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

Episode Date: January 3, 2019

Are you a real estate investor concerned with the potential of a shifting economy? These concerns are understandable, and today’s guest has some great techniques for both protecting your money and taking advantage of deals in any market! J Scott,... Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 311. So one, be certain of your numbers. Two, stay away from long rehab, stay away from new construction. Three, have a backup strategy. Four, avoid thin deal. Five, avoid leverage at all costs. Only borrow money when you absolutely have to. And six, stay away from the high end because that's the part of the market that's

going to soften fastest when things start to turn. The high end market's going to turn first. You're listening to Bigger Pockets Radio. simplifying real estate for investors large and small. If you're here looking to learn about real estate investing without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online.

What's going on everyone? This is Brandon, a host of the Bigger Pockets podcast here with my co-host, Mr. David Green. How you doing, buddy? I'm doing great, actually. I am just put a house in contract a couple days ago that I'm going to be flipping with a partner. Mr. Mario Mazamoto is kind of my partner in crime when it comes to flipping houses. And we actually hold free seminars where we teach people how to hold houses. And every time I get a deal in contract, it's a good day.

That's awesome. That's awesome. Yeah, Mario's a good deal. We got to get him on the podcast. I really like him a lot. We'll make that. Yeah, he's one of the best appraisers I've ever met, which really helps to have on your team and you're trying to figure out of ARV. It's like almost cheating.

It's really cool. That's awesome. And it actually applies to today's show because today's guest. is a big house flipper, Jay Scott, is known for flipping houses. And he gives some really good advice on specifically when you partner with somebody asking the tough questions up front and spelling out what to expect rather than entering into it with some naivete and just hoping it goes well. Yeah.

Yeah. And today's show gets really, I want to let me know a couple of things about today's show. First of all, I'm working in, I'm recording this in a construction zone. So I'm actually getting air conditioning put in today. So you'll probably hear hammers and saws and whatever in the background. Just ignore that. And secondly, we go really deep. today into some economic things.

Like if you don't know what an inverted yield curve is, you're going to learn today. Now, if you get to that point of the show, I mean, the first probably 20 minutes of show goes really deep into the stuff. If you, if you're like, man, this is just over my head. Just stick with it because it's really, really good to know. And if it comes up later in conversation, you'll know where to go back to it. But then after that, Jay moves from how do we know the economy is bad or going to go bad at some point or going to shift to what do we do about it.

And it's like just gold. He goes through like six rules for flipping or for buying rent. rentals or whatever in today's market. And then also six things that he's doing right now to prepare. It's just solid goal. And no, it doesn't mean don't do real estate. Now it's still a good time to get into real estate. It's still time to do a deal.

You'll hear that today over and over. But it's different. This is a different market. So I think you guys are going to love today's show, but we go real deep into this stuff, which is something I'm excited to do. And last thing, before we go any further, let's get to today's quick tip tip. All right, so we're not just a podcast. People often think we are that just listen to the podcast.

But Bicker Pockets is more than that. We have an entire website, millions of people on there every month, devoted to helping you reach your real estate investing goals. So if you're not already a member, join for free. And when you do sign up, this is important. And everybody, even if you're already a member, fill out your profile and tell us about one deal that will inspire us or teach us something. Like, you know how we do the deep dive and deal deep dive in the show?

We actually allow every member on Bigger Pockets to be able to upload your own deal diaries, like your own deep dive, basically. So people can see what you're doing. They can connect with you and see what you're up to. It only takes a couple minutes to do it. So definitely check it out. Again, go to your bigger pockets profile and look for the deal diaries there and tell us about your investments.

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in the best markets across the country, without making real estate your second job? That's exactly what rent-to-retirement does. They're a full-service, turnkey investment company, handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've partnered with bigger pockets for over a decade, helping thousands invest smarter. If you want to do the same,

visit biggerpockets.com slash retirement to learn more. Now with that, let's get today's show. So today we're talking with Jay Scott, author of many of you read it, the book on flipping houses and the book on estimating rehab costs. What you might not know is actually we are relaunching that today

because Jay wrote an actual brand, like I'll call it an updated version. So it's version two or the second edition of the book. It's updated for today's economy, right? Things are different than they were five, six years ago when the book was written. written. So again, back in 2013, he wrote the originals. A lot of lessons still apply today,

but a lot has changed. So here's the deal. We'll talk about it late in the show at like an hour in, but I'll just give you the short thing now. Go to biggerpockets.com slash flipping books, plural, flipping books today. Order both. You can get the book on flipping and the book on estimating. You get them separate, but I encourage you to buy them together. You can get the ultimate package. You get the physical, digital audio, and a bonus book, which actually you all love. It's called What Real Estate Investors need to know about the economic cycles. Anyway, you get all of that together. Just go to biggerpockets.com slash flipping books.

