses. Ask someone experienced whether it and go by their advice. You don’t need to go try to figure all this out and stretch yourself out.

Brandon: Yes, find the closest house that’s on the market that’s a flip and go walk through it and see what they did.

Brandon: All right and just real quick if people want like J suggested running multiple scenarios, which I think is a fantastic idea. Just to throw this out there, if you are a BiggerPockets Pro member and you’re using the BiggerPockets calculators that we have, the flipping calculator rental, BRRRR, wholesaling, whatever you can actually. Not many people know this, but you can duplicate a report so you can run the report one time and then you can actually make a cut. It’s called make a copy. You just like click on it. I think it’s more actions or something like that and you make a copy of it. Now you have two and you can relabel that one you know version 2 or  hi-end, low-end. You can make as many copies as you want. It keeps them all and then you can adjust them separately so you don’t have to re-run the numbers entirely if you’re using the BiggerPockets calculator so just a little quick tip for you there. With that I want to shift and head over to last segment of today’s show, the world famous.

Famous Four.

All right this is a part of the show where we ask you the same four questions that we ask every guest every week. Number 1, J what’s your current I say besides your own book, which I’m sure you love. Besides your own book you have a favorite real estate book right now?

J: Besides you guy’s books?

Brandon: Will say besides your book. You can still say it’s my book, but. I’m just kidding.

J: Okay. Did you ask? I’m sorry did you ask?

Brandon: Yes.

J: Real estate book or book?

Brandon: Will go real estate book first then we’ll go business book.

J: Yes, absolutely. Well real estate is business. I don’t know how you do it.

Brandon: That’s you. No one has ever called me out on that. We’re going to go, we’re going specific first. What’s your favorite real estate business book followed by nonreal estate business book?

J: Yes so these days it’s funny. I’m always kind of shifting like what I’m trying to learn. I like to learn about all different things and last few months I’ve been really focused on learning everything I can about notes. I’ve been really focused on note investing so I’ve been.

Brandon: Nice.

J: You know one is it backwards here. If it’s backwards.

Brandon: No it’s right. It’s right.

J: Oh no they didn’t have built in. Yes that’s. Dave VanHorn’s book is fantastic.

Brandon: What’s it called? Real estate for those who can’t see the video, real estate note investing.

J: Oh that’s.

Brandon: There you go.

J: Complicated title.

Brandon: Yes.

J: They really should have called it the note book.

Brandon: I know we talked about a lot about that. We actually went back and forth 100 times. Should we call it the note book because it would be funny.

J: Yes. Yes. Then as a math guy and this book is not well written, but it’s a classic for anybody that’s looking to learn about notes and the math behind it or whatever. Invest in debt by Jim Napier.

Brandon: Cool.

J: Napier, Napier so those are the two that kind of reading simultaneously going back and forth.

Brandon: Oh you’re one of them too. I’m always reading multiple books at one time.

J: Yes.

David: He is too. Brandon you can’t even keep up with him because he’s always like, “Oh I’m reading the cool book in its one of 20.” It’s like he’s got multiple personalities and they all have their own book that they want to read. He’s got to feed them all.

Brandon: There you go.

J: That’s the way I am as well.

David: Okay what is your favorite general business book?

J: My favorite general business book, these days it’s funny. I’m not a huge Tim Ferris guy. He’s okay, but he’s got a book called. He is. Yes. He’s okay.

Brandon: Yes.

J: He’s got a book called tribal mentors that I’m really loving. It’s one of those books that literally so for anybody that doesn’t know he interviews some awesome people and asks some awesome questions about these people and this is one of those books that you can just open up, turn to a page and just be inspired. Just pick a random page and start reading and your going to walk away 10 minutes later more inspired than you were 10 minutes earlier. He asks a lot of these people like what books do you recommend and what tips do you have for living a better life and doing better in your business. I’ve walked away with some awesome tips. Half the books I am reading right now are based on recommendations from tribal mentors so I’m sure somebody’s mentioned that book before, but I’m enjoying it.

