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

Episode Date: April 29, 2019

J Scott is a successful real estate investor (to say the least). But he’s also a student of the markets—and his studies have shown him that we are teetering near the top of this current real estate cycle. In this week’s episode, J shares three reasons why he believes we’re at or near the peak based on past market cycles, and he details seven things investors should be doing to prepare for a softening market. His number one piece of advice? Educate yourself! J brings his A-game in this episode, just like he does with every other podcast he's featured on. And make sure to stick around until the very end of the show for a special BiggerPockets announcement you'll definitely want to hear! In This Episode We Cover: Reasons J believes a market crash is coming On the 33 case studies of what economic cycles look like Talking about the last 2 recessions J Scott's analogy with economy to the seasons Phases of the economic cycle and indicators he knows the market is on the peak What a yield curve and GDP is The reason why the price drops in the market How can someone who is considering jumping into the real estate market invest with confidence What might happen in the next recession of the market How does a newbie investor get affected by the potential of being on peak phase of the economic cycle What should people be doing now in preparation for the next phase The importance of building credit and paying your debt on time His recommendations for someone who is investing right now The biggest mistake he sees people make And SO much more! Links from the Show BiggerPockets Real Estate Podcast BiggerPockets Bookstore J Scott's Books on Amazon Using the Power of Goal-Setting to Fundamentally Alter Your Financial Path with J Scott (episode) BiggerPockets Forums Mint Credit Karma Annual Credit Report TransUnion Equifax Experian Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 70, where we interview Jay Scott. But at some point, we're going to hit that winter phase, that recession phase, where the whole country just starts to trend down. But none of us can really predict when that's going to happen. They can't predict where it's going to hit first, what markets it's going to affect first. But it's going to happen at some point in the next week or month or year. It's time for a new American dream, one that doesn't involve working in a cubicle for 40 years, barely scraping by. whether you're looking to get your financial house in order, invest the money you already have, or discover new paths for wealth creation, you're in the right place. This show is for anyone who has money or wants more.

This is the Bigger Pockets Money Podcast. As it going, everybody, I'm Scott Trenched. I'm here with my co-host, Ms. Mindy Jensen. How are you doing today, Mindy? Scott, I am doing fantastic. It's finally getting warm outside in Colorado and the sun is shining like always. And it's just a beautiful day. I had a great weekend.

How about two? How are you doing? I am doing great. I used my travel rewards for my first vacation. Just a little quick trip to Portland, Oregon. We thought we'd never get there for another like a work trip or anything like that. Had a wonderful weekend and missed all the rain. Nice. Nice. Well, that is always good when you can go to Portland and not hit the rain. That's right. Well, today we have Jay Scott, who is a master of everything, I think business, finance, and real estate related. He's kind of just smart about everything.

Yeah, he's got experience in public businesses. I mean, we heard his story a couple of episodes ago here on the Bigger Pockets Money podcast with regards to money. But today, we have him really talking about, you know, market cycles and how to prepare, you know, really specifically a real estate portfolio, but with some definitely overlap into other types of portfolios for an oncoming recession. So we're going to talk about, you know, how to define market cycles. There's no surprise.

I think we can give this one away in the insurance. here that we think that we're entering a peak market phase cycle and that a recession is looming on the horizon in some capacity and another. That's just how the economic cycles go. And just basically how to make that a good thing, how to make that a win for you in your portfolio and prepare intelligently for it. Right. It's just because you're entering the peak phase or we're in the peak phase, obviously you can't time the market. You know, you can only look backwards and see where you used to be. But, you know, we don't know where we are in the market cycle. Jay gives us several tips for how to kind of view a market and how to sort of get clues from what's going on

around you as to what portion of the cycle you are in. But it's not just invest in the lows. It's not just invest in the highs. You can still make smart decisions right now through investing. And near the end of the show, he says he's doing even more investing now than he did last year. That's right. So it's certainly not a, you have to cease all activity. And, you know, I think he uses the phrase bunker down. But it's definitely like, hey, here's some common sense. I hope that as we presented to you in the show, you being a listener, that you'll realize that, hey, these are a lot of common sense concepts and ideas

that you can just begin applying that really won't have a negative impact on your overall investing structure, but that could prepare you should a recession be coming in the next couple of months, as Jay believes, well, is likely the next six to 15 months, I think, was his range. Yeah. And even if you're doing all of the things that Jay suggests, there's no downside to doing these. He doesn't say stop investing in real estate. He says, start making more conservative estimates. Estimate a little bit higher costs. Estimate a little bit lower occupancy. Estimate a little bit less rent. And if you're wrong, if you, $900 for rent, but you get $1,000, what's the downside? Yay, you're doing better.

So, you know, being conservative in your numbers is always a smart choice, even in the middle of the growth phase of a real estate cycle. And if you're a listener who's thinking about getting started investing, buying that first house hack or first investment property or otherwise making that first foray into the world of investing after having maybe saved up, got your savings rate up and start to stockpile some cash, we'll also cover some tips and strategies for you as well. Right. This isn't just for people who are currently in the market. This episode is really for anybody who is considering buying a rental property, buying a real estate investment of any kind, really, in the next 18 months, two years. Yeah, I think so. 15 years. Yeah. I mean,

it's just, Jay has been investing in real estate forever and he's so masterful in his look at just the entire market. Hey, here's how you can prepare yourself to be at the best, possible advantage to put yourself in the best possible place to not lose money. He's not guaranteeing you're not going to lose money, but here are really great tips to make smart investment choices. Yep. Love it. Well, should we bring them in? Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going,

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At this point, I've logged over 229 audio book completions on Audible alone, and I still regularly re-listen to the highest impact titles. Lately, I've been listening to Bigger, Leen or Stronger for Fitness, the Anxious Generation for Parenting Perspective, and several Arthur Brooks' audiobooks that have been excellent for mental well-being. What makes Audible so powerful is its breadth. Beyond audiobooks, you also get Audible Originals, podcasts, and a massive back catalog across business, health, parenting, and more.

All accessible in one app. If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP Money. Jay Scott, welcome to the Bigger Pockets Money podcast. Or I'm sorry, welcome back to the Bigger Pockets Money podcast. How are you today?

Great. Great to be here. Thanks, Mindy. How's you going, Scott? Life is good. Happy to have you back. Excellent. Jay is our first repeat guest.

our first repeat customers. So thank you so much for coming back. To refresh our listeners' memories, Jay has been a guest several times on the Bigger Pockets Real Estate podcast. He's written four books for us, Jay, is that correct, for Bigger Pockets Publishing. And he was featured on episode 43 of this very BiggerPockets Money Podcast, which can be found at biggerpockets.com slash money show for three. Today, we're going to be talking about real estate investing because that's kind of of Jay's specialty. We've already heard his money story, which was great. It was really interesting to hear that because I've heard your real estate investing story before, but I hadn't heard your money story, and that was a lot of fun to hear. But today we're going to talk about real estate investing,

and specifically, should you start now? The market is really hot, and it has been for a really long time. And we're starting to see some markets that are kind of softening up a little bit, which is leading to speculation that maybe there's a crash coming. And, you know, can you time it? Do you know, is there a crash coming, Jay? Nobody knows if there's a crash coming. And I'm certainly smart enough. I'm certainly not smart enough to predict if and when a crash might come. But there are things that we do know. So the nice thing about our economy is in this country is that we have a couple hundred years of data and experience. So we know what's happened for the last 200 years. We've kept good records. And there's a lot of what we call cycles. I mean, everybody's familiar with cycles.

There are a lot of cycles when it comes to the economy. And if you look back a couple hundred years, you can see that there are certain things that happen over and over and over again. And it shouldn't surprise people that our economy works in a cyclical matter. It goes up, it goes down. And actually, over the last 160 or so years, we've seen 33 cycles, economic cycles, where the market's gone up, it's peaked, it's come down, and then it's gone back up. And so we have about 33, essentially 33 case studies of what these cycles look like. So if we go back over those last 33 cycles, we start to see some patterns and some things emerge. And based on those patterns, based on what's happened in the past, we can somewhat predict what's going to happen in the future.

Nobody has a crystal ball. The next one could be much bigger than what we've seen in the past. It could be smaller than the typical recession or downturn. But we do know that given the cyclical nature of the economy, given the patterns that we've seen over the last 160 years, we do know that at some point, probably in the near future, we're going to see a downturn in this cycle. I like that you said you couldn't predict it because I see all these people,

especially in the bigger pockets forums. Ooh, is there a crash coming? Yes, it's going to happen on March 14th. You can't predict it. And even when it does, it's not like it's going and then it hits a brick wall. It starts to slow down first and then it slows down more and then it slows down more. And what's that quote, don't wait to buy real estate, buy real estate and wait? Absolutely.