All right. So with that, let's get to the show with Mr. J. Scott. All right, what's going on, Jay Scott? How you doing? Welcome back to the Bigger Pockets podcast. Gentlemen, nice to be back. Thanks for having me. Yeah.

So the last time you were on the show was a while ago. I don't know how long ago was it. Do you even know? It was a previous lifetime. I know that David wasn't on the show. and you did not have that beard. That is true. Okay, so a lot has changed the last time.

I know you were first on the show. I think you've been on twice before. Is that right? Yep. I think the first time was 2012. I was number 10. So right at the beginning. Crazy.

All right. So a lot has changed in the market. A lot has changed in your own business and how you're doing things, what you're doing. So that's what we're going to talk about today is a lot of like the changes and where you see things going.

But for those who don't remember or haven't listened to the era of podcast, can you just give like a, you know, a three, four minute, like summary. Who are you? How'd you get into real estate and why did you choose real estate and what did your career look like? Yeah, absolutely. So I got into this business. I started in the corporate world. I was a tech guy,

engineer by trade, worked out in Silicon Valley for a long time and met my wife. We decided to get married. We were both working crazy hours and just not conducive for a family. So she and I got married, jumped on an airplane, moved from California to Atlanta back in 2008 with the idea that we were going to have some lifestyle business where we could have kids. We could make our own hours. We could basically be good parents and not be stuck in the rat race, like missing kids soccer games, missing piano ourselves. We didn't want any of that. So 2008, trying to figure out what we wanted to do with our lives now that we were sort of grown up.

We were in our 30s. And my wife was watching a flipping show on HDTV back then before the bigger, during the last recession. That's all you saw on TV. And she said, let's flip a house. While we're waiting to figure out what it is we want to do with our lives, let's flip a house. And I thought she was joking, but she was serious. Long story short, three months later, we bought our first house. Two weeks after that, we bought our second house. A month after that, we bought two more. And while we were trying to figure out what we wanted to do with

our lives, we bought 14 houses that year. And before we knew it, we were house flipping. And it kind of just snuck up on us. It wasn't something that one day we said, we want to be house flippers. In fact, I never in a million years would have imagined that's something we would do. But we figured out we were good at it. I could do the, uh, the analytical side. She was good at the marketing and the, the sales side. She was good at the design stuff. And here we are. I guess it's 10 years later. We've done a couple hundred deals. We've partnered on deals. We've done new construction. We've done a little bit of everything. And I'm finally getting to the point where I'm, I'm willing to call myself a real estate investor. Well, finally, you know, it's, yeah. You're figuring this out.

Yeah. It was just last year that my wife and I stopped trying to figure out what we're going to do next and realize that we've figured it out. That's funny. That's funny. All right. So what I guess I'm wondering the big picture, because today, you know, people can listen to your last show, like you said, it was on episode 10. And I don't remember the other episode, but it was somewhere on there. I think what 60s maybe. I don't know. 63 maybe. Okay. So they can listen to your actual, you know, full story. I want to know about the changes because like six years is an eternity when it comes to real estate cycles, right? So what you did back in 2010 is probably very different than what you did in 2018. And what other people should be. be doing, right? So maybe you can explain how has your business evolved in terms of changing through the market over the past 10 years? Yeah, absolutely. So let's start with, I am really lazy. I'm probably the laziest person you know. And in the way I look at it, there's two types of investors. There's a type of investor that figures out what they want to do. They get, I mean, they become the best in the world at it. They learn everything there is to know about

it, and they do that forever. And so I know people that do multifamily syndications that they can be in the middle of the biggest depression in history, and they're doing multifamily syndications. They can be up like during a hot economic market. They're doing multifamily syndications. No matter what the economy, what the market, what the anything hands them, they're doing multifamily syndications. I know people that do that with flipping. I know people that do that with mobile homes, with lending, whatever it is. They're just, world class at what they do, and that's all they do. And then there are people like me who aren't that smart. And instead of trying to be the absolute best in the world and try and do things when the

market doesn't want to allow me to do it, I prefer to take the path of lease resistance. I look for the low-hanging fruit. So what I do is I let kind of the market and the conditions and where I am and all of that, I let that dictate where my business goes. So I don't say this is what I want to do. I say, tell me what I can do, what I can easily do, what allows me to continue to be lazy but still do a lot of deals and make a lot of money. You know what I love about that is it reminds you of that quote, I'm sure you've heard it before, where you can't control the waves,

but you can learn to surf. I really like that. Exactly. Right. Yeah, you can't control what the economic waves look like, but different waves make you want to surf a different way. So, yeah, keep going. Absolutely.