Brandon: I’m actually not sure. If anybody has ever recommended it, but go ahead David.

David: Well I was going to say you know that you’re already successful when you’re listening to Tim Ferris because you have four hours of downtime to spend with one. Podcast of Tim waxing on and on and on about things that you need to know so.

J: Yes.

David: I’m actually to live the what is it called? The tribal mentors book is probably like 9,000 pages.

J: It is really big.

David: Yes. exactly okay. What are some of your hobbies?

J: Some of my hobbies so these days I’m focusing a lot of time. This is kind of an investing hobby, but I’ve started buying race horses so the last year or so I bought 10 racehorses and I’m really getting into the investing side of racing and I love the horses. I spent a lot of time at the barn actually visiting my little guys and girls.

Brandon: That’s awesome.

J: Yes that’s probably been my biggest kind of side hobby for the last year or so has been racing and resources.

David: We have a book coming out in the future for how to invest in.

Brandon: The book on.

David: Rents.

Brandon: The BRRRR, book on thoroughbreds.

J: I won’t write a book unless I think I can do it better that anyone else and I don’t think I can I’ll ever be able to do that better than what’s already out there.

Brandon: That’s funny. All right the final question of the day. What do you think sets apart successful real estate investors from those who give up, fail I never got started.

J: There are so many things, but I would just say taking action, doing that first deal and I know everybody probably says that, but let me throw something out in I probably threw this out there on my 2013 podcast, but I really, I need to drive this home for anybody that’s listening but hasn’t done and is like thinking about giving up are you getting discouraged. I have yet to meet or it’s probably an exaggeration, but I very very very rarely meet anyone in this business that has done one deal. I meet tons of people that have never done a deal. People that have given up before they’ve done a deal. Then I meet tons of people who have done lots of deals and what you’ll find in this business is if you can get that first deal you’re not going to stop. You’re going to get the second, You’re going to get the third. You’re going to get the tenth because the first deal is infinitely harder than all the rest so my biggest piece of advice to anybody out there that hasn’t done a deal and that’s getting discouraged keep going because once you get that first one it’s going to snowball and you won’t do just one deal. Get that one and you’ll do a 100. Yes.

Brandon: Yes, I love that. I love that. We talk a lot about that. There’s a thing I call the stack right and the stack basically means.

J: Yes.

Brandon: If you just buy a first deal and then later on you’ll understand you have knowledge, experience, you can then buy maybe two deals and then you maybe go to four deals and then eight, 16, 32.

J: Yes, yes.

Brandon: Like yes people like it’s a lot faster than people imagine and a lot not I’ll call it easier, but more simple than people imagine to acquire a number of flips or a number of rentals because you just you, you know you’re getting a little bit better every time.

J: Basically, the summary of this entire podcast is I threw out an idea over five minutes and you guys give me the word or the phrase or the acronym that.

Brandon: There you go.

J: Means exact same thing.

David: It’s you got to study geometric progression versus linear progression. Real estate.

J: There you go.

David: Is not linear progression. You feel like you’re getting nowhere and then the next thing you know you’re going so fast you can’t even keep up with it.

J: Absolutely.

Brandon: Yes.

David: Okay. Well J this has been fantastic. The last question for those of us that are fascinated with you as where can we find out more about you?

J: You can find out more about me on BiggerPockets.com first of all.

Brandon: Woohoo.

J: I think I currently have this distinction of being the most post of anybody on BiggerPockets so.

Brandon: Yes.

J: J Scott on BiggerPockets. If you want to check me out on Facebook, we’ve got a great group of people that talk about real estate and the economy on Facebook. My handle is J Scott investor and my website is 123Flip and if anybody ever wants to send me an email, the letter [email protected]

Brandon: All right good deal. Well J this has been fantastic. Thank you so much. We’re going to take this show out right now and just I guess We’ll take it out nice and easy. This has been fantastic. I don’t want play with the point because it’s just so good. Thank you for joining us today. I’m going to go take care of my dog who won’t stop barking by my feet and you know we’ll see you around. Thank you J.