I love that quote. That's one of my favorites. I like to tell people, if somebody says they know what's going to happen and when, when it comes to the economy, one of two things is true. Either they don't know enough or they're trying to sell you something. wait for the pitch. See what they're trying to sell you. The best economists out there will tell you that while there's a lot of great data, trying to time the economy to a week or a month or even a few months, it's really, really difficult. I mean, we look back at 2001 and 2008. Those were both recessions. Those are the last two recessions. But they both occurred very differently. 2001, we kind of got to the top of the

market around 2001 and we bumped along the top for about six or eight months before we kind of slowly trended down. Then we had 2008 where we kind of rushed to the top and we're at the top of the market for a month or two or three and then everything came crashing down overnight. And so it was a really, it was a very different feel between those two recessions. And if you go back again through the last 33 cycles, every recession feels different. Every recession is triggered by something different. there are a lot of commonalities, but there are also a lot of very different things. I mean, 2008 was a real estate crash. 2001 was a tech bubble. I mean, we all remember the dot-com boom if we were at least teenagers back then. Go back further in late 80s, we had the savings and loan crises. And you go back to the 70s, and it was oil that was bubbling.

And so every recession kind of has its own things that precipitate it, but at the same time, there are a lot of commonalities and a lot of things we see that are the same from recession to recession to recession. So what are some of those commonalities for those who have not had a chance to read up on the subject yet? Sure. Well, let me start with something that I think a lot of people get confused about. I like to use the analogy with the economy to the seasons. And we can think of kind of, you have your economy kind of going up, we hit a peak, and we kind of go down, we hit a trough, and then we go up again. And I like to think of that going up phase. Often economists call it the expansion phase of the economy. That's kind of like summer. Now, you wake up one morning, it's summertime, and you're not going to check the weather to know whether you should be wearing

shorts or a sweater. We know it's summertime, every day is going to be pretty nice. We're going to wear shorts most days. We're going to wear short-sleeved shirts most days. It doesn't matter where you are in the country, whether you're in Seattle or Tampa. It's going to be a nice day. Now, certainly you're going to have some rain one day. It might be windy another day. It's the same way in the expansion of the economy. Every day is kind of the same. Things are getting better. Unemployments going down.

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

and get to this recession phase. And during your recession, that's kind of like the winter. where, again, when you wake up in the morning, you don't need to check the weather. You know it's going to be cold out. You know you're probably going to be wearing long pants and a jacket. And again, it doesn't matter where you are in the country. In general, things are going to be a lot colder than they were in the summer. So the expansion is kind of like the summer, the recession is kind of like the winter.

And then we have the top and the bottom. And so the peak of the market and the trough of the market. And those are where the interesting things happen. And that's kind of like the fall and the spring. Now, we all know we wake up in the fall, if we wake up in October, September, October, we have to check the weather because we don't know, is it going to be snowing or is it going to be 75 and sunny? And if you're in Buffalo, you could get a foot of snow. If you're in San Diego, you can have a beautiful day that you're going out to the beach.

And that's the way the top and bottoms of the market are, where every day is going to be a little bit different. You might get unemployment numbers next month and they're really good. They're still really good. But then the month after, unemployment jumps up. But then the next month, it drops down again. And so we start to see weird things happening. And we can't really predict what's going to happen day to day or month to month. And we also can't predict what's going to happen in every market.

We're going to have some markets that are going to remain strong through the top of the economy. We're going to have some markets that start to weaken and get really soft during the top of the economy. If I'm talking to somebody, I live outside of D.C. right now. If I talk to somebody in Seattle, they're going to tell me they're seeing a softening house. market. Me, on the other hand, our markets continuing to thrive. We're seeing lower days on market. Things are selling for higher prices. So there's this disconnect at the top of the market, both between what happens day to day and what happens in different markets. And so right now, we're at the top of the market. A lot of economists, I can't guarantee that, but I think most economists agree, most

Americans who are paying attention kind of agree that we're near a peak of the market. So what that means is every day is going to be a little bit different. We might get good economic news tomorrow, bad news next week, good news again next month. And we're going to bounce along the top there where things are going from good to bad and bad to good maybe for the next week, maybe for the next month, maybe for the next year. But at some point, we're going to hit that winter phase, that recession phase where the whole country just starts to trend down. But none of us can really predict when that's going to happen. They can't predict where it's going to hit first, what markets that's going to affect first. But it's going to happen at some point in the next week or month or year.

So what are some of those indicators that are leading you to say that, or a lot of experts to say that we're at the peak of phase right now? Yep. So there are, typically I like to look at three things. So first, there's the timing factor. And I talked about the fact that we've had 33 of these cycles over the last 160 years. If you look at those cycles, there's an average amount of time from like peak of the market to the next peak of the market to the next peak of the market. Typically speaking, that's somewhere in the five and a half to eight year range. So if you go back 160 years, on average, we're at about six, six and a half years for each cycle. So in general, when we hit that six years into a cycle, seven years into a cycle, economists start to think, okay, let's start thinking about looking at the data and seeing if things are

changing. Right now, we're 11 years into the cycle. This is the longest cycle in history. And we can talk about, if you want, what's causing the cycle to be a little bit different than past cycles. But the fact of the matter is, we're 11 years into a cycle that's typically about six or six and a half years long. So from a timing perspective, we're due for a downturn sometime in the near future. The second piece is observation. You look around and things just start to feel a little bit different. I mean, everybody remembers 2014, 15, 16, especially if you were a real estate investor where the markets were really hot. Every day the market was going up, you put something on the market and it sells in a day. You buy something in September for

one price you listed to resell in December and it's it's 20 or 30 or 50,000 higher these days and again not every market but these days in a lot of markets we're not seeing that anymore we're seeing houses that sit for a little bit longer prices that are stagnating in some areas like Seattle and San Francisco we're seeing price drops in the in the 20 to 25 percent range that's pretty significant so we're starting to see and feel things that are different consumer confidence numbers. So the government measures how confident consumers are in the economy. And over the last couple months, consumers are a little bit less confident than they've been the last few years.

Things like just day to day, how much are people willing to spend on things like new cars or on a mortgage or on clothes? And what we're finding is people are spending less money. So just from an observational standpoint, it just feels a little bit different now than it did three or four or five years ago when everybody was really excited about the hot economy. and people had no problem spending money. So the second piece is observation. The third piece is the economic data itself, so the actual data, the quantitative measures.

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

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

That's a healthy, what we call yield curve. Now, when investors start to get nervous, they start to sell certain types of bonds and they buy other types of bonds. And what we see is instead of that curve going from lower left to upper right, like we see in a healthy economy, we start to see that curve flatten out. And that curve flattening out is just an indication that investors are getting nervous, big investors, hedge funds, even other countries. So China buys a lot of our treasury bonds and Japan buys a lot of our treasury bonds. Russia buys a lot of our treasury bonds. And when they start getting nervous about what's going on in our economy or the global economy, they do things that make that curve of the

interest rate curve flatten out for bonds. So over the last few months, we've started to see that interest rate curve flatten out. And that's a predictor of tension in the market that some investors are starting to get nervous. And then eventually what we tend to see is what we call an inversion in that curve, where the really short-term bonds and really long-term bonds pay interest rates that are kind of up here. And then the middle expiration bonds pay interest rates that are kind of down here. So we see the shallow cup kind of form. And we call that an inversion. Historically, when that yield curve, when that curve of those interest rates inverts like that, that is the single best predictor of an upcoming recession. And typically speaking, you'll see an upcoming recession within about

six to 15 months after the inversion in that curve. We saw a real small inversion in that curve back in late December. And then just last week, we saw a major inversion in that curve. When I last week. We're recording this at the beginning of April. So probably a few weeks ago to those who are listening now, we saw a big inversion of that curve. So if you look at that, that's one indicator to a lot of economists and a lot of people who follow the economy that we could be within six to 15 months of a recession. So that's one thing. And I'm sorry, I harped on that for so long, but that's a big one. And a lot of people talk about that. It's a really good predictor. Then we can look at things like unemployment. So unemployment

it tends to go down over a strong economy during the expansion. And then eventually we get to the point where what we call full employment, basically most people that are looking for a job have a job. And we kind of hit that about a year ago. That's around 4% unemployment. We got down to about 3.6% unemployment. What we typically see is after we hit that full employment number around 4%, within generally about a year, we start to see employment go up,

and that leads into a recession. number of reasons for that that I'm not going to go into, but unemployment hitting that full employment number of about 4% is a good indicator of an upcoming recession. GDP, gross domestic product, which is the total output of all the companies in this country. What we tend to see is GDP will go up and up and up, the economy gets strong, and then we'll start to see the output from the companies in this country drop. And so since last summer, last summer we saw a peak in GDP at 4%, which means the economy is growing at 4% every quarter. Well, in the third quarter, we saw growth of 3.2%. In the fourth quarter, we saw growth of 2.2%. So we're starting to see a slowdown in growth of the economy.