I don't want to interrupt you. No, no, that's exactly it. I mean, I remember back in 2008, my wife and I were doing REO deals, which are basically bank foreclosures. And they get listed on the MLS. And back in 2008, 9, 10, I mean, literally, there were hundreds of these on the MLS at any given time. And we could throw a dart at the MLS.

And whatever it hit was probably going to be a profitable deal. And so our first. Those are the good old days. Those were the good old days. They're all good old days for different. reasons. They are, right? Actually, yeah, because I couldn't get money back then. There were deals everywhere. I couldn't get money. Exactly. Exactly. And so our first 50 or 60 deals were REO deals right off the MLS. 2010 comes around and my wife looks at me and says, hey, I think these are

getting tougher. I'm seeing fewer and fewer deals, but I'm hearing people talk about short sales. And maybe we should investigate the short sale thing and see if there's an opportunity here. And so me again, being lazy, I'm like, oh, we're seeing a lot of short sale deals. Great. I don't need to do REOs anymore. Let's do short sales. And we know a lot of people who were just like, no, I've done 100 REO deals in the last two years. REO deals are easy. I'm good at them. I know how to do them. I know how to find them. I have got relationships in the industry. And they were just dead set on like not doing anything other than REO deals. They thought of themselves as REO investors. And here we are in 2011 and 12. My wife and I are doing short sale deals.

We don't have much competition. And just like REOs a couple years earlier, there's hundreds of deals. day. I mean, plenty of deals. Meanwhile, we look at our investing friends and colleagues and competitors and they're still trying to do REO deals and none of those exist anymore. And so they didn't want to modify their business based on what the economy and the market was handing them. We, on the other hand, we just were going to do what was easy. So we went to short sales. And a year or two after that, we started seeing short sales dry up and everybody was talking about, well, new construction's getting hot. Maybe we should learn new construction. So 2014, my wife and I partnered up with a friend of ours, and we started doing infill new construction.

And then 2017 came around, and we started seeing that new construction was getting really tough. So we started partnering on flips, and we started doing some multifamily deals, some mid-sized multifamily deals, because there was some good opportunity there. And that's kind of been the evolution of our business over the past, how many years is it, 10 years? We kind of, we look for the low-hanging fruit. We go where the market's allowing us to go. We're doing the stuff that allows us to continue to make money without having to fight the market, without having to fight a ton of competitors, et cetera. Yeah, we're just, we're very much.

We try and be flexible. There's the word. We try and be flexible. I love that. Yeah, flexible, I think, is the perfect word. What gets a lot of people messed up is they're looking for the quick, easy answer, the silver bullet. Where do I find a deal? Okay, that's where I find a deal.

Boom. That's all I wanted to know. And you're in a competition when you're a real estate investor with other investors. And the thing about competition is there's never ever going to be one thing that will always work because your competition figures it out too. So you take like an MMA fighter. And if his question is, well, how do I tap out my opponent? There isn't one way to tap out every single opponent because if there was, everyone would do it and then they'd practice how to defend it. You got to learn to take what the defense gives you.

That's a sports terminology. If you're playing football and they're giving you the run game, then you run the ball. And if they stack the box so that you can't run it, well, then you got to throw the ball. And something I've always admired about you, Jay, is you are very, very quick to adjust, like the best teams, the best athletes, that's what they do. I think we had Ken Corcini on. Was that right, Brandon? And he talked about the same thing that he moves with the market, right? And it reminds me of Warren Buffett's quote that you want to be greedy when others are fearful and fearful when others are greedy.

Like, you're always going away from the crowds. So this is really interesting because right now we're in a hot market. And it's easy to get money. it's very easy to get money. Money's cheap, but it's hard to find deals. So a lot of people are worried like, oh, it's too late. The market's at the top. There's a correction coming.

There's a shift coming. Can you tell us, Jay, if that's a concern someone has, what are some of the things you look for to know that, yeah, that's the case. It's where we're headed into a shift. Yeah, absolutely. So first of all, we'll step back. I don't think I'm smarter than anybody else when it comes to changing up my strategies. For me, it's, I am never so heads down

focused on day-to-day activities in my business that I don't take time to look up and keep a tab on what's going on around me. I always like to know not just where the market is today, but I like to look at the signs of where the market's likely to be tomorrow or next month or next year. We don't know for certain, but markets move in cycles. The economy moves in cycles, the real estate market moves in cycles. Every market moves in cycles. And people talk about, well, depending on who gets elected president, this is what we can expect, it doesn't matter. Whoever gets elected president, whoever's in Congress, whatever is going on in the world, we're going to see ups and downs in our economy. It's happened for 200 years now, and it's going to continue to happen. And maybe the