J: Thanks guys.

Brandon: Thank you David.

David: Thanks for sharing your wisdom. Check out the new book. It’s going to be very very good. You want the revised addition of what J has done, learn from the master. This is David Green for Brandon the buying Hawaiian Turner, signing off.

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In This Episode We Cover:

  • J. Scott’s story on how he got into flipping houses
  • How his business evolved over the past 10 years
  • Market cycles and market indicators to look for
  • Why unemployment is an indicator
  • The “yield curve”
  • The Buffet indicator
  • His 6 rules for investing in this market:
    1. Be certain of your numbers
    2. Stay away from long rehabs
    3. Have a backup strategy
    4. Avoid thin deals
    5. Keep clear of leverage at all cost
    6. Stay away from the high end vacation rentals
  • 6 ways to prepare for any market:
    1. Hoard cash
    2. Open as many credit lines as possible
    3. Build credit
    4. Figure the “worst case drop”
    5. Restructure short-term debt
    6. Don’t chase your losses
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Fire Round Questions

Tweetable Topics:

  • “Markets move in cycles.” (Tweet this!)
  • “Any time you have more money than you have deals, that’s an indication that the market is super hot.” (Tweet this!)
  • “When businesses pay people more money, we have inflation.” (Tweet this!)
  • “Don’t borrow the money just because you can. Only borrow as much as you need to borrow.” (Tweet this!)
  • “The next best thing to cash is a credit line.” (Tweet this!)
  • “Having longer-term debt will help you weather any big storm.” (Tweet this!)

Connect with J Scott

About Author

Thanks for checking out the BiggerPockets Real Estate Investing & Wealth Building Podcast. Hosts Joshua Dorkin & Brandon Turner strive to bring top-notch educational content and interviews to our listeners — without the non-stop pitch prevalent around the industry.

With over 180,000 listeners per show, the BiggerPockets Podcast has become the biggest real estate podcast in the world. But don’t take our word for it. We’re the top-rated and reviewed real estate show on iTunes — check it out, read the reviews on iTunes, and get busy listening and learning!

10 Comments

    • Chuck Masters

      What Mathew Said. Brandon, around the 5:15 mark in the podcast you stated an Ultimate package was available for purchase that included physical, digital, audio and bonus material. I went to the website to buy the ultimate package and saw the physical thinking that this was it. Now I’m being told by BP Support that the digital is not included. But you said they were.

      How is BP going to make this right?

      GREAT Podcast guys. I have J’s first books and I’ve heard J speak at local REIA’s here in Baltimore. Can’t wait to read the updated versions.

  1. Matt Hurley

    After hearing this podcast, starting to re-think my approach. I’m currently looking for my first house, was originally going for the duplex house hack then shoot for a cheaper BRRRR right after. Anybody have any advice regarding this approach with the potential downturn at our heels? Do I need to try and get a quick flip in before it hits so I have some extra cash ready to buy another property (or 8) after the market tanks a bit?

  2. Dave G.

    Great podcast with a lot of content I can relate with. As an old-timer that has seen multiple market cycles, The 4% BP podcast with Michael Kitces talks a lot about market cycles too. I am watching the market like a hawk these days. Haven’t bought anything in more than a year, but not quite selling yet either.

    Our local investment association AZREIA in Phoenix puts out an incredible slidedeck of actionable metrics every month to monitor market conditions. All investors should be watching the key metrics for their local & state markets as well as watching the US & world macroeconomic conditions (as J Scott points out).

  3. Jessica Franta

    My husband and I really appreciated and enjoyed this podcast! While we never want anyone to suffer during an economic downturn, Mr. Scott presented a great outline for making the best of a (potentially), bad situation. His comments made us analyze our strategy. Thank you!

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