Now, whether that actually goes negative, when it goes negative for two straight quarters, we call that a recession. We haven't seen it go negative yet, so we're not ready to say, hey, we're in a recession, but we're seeing that trend down, which means in the next quarter or two quarters or four quarters, we could see a recession. You add that on to a whole bunch of other indicators, things like auto sales are down when people start to get less confident about the economy. They don't make major purchases like houses and cars. Housing market is slowed down across the country. So we're seeing a lot of these economic indicators that are basically telling us that we're slowing down. We're probably around the peak of the market. And again, at some point in the

future, whether it's a week, a month, a year, at some point in probably the near future, we're going to start to see that trend. Okay, well, I can't really argue with the timing. And I don't want to argue with you. Oh, no, please argue with. The yield curve. You're wrong. No, the yield curve was one of the explanations I have heard of the yield curve. So thank you for that because I've seen that term around and, you know, I kind of understand it and now I understand it a whole lot more. I don't do a lot of bond investing or any bond investing. But that's, yeah, that's neither here nor there. I'm not not recommending them. I'm not recommending them. Whatever. Make your own decision. But the timing, yeah, we're at 11 years and that's huge for, I mean, that's three years more than

the highest peak of the regular five to eight year range. So that you can't argue with that. The observation, the thing's feeling different, the house is not selling instantly. I want to ask your opinion on this because in my market, there are like three ladies who list 97% of the houses. And I just saw a listing that popped up the other day. It came on the market under contract. which is interesting. That means that they had a pocket listing, then they automatically put it up

on the market anyway or maybe that was part of their marketing plan, whatever. But they already had a buyer when it went on the market. She listed this. I thought it was a 450 house, 500 if you really want to push. And she listed it at 672. Wow. Do you think that some of these price drops are just due to over-exuberant real estate agents trying to push the market or being super aggressive on pricing, or do you think that it is more a condition of the market? Yeah. So remember, when we get to where we think we're at the top of the market, we're going to see very different things in different markets. And again, what you just described in your market, I assume around Denver, is not uncommon to see here where I am in the

D.C. market. I mean, things are still really strong here. I went down to Florida over a winter break with my wife, and we were looking at some houses down there. And it felt a lot of like 2008 in certain parts of the Florida market where there was streets with like a dozen houses that were for sale and they weren't moving. Days on market were several weeks or months. And so there were certain segments of the market that were still strong, like the medium-price houses, but you get into the higher-end houses. And this is one thing we typically see towards the top of the market is that the higher-end houses, the houses that are well above medium price, those are the ones that tend to slow down first. So it's not uncommon.

to see slowdowns in places that have really high-priced markets like New York City, San Francisco, Seattle, maybe even Denver, at the higher end of the market. And so we're starting to see a lot of that now where we're just not seeing as many buyers. There certainly could be other things at play. Interest rates are up a little bit and there's not enough inventory and things like that. But you can't deny that there are fewer buyers at the higher end of the market right now. And that's just a function of people who are being more conservative. And yes, there are other things of play. And there's definitely when it comes to things like observation, you never know if what you're observing is true just on your street or your block or your city or whether it's true across the country.

You never know. But when you compare the observational data that a lot of people are getting right now with the actual quantitative data, the economic data, what we're seeing is it's not just one or two or three people. observation. There's really economic data that supports these observations that we're seeing in a lot of markets. And again, remember, it's when you're at the top of the market, it's like being in the fall. Somebody could walk outside in shorts and go to the beach, while somebody else at a different part of the country could walk outside and they're stepping in a foot of snow. So it sounds like you're on the beach there in Denver. I'm on the beach here in D.C., but I have friends in Florida and San Francisco and Seattle who are feeling like they're walking out in the

snow every day when it comes to the housing market. I was just in Florida. They are not feeling like they're in the snow right now. It's 150 out there. That is true. Okay, so how can someone who is considering jumping into the real estate market invest with confidence? Because clearly the sky is going to fall and everything is going to collapse. Okay.

I'm just, I'm baiting. Sure, of course. No. So maybe the sky is going to fall. I don't know. Again, I'm not going to try and predict it. but if you just look at the historical data, if you look at the last 33 cycles,

I think a lot of people are kind of locked into what we saw in 2008, and that's what they think about a recession now because that's what they, that's the people tend to remember the most recent thing that happened. But 2008 was an anomaly. We haven't seen anything like 2008 since the 1930s, the Great Depression. That was literally the worst recession that we've seen in 90 years. So 2008 isn't the same.

standard that we should be thinking about. I'm not saying 2008 won't happen again. Maybe it will. Maybe 1930s will happen again. Maybe worse than the 1930s will happen again. It's possible. And again, I'm not going to try and predict. But if you look at the data, which most likely to happen is not 2008. What's most likely to happen is what we saw in 2001 or what we saw in the late 80s, where we do get to a top and we do see a trend down and unemployment jumps to five or six percent across the country and days on market for houses jumps from three months to eight months, and we do see some suffering and people losing jobs and wages going down. That's likely to happen, but it's unlikely that we're going to see what happened in 2008 again,

just statistically speaking. It's unlikely that unemployment's going to drop to 12 or 15 percent. It's unlikely that days on market for houses are going to drop to a year and a half, and we're going to see as many foreclosures as we did, and people are going to be losing jobs, and people are going to be going bankrupt left and right, that hopefully was an anomaly. So when we talk about a recession, don't think 2008. If you remember back, think 2001.

If you don't remember 2001, think about a really toned down version of 2008. And when you think in those terms and when you look historically, it's really easy to support the fact that there's really never a bad time to be buying real estate. Now, if you knew for a fact that 2008 was coming again, the 1930s were coming again, I'd say don't buy. But again, that's unlikely. And if you look back at 2001 and the early 90s, the late 80s, the mid-70s, that was still a good time to buy real estate, assuming you were following certain rules and you were investing intelligently and you're being conservative, it's always a good time to buy real estate.

That's the nice thing about real estate. As long as you're being smart about it and as long as you're setting rules for yourself that kind of limit your risk, limit your worst case scenario, it generally is not a bad time to remind you. In your book, the recession-proof real estate investing, you know, there's a lot of really good tips in there for how a real estate investor should react and think about things at various times in the market cycle. So for example, there's a bunch of tips on here's exactly how to maybe start thinking about things if you do think that we're in the peak phase of preparing your business. I was wondering if we could go through an exercise. We put

ourselves in the shoes of someone who's new to real estate investing. Sure. Suppose that we're all new investors. We're all making a $50,000, $60,000 a year household income. We're saving up our first pile of money and we're thinking about maybe like a house hack, you know, as our first major investment. We don't really have that much much in there. How does that thought process get affected by the potential of being in the peak phase of the

market? So the first thing I'll say is whether you plan to buy real estate this year, or next year or the year after or whether you plan to wait a few months or a year or two, it's always a good time, regardless of what your plans are, to start learning. And so I tell people now, I have people come up to me and say, well, I'm just not comfortable investing in this market. I'm going to wait until the downturn hits and I'm going to do what everybody did after 2008 and buy up all the foreclosures really cheap.