ups will be a little bit higher, the lows will be a little bit lower, or the cycles will happen a little bit faster or slower. But the given is that we're going to see these cycles. The economy is going to go up. The economy is going to go down. And what we need to be able to do is kind of recognize where we are in the cycle and recognize all the factors that influence us as real estate investors and how they change throughout the cycle. And I know you guys mentioned stuff like lending. So yeah, back in 2008, we could find a thousand deals. But finding money was tough. Interest rates were higher and lenders weren't lending and there was no private money out there. I mean, these days, everybody and their brother has IRA money that they're just like desperate to

put to work. Back then, you tell somebody, hey, you, you want to give me some of your retirement money for real estate, and they just looked at you like you had five eyes. Yeah. So, and you'd go to a RIA meeting and there weren't hard money lenders there looking to give you money. I mean, everybody was looking for money and there was nobody there with money. So, yeah, things change.

And no time is a good time or a bad time. If you know what you're doing, if you can modify your business correctly, if you can change up your strategies correctly, every time is just as good. Every time is just as bad. It's just the key is knowing where you are and what the market's allowing you to do and not trying to fight that. Yeah. So what are some of those indicators? Like what are the things that you look for?

Yeah. So I'm again, I'm no smarter than anybody else, but I like to do a lot of research and reading on this stuff. And there are a few big predictors of like those big economic shifts. Like we've been in a bull market or a hot real estate and hot economy for about 10 years now, eight years now. typical cycle, I mean, again, I don't want to bore people with this kind of these details, but a typical cycle lasts six or seven years. We're 10 years into this cycle. So statistically speaking, there's going to be a change coming.

Is it next week, next month, next year, two years? We don't know. But sometimes soon there's going to be a change coming. I mean, just the timing of the market. And, I mean, you look around you. We all see things heating up. We see like just real estate prices going through the roof. and it's really hard to find deals.

And there's all this money out there that's desperate to find a home. Anytime you have more money than you have deals, that's an indication that things are getting super hot. But then aside from like the timing thing and the observation thing, there's also this economic data that you can look at. And there's a lot of really good economic data that has predictive value. That if you look at this data, you can say, hey, these are kind of the shifts we see every time before there's a downturn. And so there are a few pieces of economic data I like to look at that kind of allows me to kind of gauge how close we are to that top of the market. One of them is just unemployment numbers. So typical unemployment we expect to be in the 4 to 5% range.

And we all know that when unemployment goes higher than 5%, that's a sign of the economy getting weak. But what a lot of us don't realize is anytime the unemployment rate goes below 4%, well, that's a concern also. Because when unemployment goes below 4%, that means that people are happy. People are good. Everybody has jobs. People are making lots of money. The problem with everybody making lots of money is that there's a lot of demand for products and services.

So businesses are like, I need to produce more. I need to build more factories. I need to hire more people. I need to buy more equipment. And the problem is if you have to hire more people and the unemployment rates at 3.6%, there's only one way to hire more people. and that's to pay them more money. And when businesses pay people more money, we have inflation.

And when we have inflation, well, things cost more. And when things cost more, that hurts the economy. Government's going to raise interest rates and blah, blah, blah, blah, blah. So anytime, and I know I dragged that out, but any time you see an unemployment rate go below 4%, that's an indication that the economy is likely going to slow in the near future. We're going to see inflation. We're going to see a hike in interest rates to slow down that inflation.

So I like to keep an eye on unemployment. Right now, that 3.7 number, I think it is, today is awesome, but it's not sustainable. So that's the first thing I look at. Another thing, and this is probably the most popular thing, but a lot of people haven't heard of it. I know I'm hearing more talk of it these days. It's one of those things that more people are starting to hear about with the economy where it is. But there's a thing called the yield curve. And government likes to borrow money.

And they'll borrow money from investors by selling bonds. And basically, these bonds pay an interest rate. just like a savings account. But the difference is that they have some maturity date, which means you have to hold these bonds for a certain period of time before you get your interest. So if you buy what are called three-month treasury bonds, you have to hold those for three months.

And if you do that, they'll pay you 1% in interest. If you're willing to hold it for two years and buy a two-year bond, they'll pay you 2% in interest. If you hold it for five years, they may pay 4%. If you hold it for 20 years, they may pay like 5.5%. So if you look at a chart of these bond rates, where the shorter term expirations, the shorter time you have to hold them, lower interest rate, and the longer time you hold them, the interest rate kind of goes up.

That's what we expect to see. You expect to see that if you have to hold something for 20 years, you want to get paid more to do it. The interest rate is going to be higher. But what we see when the economy starts getting really hot and investors start to get a little bit worried, is that they want to put all their money in these long-term bonds because it's safe. They don't have to worry about the market dropping out from under them. they can lock in a rate for the next 20 years. So people start taking all their money out of other investments like real estate, the stock market, gold,

and they put them into these long-term bonds that the government offers. And when a whole bunch of demand, when there's a whole bunch of demand for these government bonds, what happens is the government says, okay, well, we don't have to pay as high interest rates anymore on these bonds to get people to buy them because everybody wants them. So they lower the interest rates. At the same time, when investors start to get a little scared, they pull money out of these short-term bonds. because they're like, no, I need security. I need to put my money someplace safer.

So everybody pulls money out of the two-month and the two-year bonds and the three-month bonds. And when there's no demand for those, the government says, oh, we got to raise rates on those to get people to buy them. So when investors start to get worried about the economy, what we see is we see those lower expiration, those two-month and two-year and three-year bonds, the rates go up. And on the other side, we see the longer-term bonds, the rates go down. So instead of seeing this curve that goes from like low to high, we see this kind of flat curve. So the two-year bonds are paying the same as the 10-year bonds.

And that historically has been one of the best indicators. That's called the yield curve, by the way. So if anybody hears the term yield curve, it's basically this graph of interest rates for different bond expiration periods. When you see the yield curve go flat or even get inverted where the two in the 10-year are higher than like the middle ones, historically for the last 60 years, that has been the absolute best predictor of an impending recession. And what we're seeing these days is that we're seeing a flattening of the yield curve. And in fact, anybody that is on Facebook probably saw this big article that came out last year that we saw our first inversion in the yield curve, meaning for the first time since 2007, I think, the curve kind of inverted a little bit. And so now everybody's starting to yell recession, recession, recession, recession.

That doesn't mean we're going to have a recession next month. but generally speaking, when you see that first inversion in the yield curve, we're generally within about 18 months from our next recession. So that's been a really reliable indicator. So do we know that we're 18 months? Of course not. Things change cycles. The cycle could be different than all the previous cycles, but they say history is the best predictor of the future. And in this case, history is telling us that we're probably within a year or two of a recession just based on that. Do you have any indication, if that's true, do we have any indication, first of all, like, how bad it's going to be?

I mean, are we looking and do they get another 2007, 2007, and some of this is just opinion, of course, but are we looking at another 2007, 2008, or what do you think? So I've heard people say, and when I say people, I'm talking about economists that are well respected. I've heard some say, yeah, this isn't going to be much. It'll be a little downturn. It's not going to look anything like 2008. I've heard other people say that this could be like bigger than 2008. So we talk about the economy going in cycles. And we had this, what I was talking about, this like six-year cycle.

It's called the business cycle, where the economy kind of goes up and down and up and down. And for the last 200 years, it's averaged about every six years. So we saw it in 2001. We saw in 2008. We saw it in the early 90s, whatever. There's also these longer cycles. And so there's this really long cycle that lasts like 100 years, 50 to 100 years. And it's called the long-term debt cycle.

And so anybody that's read guys like Ray Dalio or Peter Schiff, who are to some degree pretty well respected, have probably heard this long-term debt cycle. And so some of these guys are saying that, like, we're due for, like, the 75-year downturn, which the last one was the 1930s, the Great Depression. And so there are a lot of people who are saying that the next one could be the big one, like the biggest downturn since the 30s. So nobody really knows. Another indicator I really like, though, is something called the Buffett indicator.

And this is kind of a cool one for anybody that's into the stock market. So Warren Buffett likes this, and that's why they named it after. But basically, they say that, like, you can look at the total value of all the stocks in the stock market, what we call the market capitalization of all these companies. And you compare it to the gross domestic product, basically the total output of our entire economy. And you do a simple division. You take the market cap of all the companies, you divide it by the gross domestic product, and you get a percentage. And that percentage is generally somewhere between 50 and 150%. And what they say is if it's between like 80 and 90 percent, those companies in the stock market is fairly valued.

If it's under 80 percent, the stock market's undervalued. If it's over 90 percent, the stock market is overvalued. And typically over, again, the last 200 years, what we've seen is the stock market kind of always comes back to that average number, that 80 to 90 percent number. Well, today, if you look at the Buffett indicator, the Buffett indicator says the stock market's over. valued by about 40 to 50 percent. So if you believe that metric, that says that we've got 40 to 50 percent to fall in the stock market before it gets back to what would be considered a reasonable valuation based on our entire economy, based on the GDP. So that's another indicator that, hey, we could see a 40 to 50 percent drop in the stock market before things get back to where they

should be. Now, again, this is all historic. Who knows what is going to have to happen? in the future, but it's another good indication of what could potentially happen. So yeah, there's a lot of these indicators. I think it's important to note to people listening, we don't need to live in fear of a recession happening. What we're not saying is, oh my God, the world's going to end, run and build a bomb shelter, right? It's more about preparing for it so that you're in a position to take advantage. Like things are going to change. They're always going to change.