And what I say to them is, great, if that's what you want to do, that's perfectly fine strategy, you may not find that what happened after 2008 happens after this one. But if that's what you want to do, fine. But don't wait until the equivalent of 2009 or 10 to start studying and being prepared. Now's a great time. If you know you're going to start buying in a year or two, now's a great time to basically spend the next year or two learning the business, learn the different types of investing, learn how to estimate rehab costs, learn how to estimate the value of a house or to comp a house, learn the different types of sales and the different marketing strategies, learn how direct mail works,

and learn how the MLS works, and learn how Banned It signs work. And jump on bigger pockets. This is what I tell people. Jump on bigger pockets. If you know you're not going to be investing for a year, that's awesome. You have a year to read through hundreds of thousands of threads on bigger pockets,

watch 300 real estate podcasts and 80 money podcasts and basically learn about real estate. estate investing so that when the day comes that you're ready to actually jump in, you're prepared. So let's pretend, even if you don't want to invest right now, it doesn't mean you shouldn't start preparing right now's the time. It's always the time, but now is a great time to start preparing. Next, I tell people, let's say you don't know if you want to invest. Well, now's a great opportunity to start preparing and start making offers. And it's possible that you won't find a good deal for a month or six months or a year. That's okay. Start making offers, start getting out there and trying real estate.

And if you don't get an offer accepted for six months or a year, great. In a year, when you start getting offers accepted, you have a year of experience of making offers and again, comping houses and estimating rehab costs. So there's no harm. There's no risk in making offers and seeing what happens. Now, maybe you'll get lucky and you'll get a great deal. And you can buy that first deal now at the top of the market. Maybe you'll find five great deals and you can buy five, buy five great deals now at the top of the market. But again, there's no risk in making offers. There's no risk in getting experience and getting practice doing all the things that you're eventually going to want to be doing a whole lot more of. Okay. So the two,

the big piece there is basically just get comfortable with investing and then do what you would do basically at any cycle, which is make an offer at the price that would make sense for you at that point. If it doesn't happen, it doesn't happen. If it does, it does. and you can just kind of apply the strategy across all investment cycles. Is that right? Absolutely. You shouldn't be changing. What's going to change is the number of your offers that get accepted potentially. Maybe you're going to be more conservative in the offers that you make. But essentially, as we as real estate investors are doing the same thing that we've always done, we're just going to get different results at this point in the cycle. That said,

in the book, I characterize four phases of the cycle. I talk about four different phases of the cycle. And in each phase of the cycle, I think of three things. I think of what are the strategies and tactics that are working in that phase of the cycle? Two, first is how to identify that you're in that phase of the cycle, because that's the most important thing. If you're doing the strategies and tactics for one phase of the cycle, but you're actually in a different phase, that's going to be a problem. So the first thing is identifying which phase of the cycle you're in right now. Two is identifying which strategies and tactics are most likely to do two things. one, grow your profits or ensure that you continue to make profits and two, decrease your risk.

Because ultimately that's the two things we want to do as real estate investors. We want to make money and we want to do it as little risk as possible. So again, the first thing is figure out what phase of the cycle you're in. Second thing is figure out the strategies and tactics to kind of optimize your business for that part of the cycle. And then the third thing, and this is the thing that I think a lot of people don't think about enough, is how do you prepare for the next phase of the cycle, whether it's a month out or a year out or two years out, what should you be doing now to prepare for the next phase of the cycle?

So if you're jumping into real estate investing now, there are certainly strategies and tactics that you can use to kind of optimize your real estate business, minimize your risk. But what I would tell people who are jumping in right now, the most important thing to do is, one, get educated like I talked about before, but two, do the things that you need to do to prepare for the next phase, and the next phase being the recession phase. And there are a number of things that anybody can do,

whether you're investing or not investing, there are a number of things you can do right now to prepare for the next phase of the cycle. I'm going to guess the next question is one of our mistakes. Wait, wait, wait, wait, this isn't your show. This is our example. I'm sorry, I'm sorry. Jay.

Yeah. What is the next phase of the cycle? So the next phase of the cycle is the recession phase. So, Jay, what should people be doing in this phase to prepare for the next phase? That is a great question. Oh, she really walked into that one. I am a professional here. Yes, you are.

So, yeah, so here's what I'm recommending to everybody that wants to be selling real estate or investing in real estate in the next phase of the cycle. The next phase being the recession phase. And again, I don't know if the recession's coming in a week, a month, and year. but here are the things you can be doing now to prepare for when it does come. The first thing I'd like to tell people is start hoarding cash. So everybody's heard the phrase cash is king. That is especially true during the recession phase of the cycle, whether you're investing in real estate or anything else.

The big reason for that is that when it comes to investing, a lot of times we are reliant on financing. We're reliant on other people lending us money. Most of us don't have enough cash to just buy all the deals we want to buy outright. We borrow money. During a recession, lending gets really tight. And I tell people who weren't investing back in 2008, 9, 10 about this, and they don't really get it. If you weren't investing back in 2008, 9, or 10, you don't get how tight lending becomes, how difficult it can become to get a loan. regular banks don't want to make loans. Portfolio banks or small banks that lend to investors, they don't want to make loans.

A lot of people rely on private money, so loans from family and friends and other professionals. People don't want to lend money to real estate investors during a recession. They're terrified of losing money. So they're putting their money in CDs, they're putting their money in savings accounts. And so the people that are, the private investors that are lending you money now, when the market turns, they're not going to be lending you money. hard money lenders start to go away and those that are left are charging 15, 16, 18% interest rates. So hard money becomes much more expensive.

So the best way to combat the tightening of lending moving into the next phase is to have as much cash available as possible. Okay, so I want to jump in here. I get this question a lot. Oh, I'm saving up for my home purchase. Where should I put my money? Oh, you should put it in the stock market. isn't really necessarily the best choice because as the housing market goes down and the economy goes down, so does the stock market. And so the $10,000 that you put in there is now $8,000 or $2,000 or

whatever it is. So where are you hoarding this cash? Yep. So first of all, I'm not telling people what to do with their money. I don't always, again, I don't have a crystal ball. I may have told people back in a year ago to take the money out of the stock market and put it someplace safer. And the stock market's gone from 22,000 to 26,000, and now they've lost money because they took my advice. So I'm not saying don't put your money in the stock market. But that said, during the peak phase, going into the recession phase, the stock market's going to be more volatile. That's actually one of the economic indicators we use to predict that we're heading into the recession phase. There's this stock thing called the VIX, and it's basically a volatility index. That's what VIX stands for

volatility index, and it measures the volatility in the stock market. And as we get into the peak phase and then head down towards the recession phase, we start to see a lot more volatility in the stock market. So there's a lot more risk of having your money in the stock market. Sure, the market might go up to $30,000 from here, and you might make more money. It might drop to $20,000. You might lose money. I don't know. But what I will say is that we're going to see some more volatility in the market as we get closer to the recession. And so what I typically recommend for anybody that doesn't like that volatility,

for anybody that's saving money and they don't want to risk losing that money, put it in something that's federally insured. Put it in a CD, put it in, I wouldn't recommend a money market. I like CDs because CDs will pay a little bit more than a savings account. They'll pay a little bit more than a money market.

It's federally insured. Sometimes you have to keep your money in for three or six or 12 months to get the full interest payments on it. But that's going to be. be the most secure place to put it. Now, if you are an experienced real estate investor, you really know real estate. What I'm telling a lot of experienced real estate investors who have cash is use that money to lend to buy and hold investors. Use that money to lend people that are

doing the Burr strategy because buy and hold is a relatively low risk strategy at this point in the market cycle. Even going into the recession, buy and hold is a relatively low risk strategy when you're conservative, when you're buying things in good prices, you're not over-leveraging. Because worst case, if the market drops, lending gets tight, and the investor that's doing the birth strategy can't do the refinance piece, at least they're still generating cash flow every month on that investment. So if you've lent them money, if you lend money to a flipper and the market drops out from under them, they may have to go into foreclosure. They're not getting money from anywhere to pay you. But the buy-and-hold investor is renting out their property.

So even if your loan comes due and they can't pay it off, they can't refinance, they may still be able to repay you every month for the next two or three or five years until they're in a better position. So a relatively low risk strategy for your cash right now, and again, you do run the risk of it being tied up for a while, but a relatively low risk strategy for generating good returns on cash right now is to lend to buy and hold investors. And that's actually what I do with a lot of my cash right now. I'm charging 8, 9, 10, 11% interest.

So I'm making a good return on that money. it's relatively low risk if they can't refinance. I just extend the loan five years and they keep paying me that 8, 9, 10, 11% interest. So for those who don't have that investing experience but are saving up, I'd probably recommend CDs. For those that do have the investing experience, I'd probably recommend lending to buy and hold investors. For those people who have a lot of money, like more than the federal limits for ensuring on a savings account or whatever, bonds are a great choice as well. But if you have that much money, you're probably familiar with these options. I don't have that much money.