The people who adapt to change are the ones who build their wealth the fastest. And that's kind of where we started off this podcast with flex Right. So we know the stock market could be affected. Other things can be affected right now. You're not getting much money if you buy bonds because everybody wants them. That's where everybody's running to. And in my opinion, that's one of the reasons that you make money with real estate is because like it isn't affected nearly as much by this stuff. When there's inflation, prices go up and rents go up, but your payments stay the same. When you're in a bad economy, everybody else loses their house. And so there's more stuff to buy. Like there's always a play you can make no matter what the economy is with real estate. So, Jay, I'm going to let you comment on that. And then after, can you follow that up with what are some actionable things people can do right now to prepare for this shift that we think could be coming? Yeah, and that's great because it's funny because my very next point was going to be when I look at where we are in the market, when I take that time away from heads down on my business and I'm kind of looking at the bigger thing, I'm asking myself two questions. One, what's working now? What should I be doing now to make money?

And two, what should I be doing now to prepare for the next part of the economic cycle, the next thing that's coming? Because once you get there, a lot of times it's too late. So yeah, you ask the question and we were thinking the same exact thing. Let's start with, and I know a lot of people look at me as a house flipping guy. So let me talk about what I'm doing from the house flipping perspective in terms of making money now. And a lot of people are saying to me, hey, you can't make money in flipping now and the economy's getting ready to turn. You've got to do something else. And no, that's ridiculous.

You can make money in flipping. Again, if you want to be that person that like wants to be best in class, world class, you can flip anytime. Doesn't matter. Me, again, I like to take the path of lease resistance. But even now, I'm still flipping houses. And if you take some precautions, if you do things, if you modify your strategies a little bit, you can still be successful. So flipping, here are my six rules for flipping right now, knowing that we're getting near the top. First, I like to be extra sure of my numbers.

So five years ago, I could go into a flip thinking, okay, I think the rehab cost is going to be this. I think the ARV is going to be this. I think I'm going to be able to sell it in three or four months, whatever the time frame is. And I knew that if I was off on a couple of those numbers, the market was going up. And the house was going to be worth, if it took me six months to sell instead of three months, I'd probably make more money because values were going up. And so I wanted to have a general idea of my numbers. I wanted to know about how much I was expecting to make, but I didn't care that I knew down to the penny.

These days, I want to know down to the penny. I don't want there to be a lot of margin of error because there are too many external factors like the market that can come in and affect me as well. So these days, I make sure that I do due diligence two or three times before I buy any property and I know my number's cold. I make sure I get quotes from contractors. I don't just assume I know what they're going to charge me, et cetera. Second, I'm staying away from any deals that are going to take me more than three or four months. So for several years, I was happy to do new construction projects that would take eight, 12, even 14 months. We were doing some big rehabs where we were doing what are called pop tops, where we put it on a second story or add square footage.

And between the zoning and the permitting cycle and all the work, I mean, we're looking at six, eight, ten months. These days, who knows where the market's going to be in six or eight or ten months. And I don't want to take the chance that we see a big downturn while I'm holding five properties that I'm building. So we're pretty much sticking with shorter projects these days. We're trying to only do things that are going to take three or four months to buy, renovate, and resell. Third, we're making sure that we have Plan B, Plan C, Plan D on all these properties.

We have backup exit strategies. So, again, two, three, four, five years ago, I knew that if I bought a property to there was a 99.9% I'm making that number up, but I knew there was close to 100% chance I was going to be able to flip it unless something crazy happened. I was going to be able to flip it. These days, who knows, if I hold a property for three or four or five months and the market starts to change and the buyers go away or the buyers start looking for a different type of product, I could get stuck holding that property. So I like to know that if I can't flip it, that I have reasonable backup strategies. And those backup strategies could be hold it as a

rental, do a lease option on it, turn it into some type of commercial space or short-term rental, or even like with some of my small multis, perhaps I could turn parts of them into warehouse space, whatever it is, having a backup strategy where I can either get rid of it and not lose a lot of money, or I can preserve some cash flow on the deal so that I can hold it for the next two or three or four years until I can eventually flip it. Number four, I'm avoiding thin deals. So I like to tell people, people tell me what are you looking for in terms of profit margins these days. And so what I like to say is figure out the biggest drop you could imagine the market taking right now and make sure that's your minimum profit target. So if you think the market could