That's a question that I get a lot is, you know, I'm starting to save. I don't want, and it comes from people who really don't want to put it in the stock market because they see the volatility. So I like the CDs. I like even just a plain old high, in air quotes, high yielding savings account, like an American Express account. I think we're making 2.3% or 2%, which is such a ridiculous rate. I'd really like a lot more.

But when I'm getting ready to use it, and that's really liquid, that's just, hey, transfer this to my bank account and then I have it as opposed to a CD. You might have to wait three months. The buy and hold investors, like you said, could, you know, there's more risk that your money isn't as liquid, but it's, you know, you're still generating. I like 8%. I like 11%. But the point is, though, that it's not, it's generating more. than that, right? So yeah, you're getting a 2% yield, but Jay is basically saying, hey, this is going

to reduce your risk. And then, I think, you know, by implication, expose you to opportunity, if we're saying, hey, there's a 60% probability that there's a recession coming in the next 12, you know, five to, what you say, four to 15 months or something like that, six to 15 months. Is that we're saying? You know, if there's a 60% probability that it happens and you have cash there, then yeah, you're only earning a 2% return. You could be earning more in the short term. but that could expose you to much higher returns somewhere in that six to 15 month period, right? So that's kind of how I think about that cash piece is, hey, it's not really earning those low returns. In the meantime, it's reducing your risk and exposing you to potential greater opportunities down the line.

Absolutely. And I'm not saying, again, I'm not saying to put your money there and wait. But if you're waiting for a particular event, for example, you're waiting to save up enough money to buy your personal residence or house hack, where you're saving up money to buy a rental property, then there's nothing wrong with leaving it in the savings account for three months, six months, 12 months, even a little bit longer. Keep in mind, we talk about these 2.2% interest rates and returns. In reality, we have inflation.

So inflation is around 2 or 2.2%, which means every year, the money that we are holding on to that we're storing under our mattress or putting in a savings account is purchasing about 2% less than it was the year before. So if you're getting 2% return in a savings account or a CD or a bond, what you're really doing is you're breaking even. You're getting a little bit more money, but next year your money's going to buy less than it did this year. So don't fool yourself into thinking you're really getting a 2% return. But it's that way with any investment. If I'm getting 8% by lending it out, it's really 6% a year because we have inflation. So always something to keep in mind. Yep. Okay. So you said here's some tips. Start hoarding cash. Yeah. So next one is focus on building your credit. So it kind of goes along with cash. I mentioned how tight lending gets. It doesn't stop. It gets tight. It's a lot harder to get loans. But it becomes harder to get loans because lenders are requiring better credit. They're requiring more income. They're requiring more assets. And you can't necessarily impact your income or your assets. But what you can impact is your credit. And so what we see is just in the conventional lending world, if you're buying a house, if you're a regular buyer buying a house. These days, you can get a loan from a conventional lender of Fannie Mae, Freddie Mac.

If your credit score is around 660, 680, you might pay a little bit higher than if you had a higher credit score. But if you have a 660 or 680 credit score, you can theoretically get a loan to buy a house right now. During a recession, if you look back to 2009, 2010, 11, even 2012, what we saw was lenders were requiring a 740 credit score. It was big news in 2011. 11, I think, when the first lender said, hey, we're going to start lending to people that have a

720 credit score. So the first thing it's going to happen as lenders tighten up their requirements is they're going to require better credit scores. So now's a great time to really focus on building your credit, to focus on getting your high interest rate debt down if you have high interest rate credit cards or if you have a high interest rate car loan, start paying that down. Talk to a good financial consultant, somebody that really understands credit. And figure out should you be closing account, should you be opening accounts, because these things will impact your credit score. But focus really on building up that credit score because once the market starts to turn, you're going to need a better credit score to get loans. So it's a really

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Tap the banner to order your groceries online at voila.ca. Enjoy in-store prices without leaving your home. You'll find the same regular prices online as in-store. Many promotions are available both in-store and online, though some may vary. One of the best ways to build your credit is to pay your bills on time. And this sounds like a... a no-brainer, but 35% of your credit score is based on your ability to make on-time payments. So I can be sometimes flighty and not necessarily remember that my credit card is due on the 30th.

There's a lot of ways to make these on-time payments that don't require you remembering to make the payments. First of all, you could just set up a Google calendar or whatever calendar you use, alert, hey, tomorrow, pay your bill. Set them up on automatic payments. That I think almost everybody has automatic payments except my water bill for some. reason. So then I just have to remember that or I just give them a credit card. But yeah, automate as much as you can so you don't have to think about it so you don't miss it because that is a real number killer, a real credit score killer is just missing a payment by one. I remember the first

place I ever bought. I'm sitting there going through the with the lender and she's like, oh, here's your credit report. It looks like you made a payment late like six years ago. I'm like, really? I don't remember that. Like I never remember making a late payment. payment, she's like, well, you know, this is coming up. She's like, did you maybe just not get the bill? I'm like, sure, let's say that. Like, it was a very different time when I bought my first place. But, you know, they keep that information forever. So if you are not making payments on time, start. Number one, start. And the other thing I would say is go out and understand what your credit looks like right now and why it looks that way, right? I mean, you can get these free credit

reports or you can go to a site like mint.com or credit karma, all these different online places will show you pretty clearly what's impacting your credit score and why. And if you have any missed payments, take care of that. But then start playing with the finer points there because it sounds like you're targeting a 750 or above really to kind of be in a strong position going into any type of recession. Is that fair commentary, Jay? Absolutely. Yeah. If you can get your credit score to about 740, you're probably going to be positioned to not only get loans, but also get the best rate loans. And just to not to pile on to what you guys were saying, but keep in mind, there's a site called annual credit report.com, which is a government basically requires that the three big

credit companies provide you a free credit report once a year. And so you can go basically once a quarter, is it four credit companies? Three, three. And I think it's three times a year. or each one once a year. So you can basically go every four months and request a copy of your credit report from one of the credit agencies. And that's a great way. It's a free way to every four months

to verify that you don't have anything on your credit report that you didn't expect to have your credit report. So just a tip there. Yeah. And the people who are putting the information into the credit report, they make mistakes, they transpose numbers,

they forget or it doesn't get entered properly, whatever. So if you, you know, if you're just starting out, you want to start building your credit. Go and get a copy of your annual credit report for free, like Jay said at annual credit report.com. We'll put links to all of this in the show notes. But go there and just choose one. It's TransUnion. I shouldn't even start this because I can't remember them all. There's three.

Equifax and Experian. Yes, there's, there you go. Equifax Experian and TransUnion. Pick one. Choose one. Ask them for a copy of your credit report and then spend some time. reading through it. Make sure everything on that report is actually what has happened in your life because maybe somebody else's name is Jay Scott and their information got put into yours. Or maybe

you never lived at this address. So you need to take this information and correct it if it's wrong because that could be affecting your credit score too. Absolutely. Okay. So after hoarding cash and building your credit, what else? So next thing I would recommend, open up and again, you want to make sure that your credit score is strong before you do this, but considering, consider opening up lines of credit. So I talked about hoarding cash. A lot of us don't have access to a ton of cash, but we may have access to cash through lines of credit. And a line of credit is basically just credit given to us by a lender, by a bank that's secured by something. It might be secured by real estate. So you can get a line of credit against your personal residence if you have equity in your personal residence.

You can get line of credit against your business if you have assets in your business. You may be able to get line of credit against yourself personally just by having a really good credit score, a personal line of credit. So I recommend that people talk to banks, talk to lenders, and find out if you can get a line of credit or multiple lines of credit. And what a line of credit is is it's basically cash that's available to you when you need it. You don't take it now, unless you need it now. You only pay interest. on it when you use it. So if I take out $1,000 tomorrow, I'll pay interest on that $1,000 until I pay it back. And then once I've paid it back, I'm not paying interest until the next time I take money.