potentially drop 20%, then go into all your deals with the goal of making 20%. So that way, if your worst case fears are realized, you're still going to break even. I love that. Yeah. So my number has always been about 15% cash on cash return on these deals and or cash on ARV. So for me, I think 15% is kind of like where I see the most drastic scenario of a downturn in the near future. I don't think that's going to happen. But if somebody said, what's the worst case scenario in the next six to 12 months? I'd say, I don't think we're going to see this. But worst case, I could see being 15%. So if I know I go into all my deals expecting to earn 15%, worse case, I should break even on those deals. So number four is I'm trying to avoid thin deals. Five, think about leverage more. So I know

a lot of flippers for the last few years, they haven't really thought about borrowing money for their flips. They were trying to get 100% financing on the purchase, 100% financing on the rehab, trying to be out of pocket as little as possible. The problem there, again, is the same thing. If you think the market could drop 15%, you have 15% built in and the market dropped 16%. you're not just losing your money now. You're losing your lender's money. So what I like to tell people is don't leverage any more than you absolutely need to. It also gets affected by the fact that if the market starts to soften, which we've seen in some markets, you're going to be holding those properties longer. And when you hold properties longer, you have more holding costs. You have mortgage payments every month. So reducing your holding costs is important. And generally the biggest contribution to holding costs is your mortgage. So approach leverage a little bit differently. Don't borrow the money just because you can only borrow as much as you need to borrow. And then finally, number six, I'm telling people stay away from the high end. Typically, what we see is that when the market slows down, the first types of property that slow down are the higher-end properties.

So if average property in your area is selling for $300,000, don't flip $900,000 properties. Because when the market starts to soften, those are the ones that are going to slow down first. Yeah. Jay, on that note, what do you feel about investors who are completely, 100% dependent on the Airbnb model, that they're targeting those tourist happy places that get tons and tons of people that are staying and they don't have any vacancy, and that's what they're betting on. Yeah, so definitely not my area of expertise, but I do have a couple thoughts. One, and this isn't from the real estate perspective, but just from the economic perspective, that when the market turns,

the first thing we see is we see less tourism. We see people traveling less. We see people taking fewer vacations. And so I have a feeling that there are going to be a lot of people who are running their numbers on these Airbnbs, assuming today's occupancy or vacancy rates, depending on how you look at it, and they're going to get caught with their pants down when the market turns and they suddenly find that people aren't traveling as much, people aren't taking as many vacations. Number two, with Airbnbs, consider that when the market turns, and if it's anything like it was in 2008, and I'm not saying it will be, but if it's anything like it was in 2008, a lot of homeowners start to rent out their houses because they can't afford their mortgages.

They're moving back home. They're doubling up with friends, moving into other places. And they do their best to, like, hold onto their houses until the values come back up. So they start renting them. And with this new Airbnb model that's just taken hold the last few years, I have a feeling that when the market turns, instead of renting their houses to retail renters, there are going to be a lot of homeowners who think, hey, maybe I can do this short-term rental thing. And so I think there's going to be a lot of competition for Airbnbs from just regular homeowners looking to rent. And then finally, there's a lot of regulation coming down the pipe with Airbnb. I know both local municipalities and at a national level, there are some people that find the short-term rentals to be threatening to other industries.

And so they're trying to pass regulation that's making it a lot more difficult for short-term rental owners to stay in business. So again, not my area of expertise, but I'd say always be familiar with the legislation that's out there that can hurt people. Yeah, yeah, I love that. So, okay, so can you recap real quick, like just one sentence each, what those six points are, in case people are taking notes and then want to jot it down and miss one. Yeah, absolutely. So one, be certain of your numbers. Two, stay away from long rehab, stay away from new construction.

Anything is going to take you an extended period of time. Three, have a backup strategy. You have a plan B, plan C, plan D. Four, avoid thin deals. So know what you think your worst case drop in the market is and make sure that that's your minimum profit target. Five, avoid leverage at all costs, only borrow money when you absolutely have to. And six, stay away from the high end because that's the part of the market that's going to soften the fastest. When things start to turn, the high end market's going to turn first.

Yeah, I love that. I love that you set all those six points. So like last week I went and looked at a flip. There was an auction.com property here on Maui that I was looking at. And it just like the numbers appeared at first glance to be really, really good. Actually, a bigger pockets member brought it to me. And she's fantastic. And we had some great conversations about this deal.

But like at the end of the day, like there was something I didn't like about that thing. It was like those six points, right? Like the property was a $900,000 purchase. Supposedly ARV have $1.5 million. But like I looked at that the first rule. Like, you know, how sure am I on those numbers? Well, 1.5 is definitely pushing it. And like a year ago, sure, 1.5 made a lot of sense in terms of like, I think we could stretch to the top of the market.

Secondly, it was a huge like almost 3,000 square foot house that needed 100% gut, pretty much, right? So I'm in 250, probably 250K of just rehab. That's going to take six to nine months. So now I'm holding it too long, right? At the end of the day, like the profit margins looked good. It was like a $175,000 profit. But if I'm off on my RV, it's not 1.5, it's 1.4. And if I go 50 grand over my rehab, all of a sudden now I'm broke even.