So lines of credit are like cash in the sense that you have that money available guaranteed when you need it. And it's also like a loan in the sense that you're paying interest on it. So it's kind of the best of both worlds. You're only paying interest when you have it, but you have access to it. So get access to lines of credit if you have the ability. to. And again, opening up lines of credit might impact your credit score. So if your credit score is borderline, make sure you're talking to a financial professional who understands credit before you just go really, nearly open up a whole bunch of lines of credit. But if that's an option for you, I highly recommend it. So when you're talking about open up lines of credit, you know,

I got a house. So I can get a home equity light of credit, right, a helac on that and get access to that. You know, I can call up my credit card company and ask for my limits to be raised, right? The credit card. What are some other actions that I can take if I'm looking to take your advice? So those are the two big ones. So for most people, get your credit card limits raised and get a line of credit against your personal residence. Now, if you own a business, it's generally, especially these days, not very difficult to get a line of credit from the bank that you bank with. If you bank with a big bank like Bank of America or Wells Fargo, a lot of times they'll send you promotional things for line of credit against your business, especially if you've

had your banking with them for a couple years. If you have a bunch of inventory or equipment or you own real estate in your business, a lot of times you can get a line of credit against those things. There are a lot of people who buy rental properties for all cash, and then we'll go find a small local bank that will give them a home equity line of credit against the rental properties, which is even better, in my opinion, than a mortgage or a refinance, because again, you're only paying interest. when you're actually using that money. And then again, if you have a relationship with a bank that you've had for a long time and you have a good credit score, you'll ask about a personal line of credit.

Banks, a sun trust, not my favorite bank out there, but they're well known for giving what are called unsecure lines, personal lines of credit, which means if you have a good credit score, you've been working with them for a long time, a lot of times they will give you a line of credit just against you personally based on your financial situation. What kind of amount are we looking at for a personal line? of credit to that effect? It's a good question. I don't know the answer to that. I've never actually

gotten an unsecured personal line of credit. I'm guessing that it's going to be very dependent on your income. It's going to be dependent on your credit score. It's going to be dependent on what asset you own. So I don't want to throw out any numbers because I'd be baking them up. But typically speaking against a business, you can often get 50% of the value of any equipment or inventory. So let's say you own a business that sells stuff. Hopefully if you own a business, it sells stuff. But let's say it sells a physical product as opposed to a service. And let's say you have a half million dollars of that physical product in inventory at any given time.

And you own that inventory outright. A lot of times banks will give you a line of credit against that half million dollars in inventory because that's their collateral. If you don't pay the loan, they know they can take that inventory and presumably sell it at some discount and get their money back. So 50% is not uncommon for a business line of credit against equipment or inventory. For a house or a rental property, a lot of times it's 75 or 80%. So if you own a $300,000 house that you own outright, it wouldn't be uncommon for you to be

able to get $200 or $225,000 in a home equity line of credit against that real estate. And just to clarify, you know, the alternative here to achieve a similar result would be to just refinance and take out the cash. So if I have a $300,000 property, I can either get a line of credit where I don't have it, I don't take any money out until I need it and I start paying interest once I've taken out the cash or you're starting to use a line of credit, or I can refinance the property and pull out a ton of cash that way, right? And the advantage there is that you're going to have a fixed interest rate.

Exactly. You have the easy option for a fixed interest rate if you're refinance versus a variable interest rate on your line of credit, right? So what's your, why do you recommend the HELOC versus the, the refinance there. No, that's a really good point. There's actually, so that's, that's the first big thing. If you're going to refinance versus a HELOC, you'll typically get a lower interest rate. Typically, interest rates on HELOCs, one, it's going to be variable. So the interest rates are going to change. So interest rates are going to fluctuate on the HELOC with interest rates. So if you take out

money today on your HELOC, you might pay five and a half percent interest on that money. If rates go up two points next year and you take out money next year, or even the money you took out this year that you're still repaying next year, the rates that you're paying on that money, even though you took it out this year when rates were low, if you're still paying interest on that money next year when rates are higher, you're going to be paying a higher interest rate. So that's one of the big differences between a refinance where you fix an interest rate, a lower interest rate for a long period of time versus a variable interest rate. The other thing to know is that it is possible with a line of credit that a bank generally

writes into the terms into the contract that they have the right to rescind that line of credit or reduce that line of credit. So let's say again, you have a $300,000 house. You get a line of credit for 80% or $240,000. If the bank thinks that your house has dropped to $200,000 in value, they can come back and say, well, we're going to drop your line of credit to 80% of the new value, which is $160,000. So you could overnight find that your line of credit has decreased or even gone away. and in some cases the bank might say you have 30 or 60 days to pay off whatever you owe. So there's certainly a risk there. Now, that said, it did happen after 2008 to a lot of people that had lines of credit,

but unless there's a huge downturn, unless there's a major recession, it's not really common for banks to call lines of credit or to reduce lines of credit. It's not a common thing, but it is a risk. So to your question of when should people be doing the fixed refinance, versus a HELOC, it's really a personal decision. For me, it boils down to how often I'm going to need that money. If I think I'm going to be using that money full time between now and 10 years from now, I'd probably just rather do a refinance because I'm going to be paying the interest every month for the next 10 years. For me, though, I typically use a HELOC for more bursty type things. I might use

it to buy a rental property that I'm going to refinance in six months. So I need that money for six months. I'm not going to touch the line of credit for a year. So I only want to pay interest when I actually am using that money because it's a very small percentage of the total time. So you can run the numbers. You can say, hey, if I'm paying 4% over 30 years every month, this is how much interest I'll pay over 30 years versus I have a HELOC for the same amount and I'm paying 6%, but I'm only paying it a quarter of the time over the next 30 years. You can run those numbers and see where it falls and and what's better for you. The other thing is some people just sleep better at night

knowing that they can choose to be debt-free tomorrow. I can pay off my heel, I can be debt-free, but still have access to the money. Other people would rather just get fixed low-rate interest. So a lot of it is psychological as well. I want to tag on to this really quick. So point number three is open up lines of credit. I want to suggest point three A is to start building a relationship

with a local bank or credit union. Yes, yes, yes. I have been with Chase Bank since they were Bank One and first Chicago and I think somebody, maybe somebody before that. I've been with Chase Bank since before Scott was born. And it is actually true, Scott. But they don't know me. I've been with them for 30 years and they don't know who I am at all. And they don't care about me because they're so big.

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

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

Start talking to local banks now. And can I throw out one more point about that? No, this is my show, not yours. Yes, absolutely. Of course you can. So the other thing to keep in mind, and I know there are people that would be like, well, I walk into Wells Fargo, and they know exactly who I am. And they call me by name and they call me on the phone and offer me all these things.

So that's all well and good. but here's the thing to know about these big banks. They don't make their own rules. So if they want to lend, let's say, on the purchase of an investment property or they want to lend on the purchase of your personal residence, basically they're lending money and then they're turning around and they're selling that loan to a big organization like Fannie Mae or Freddie Mac. And so Fannie Mae and Freddie Mac basically will tell the Wells Fargoes

and the Bank of America, if you want to be able to sell the loan to us, here are all the rules you need to follow. And you need to verify that the borrower's credit is this and their income is this and their assets are this. And you need to check literally hundreds of boxes if you want to make a loan to them and then turn around and sell it to us. So Bank of America or Wells Fargo or Chase, they don't have the ability to say, yeah, your credit score is a little bit low, but we're going to make an exception for you because we've been working with you for 20 years and we know you. They can't do that even if they want to. Now, the local banks, what you refer to as portfolio lenders, what a portfolio lender

does is they don't turn around, they might, but they don't necessarily turn around and sell the loans to a Fannie Mae or Freddie Mac. They use the money from their depositors. They use the money from other people that bank with them to make that loan. And so what they can do is they can make their own rules. They can say, hey, Mindy, yeah, I know your credit's floor is a little on the low end, but we've been working with you a long time. We trust you. We know you. you have cash with us, you have accounts with us. So we're going to do the loan anyway, because we have the ability to do that. Or they can say to you, hey, Mindy, I know that Wells Fargo can't loan on your 11th investment property because that's the rule. They're only allowed to loan on 10 or in some cases four, but we don't have to follow those rules. We're going to make 50 loans to you. And I know

people that literally have 50 plus loans with small portfolio banks. They do the birth strategy and literally every single loan, 25, 50, 75 times, they turn around to a small local bank and they get a loan. And so these small banks have the ability to make their own rules. And if you had that relationship, they're not handcuffed to say, we're not allowed to do this even though we want to. They can do it. Yeah, that's the beauty of a local bank. And you may not get the best rates with the local bank, but the local bank is, yeah, but the local bank is giving you money when other people aren't. So, you know, do you want zero dollars or do you want more than zero dollars at a higher

percent interest rate? So, okay. Do you have any more points to make about opening up lines of credit? Yeah, not about lines of credit, but I'm going to make one more recommendation to prepare for the next phase. Oh, yes. Well, that was going to be my next. You keep, are you reading my mind?

I want your show. You're on my show. You're a first welcome back guest. Okay, so next tip, last tip. Yeah, last tip. So for anybody that has short-term debt, again, and this goes back once again to how lending gets tight during a recession. If you are going to need to refinance any loans in the next three to five years, let's say, during the time that could be the next recession, do it now. So restructure any debt that might be coming due in a couple years, restructure that now.

so that you're not in a situation in three years where a loan gets called due, let's say, on a rental property, and you're having difficulty refinancing because lending's gotten tight. Instead, refinance that loan now for five or eight or ten years out so that we're probably going to be in the next expansion during a strong part of the cycle by the time that loan comes due. So if you have any loans that are going to come due, or if you have any loans that you can restructure the low interest rate, so we don't know interest rates are going to go in the next couple years, but they're still historically low, as we've been saying for several years. Now's a great time to restructure that debt. And I'll throw along with that. If you own any

properties that you aren't interested, that you're not interested in holding for at least three to five years, if you're thinking, yeah, I might sell this thing in a year or two. Sell it now. Because most likely, as we get into that recessionary period, values are going to drop. And so I'm not telling people to sell your properties. I'm not saying don't hold them for five or ten years. But what I'm saying is, if you were going to sell them in a year or two anyway, it's probably better now than in a year or two. Yeah, that's really excellent advice. Sell the dogs now. Who is it? Steve, Steve from Washington says, you know, I've been cherry picking and I like these properties. I don't like these properties anymore. I'm selling the dogs at what I believe is the top of the market. And, you know, you might,

we might be wrong. This might be the beginning of the top of the market. And there's still a little bit left in there. and maybe you would make, you know, an extra $1,000 next year. But maybe you don't. And Jay, I thought you had a crystal ball, which is why I invited you back. You don't. You've claimed that you do not. So I don't have a crystal ball either. Yeah, I like that.

If you're going to, if you're thinking about selling them. If you've got one that's pumping out a lot of money, keep it. But if you've got one that isn't, I am now really, really regretting the triplex that I didn't buy over the weekend. Well, I'll just, I'll just throw in here. I mean, this is, this is a get back to basics, right? Get your foundation really strong, right? Have some cash.

Make sure your portfolio is really strong. Can weather any downturn. Sell off the stuff that you don't think is a great fit for your, you're clearly in your long-term vision. And then, you know, it sounds like this, you know, this tip might not be a miss. Like, focus on your expenses and just kind of make a quick, you know, make sure that your savings rate is continuing to be strong, right?

The day one stuff, right? All that stuff that you may not have had to think about as much in the last year, two, three, because, you know, you've probably got to raise at work or a couple of promotions and, you know, your property, your home value increased, your rental property is doing well, all that kind of stuff. You know, now is the time to really fortify that position and strengthen it and not go and take the $10,000 vacation or whatever it is, right? Just spend wisely and focus on all the basics that we talk about every single week on the show. Yep. And I actually, in the book, I include that tip. I include a whole bunch more tips than what we talked about.

like you said, a lot of this is common sense. I can't tell you the number of people that have read this book and basically said to me, I learned so much, and yet it was so obvious, because a lot of this, once you understand how the cycle works and you see how things have gone down the last 150 years with previous cycles, a lot of it starts to make sense and you can start to put the pieces together to say, yeah, of course this is what I should be doing now. And of course, this is what I shouldn't be doing now. It's all, it's really, it's common sense, but it's stuff that we don't think about very much. So it's not necessarily common sense to us yet. Love it. I love it too. All right, Jay. So we've talked about what we should be doing to prepare

for a recession or the next phase in the cycle that we think might be coming. What if we're investing and building our portfolio today, what do we kind of, what do we kind of do to maximize our returns in the current cycle in the short term? Yeah, absolutely. So, If you're flipping houses today, and a lot of us are flipping houses, and I know there are people that ask me every day, should I stop flipping houses? My answer is no, you don't need to stop flipping houses. But I would certainly be more conservative and take certain precautions. One, make sure you keep your project short because, again, it may be a month or two or three or five or six before we hit the next recession. But if you have a project that's going to take 18 months, there's a much better chance that we're going to be in the next recession by the time you finish that project.

and you could see that the values have dropped out from underuse. So keep projects quick. Two, make sure you're getting good returns on your projects. So I like to tell people, do some research on your local market and see how much of a price drop we saw in real estate in the last couple recessions. So, for example, in the D.C. market, we tended to see about 12 to 15% worst case in 2008 and a little bit less than that in 2001. So if we expect that worst case in my area that the market's going to drop, let's say, 12%,

then I want to know that my profit margins on any flips that I do are at least 12%. So that way, if the market drops 12%, I'm going to break even on those deals. If I do a deal that's 8% profit margin and the market drops 12%, I'm now losing money on that deal. So make sure that your profit margins support whatever you think is the likely or the worst case scenario during a recession in your market. If you're doing buy and hold, buy and hold is good any time during any part of the cycle. Never a bad time to do buy and hold investing, but there again, just like with flipping, there are some things you want to keep in mind. One, make sure you're being super conservative with your numbers. When I'm evaluating deals at this point in the market cycle,

I like to assume that my rents are going to drop 10%, and my vacancy is going to increase 10%. So if I have 8% vacancy. Typically now, I assume 10% higher than that or closer to 9% vacancy. And if my rents right now are $1,000 a month, I'm going to assume closer to $900 a month. So that way, going into a recession, if rents drop and in many markets they will, if vacancy increases, and again, in many markets it will, you're prepared and you've underwritten your deals. You've analyzed your deals in a sense that you've accounted for those things. If you can still make money with 10% lower rents and 10% increased vacancy, then it's probably a good deal.

And what you'll find is once we get through the recession, your numbers are even better because you assume the worst. So there's some tips there. If you're lending, again, I would say don't lend to flippers because if the market drops out, you basically have one recourse. You can foreclose. And you're going to foreclose on a property

that's probably worth less than you lent on it. But if you lend to buy in whole investors, you have that extra piece of recourse, which is, hey, I'm going to extend your loan for as long as it takes. You just keep paying me monthly cash flow, keep paying me interest every month from your market rents that you're receiving. And we'll just extend this loan. And at least you know you're going to get paid for the next two or three or five years

until the market includes and they can pay that off. Or you foreclose on a rental property. You could foreclose on a rental property, but why? If you're getting paid every month, just be happy with that cash flow because it's probably more money than you're making anyway. It just sounds better than foreclosing on a half-completed flip. That's a really good point. If you have to foreclose, you'd rather foreclose on a property that's still generating cash flow than a property that is underway. I'm certainly not saying the foreclose or necessarily. I'm just saying that.

Yep. And we talk about a whole bunch more tips in the book, but those are a few tips for if you're flipping or buy and holder lending. So Jay recently came out with a book called the Recession Proof Real Estate Investing. It's an e-book only. So it's a short, quick read. But it's full. of fantastic information. It's kind of got his style, just that we talked about all day today on the show, how to kind of think through what a market cycle looks like. What are the leading indicators of market cycles? How can, you know, again, we go through these things, timing, observation, and then the economic data. And he really makes a strong case for how you can kind of sort through in your mind when a recession or the next stage in any type of economic cycle is coming. And it's not just about really, you know, the recession-proof real estate investing is the title of the book,

but really I thought it was more of just kind of a how to handle all the market cycles and adapt to strategy at any time in a market across a variety of different things. So I really got a lot out of it. I just kind of read, I read through it again this last weekend, actually, and thought it was fantastic. I'm personally going to begin following some of the advice that Jay gives out in terms of hoarding some cash, taking out some lines of credit, you know, making sure that I've got my ducks in a row and my financial house in order because, you know, the risk is low from doing these activities and the upside is pretty big of being prepared if there is a recession coming along.

So definitely couldn't recommend the book more highly. Thank you. Yes. And it's a really great time for this book to be coming out because like you said, we're probably nearing the top of the current real estate cycle. And I just, I see this question pop up so much in the bigger pockets forums. should I wait for the market crash? And inevitably, the first response to every one of those questions is, well, when is it going to crash?

And, you know, you don't know. But being prepared is, what is it, the best defense is a good offense? The other way around. The best offense is a good defense. Yes. Okay. Clearly not a football. But, yeah, and again, that doesn't mean, you know, I'm not timing the market or anything like that.

But I can adapt and say, hey, there are some. signs that are coming along, and I can slightly modify my approach just to kind of reduce my risk and potentially have a shot at greater returns if some of those things end up being true. I'm not going to stop investing entirely or grind my business to a halt, but can certainly start preparing in some ways to take advantage of what economic data and our observation are kind of giving us. Yeah, the biggest mistake I see people make is they're so focused on today and now that they're not spending that 10% or 20% of their time that they should be looking forward and paying attention to what's coming and preparing for what's coming. And I'm not saying that

everybody should hunker down and move into their bunkers and poured guns and ammo because the next crash is coming. But what I'm saying is start paying attention to the market, figure out what is likely to happen, take a look and pay attention to the economic indicators, and start preparing because preparation is always good. Right. And what's the downside of starting to hoard your cash while still running the numbers on properties and analyzing them and seeing, you know, oh, this is a really great property. I'm going to offer on it. Great. And then you hoard your cash some more after that. What's the downside of building up your credit? What's the downside of opening up a line of credit now or, you know, reorganizing your short term debt? Loans are what is it? The interest rates have dropped in the last couple of weeks. Have you seen that? I was like, wait, what is it right? I've been telling everybody it's like 5%. And it's closer to four, which, which is really, really awesome. Okay, so I'm sorry, I cut you off. Go ahead. Nope, that's okay. I was just going to say, I'm doing more deals this year than I was doing last year.

So a lot of people like look at me and they say, oh, so I guess now that you're so familiar with all the economic stuff and you think a recession's coming, you're probably slowing down. And to be honest, no, I'm not slowing down. Again, I'm doing more now than I was doing last year, even the year before. That's awesome. That's awesome. Okay. So Jay, thank you so much for coming back on the show. Our first repeat guest, you're actually really kind of good at this podcasting thing. Yeah, you should start your own or something like that. Well, funny that you mentioned it. So I guess this is our big announcement, but I am going to be hosting my own podcast and I'm going to be doing it with my amazing wife and business partner, Carol. And we're actually going to be hosting a podcast. created by Bigger Pockets. And we're going to be calling it the Bigger Pockets business podcast, where we're going to be interviewing business owners, both investors and non-investors alike,

and really digging down into how to build scale and optimize businesses from people that have done it in the trenches. So starting this week, we're going to be releasing our first episode of the Bigger Pockets business podcast. Love it. I've been looking forward to this for so long. I cannot even begin. to describe how excited I am for this show and for you and Carol as the hosts. I mean,

you guys have just been through so many, you just have studied and really developed a strong philosophy, tempered that with experience in the real world, and then interacted with so many people across all these different types of business, real estate, personal finance, and investing concepts. I just can't think of anyone who could be better situated to kind of describe and help people build businesses and build wealth than you and Carol. So thank you so much for agree to do that. And we're looking forward to it. I really appreciate it.

And our first guest is going to be somebody that I have a feeling. Many, many, many of your listeners are going to be interested in hearing from. I'm not going to say who it is. We're going to leave that as a surprise. But make sure you listen to this week's Bigger Pocket's Real Estate podcast where we're going to be talking more about the business podcast and then tune into the business podcast later this week. Yes.

If you are not already subscribed to the real estate show, it is the Bigger Pockets real estate investing podcast. And the episode that Jay is talking about is our episode number 328. So you can find that wherever podcasts are. Biggerpockets.com slash show 328 is where you can find the show notes for that episode. And I am really looking forward to that. That is going to be a great podcast. you're an excellent guest. I can only imagine that you're going to be a fantastic host. Thank you. And I want everybody that's listening, if you have any thought or input into the business podcast, into the economy, into anything I've talked about, don't hesitate to reach out to me. I love interacting with everybody. Can I tell people where they can reach me? I was just going to ask, where can people find out more about you, Jay? Excellent. You can reach me email the letter J at the numbers, 123flip.com. Jay at 123flip.com is my best email. My website is one, two, three, flip.com, if you didn't guess. And if you want to find me on Facebook,

Jay Scott Investor, and I post a lot on Facebook and I communicate with a lot of people on Facebook. So if you're on Facebook, friend me on Facebook. Awesome. Awesome. And of course you're on this little website called biggerpockets.com. I am Jay Scott on biggerpockets.com and hopefully most of you know that because hopefully most of you are on biggerpockets.com. If you're not, go register for biggerpockets.com right now. And then follow Jay Scott. And then follow Jay Scott everywhere. Jay, do you have a favorite joke to tell at parties? My wife likes this one. Okay, hold on. I don't tell this correctly.

So we got to have a joke in every show. Okay. Here we go. Knock, knock. Who's there? Control freak. Okay, now you say control freak, too. Control freak, who?

I got it. I was first to let you go and do you think you're so forceful about it. If you were a control freak, you get that one. That's my favorite joke ever. I had my microphone on mute and I started laughing so hard. I'm like, oh, they're not going to hear me laugh. Okay, I want to give a little shout out to my friend Liam, who is seven, I think. And he asked me, he told me this joke yesterday.

Okay, what's your name? Jay. What color is the sky? Blue. What's the opposite of down? Up. Jay blew up. Ha, ha, ha, ha.

Thanks, Liam. He's seven or eight. I think that's a seven-year-old joke. because both my kids were telling that joke when they were seven. Okay. Do we have anything else do you want to add? We want to add, go listen to the Bigger Pockets Business podcast because it's an awesome show. That's right.

Awesome. No, I think we're pretty good here. Jay, thank you so much for sharing your wisdom yet again here on the Bigger Pockets Money podcast. We appreciate it. Love the book. Definitely want to encourage everyone to go out and get that. And thanks so much for your time. Awesome.

Thank you. And I look forward to being the first three. time guest on the money podcast. I'm sure that will happen. Okay, great. Thanks so much, Jay. Have a good day. You guys too. Thanks. All right. That was Jay Scott delivering his wisdom for the 15th time.

And really the beginning. It's just the beginning of the fountain of the knowledge of knowledge that we're about to receive from Jay through his new podcast. I just think that the business podcast is the next natural step in the the Bigger Pockets Podcast Empire. And Jay is a really perfect person to host that show. He's knowledgeable in starting your own business. He's knowledgeable in running your own business.

He's knowledgeable in real estate. He's knowledgeable about money. He's just kind of the total package. Yeah. Him and Carol have built just an amazing business portfolio and have tons of experience and have made consistently smart, calculated choices with a strong philosophy behind them. the entire time, right? And this is bigger pockets, right? So our audience, you, the listener,

we presume, are looking to use real estate as at least one part of a portfolio that may achieve financial freedom. It's totally fine if you don't, but typically that's how most folks do it. And there's a lot of overlap, obviously, among real estate and personal finance. You have to have a strong personal financial position, you know, in our opinion, to have a sustained chance at succeeding in the real estate business, right? But a lot of people that are interested in real estate are also going to do small businesses, right? They're also going to build their own private empires, whether that's in real estate or something else,

and then deploy the earnings from that into investments like real estate. And there's just so much overlap and ability to learn and grow and application from business to real estate and real estate to business and investing to business and money management to business and money management to real estate. We think that there's just this great overlap between the three shows that we're going to have here, the Bigger Pockets, Money Podcasts, the Bigger Pockets, Real Estate Podcast.

and now the Bigger Pockets business podcast. Yeah. And, you know, even if you're not focused on starting your own small business, the Bigger Pockets Business podcast is going to be a great, going to give you a lot of tips for running your real estate business. Something I see in the forums over and over and over again is you will have a much greater chance of succeeding as a real estate investor if you treat it like the business that it is.

Yeah. And, you know, moving over into just a career in general, even if you're not going to start a business, thinking like an owner, like the owner of a business, someone who's growing the business will help you in your career, right? Because as an employee, we're rewarded when we generate returns for shareholders, right? That's the job. That's one of the jobs of an employee working at a business. And I think that that will, that just learning from that from a perspective like Jay's will help regardless of whether you either owner or an employee or a salesperson or whatever it is and helping move your career along. Okay, so the book is recession proof real estate investing.

You can find it at biggerpockets.com slash recession. It is an ebook only. The show is BiggerPockets business. You will want to tune into the Bigger Pockets Real Estate podcast on Thursday, May 2nd to hear Jay's special announcement. Okay, Scott, shall we get out of here? Let's get out of here. Okay. From the Bigger Pockets Money Podcast, episode 70, I am Mindy Jensen and he is Scott Trench, and I have no clever ending for today. We are leaving. We are leaving. Goodbye. Thank you for listening so much. We appreciate you so very much. Send all your bad jokes to Money at BiggerPockets.com. Over and out. See you later, Alligator. Bye.