If the market drops, I'm going to be at 1.2 potentially. Yeah. Right. Like that just like that sucks. Right. So like that those like six points all together. And it was a high end flip. It was a high.

It was a it was going to be the highest price house at the ARV in that neighborhood. So for all those reasons. And you probably didn't have a backup strategy. And there was no back. Yeah. Yep. I always said like if I'm going to flip a house at that level, I want to make sure, especially if it's here in Hawaii or in a nice market.

Like I want to make sure it has it. We call them a HANA unit, like a, you know, duplex or whatever. Some extra space. that if I had to, now I could rent out both of them, hold it as a rental. I'm not only making 2%, 1% of my money or breaking even, maybe even lose it a little bit, but I'm not under, I can hold it. And that's fine. I'll hold it through a five-year downturn.

So again, for all the, like, I'm glad to hear you say that because that's what was bugging me is it kind of violated all six of those points. And so I'm glad I didn't go forward with it. But at the same time, it went up for auction, you know, on auction.com and nobody ended up, I think the highest bid was, I think, 800 and it didn't meet the reserve. So other people looking at the deal too. Like, I mean, the highest anybody else wanted to pay was $800 and it didn't work out. So it's an interesting point, too, where I don't think that the banks who put this, it's a foreclosure,

I don't think they've realized that the market is changing quite as fast as investors are realizing a way to like this is. Yeah, this is actually the third time I came up on auction.com and it's going to go back on again in a month. I think that perfectly illustrated Jay's points in a real world example. Like, we could not apply that any better because because a lot of people, They're just so hungry to do something that if the minute they see I can make $175,000, they're like, they can't let go of that 175 number. They think that they're losing $175,000 if they don't do the deal. But when you look at it practically, man, like a few things adjust a little bit. Your rehab goes a little over.

The market goes down a little bit. Interest rates go up during your rehab and that corrects the market a little bit. And boom, you're losing a lot of money. Yeah. Because it's not just the end number. It's the percentage of what you're putting in. I love that. Like if everybody who's listening to this starts using these rules when they analyze every deal, the right decision will become much more clear. Yeah, I love that. All right. So you mentioned estimating being good on your numbers. So speaking of that, I think it's a good transition real quick to mention we have a brand. Oh, go ahead. I didn't get a chance to tell you what I'm doing to prepare. Oh, okay, fine. We'll go there before we talk about your book. What are you doing to prepare? Yeah. See, again, everybody's thinking about how to make money today. Nobody's thinking about how to prepare for tomorrow. Okay. What are we doing to prepare? Go. Take you. Tell me, tell me.

I'll make it quick. Here are six things I recommend people do to prepare. Here's the six things I'm kind of doing. One, I'm moving assets to cash. People hear this phrase, cash is king. It's a pithy little phrase that we throw around. Let me tell you something. When the market turns, anybody that was around in 2008, 9, and 10,

they know that lending was really tight. And the people that were getting the deals were the ones that had the cash. So I'm a big believer in right now, hoard any cash. Don't spend cash on things you don't have to. Don't buy thin deals just to have money out there. I'd rather have the money sitting in a bank account waiting for a great deal to come along

than to put it into a marginal deal right now. So hoard cash. Two, now's a great time to open credit lines. I'm not saying people should take out credit. I'm not saying people should run up their credit cards or open a heel lock and take out the money, but have the money available because the next best thing to cash is a credit line. So I went out, I owned my house outright. I've never had a mortgage in my house, but I went out about six months ago and I got as big a credit line against my house as I possibly could. I want to know that I had that cash available in the case that some awesome deal comes along and banks have decided they don't want to lend to me anymore. So I don't ever have to use that. It costs me nothing to have it sitting there waiting. But I'm telling people, raise your credit card limits, get your HELOC, get your personal line of credit, get your business line of credit. Just have that money available in case you need it. along the same lines, build credit.

Now's a great time for anybody that doesn't have great credit. Start building your credit because right now you can go to a bank and you can get a loan with a 660 credit score or 680 credit score. Again, anybody that was around in 2008, 9, and 10 knows that you're probably looking at 720 or 740 to get a loan. And it takes six months, 12 months, 24 months to build your credit back up if your credit isn't good. So if your credit's not good, now's a good time to start focusing on that because by

the time you get it to the point where it's 750, you're probably going to need it. I like to say, again, going back to the, assume the worst case scenario you can think of in the market. If it's 15%, 20%, whatever it is, get rid of anything that can't handle a drop of that amount. So if you're holding a flip that can't handle a 15% drop, figure out how to get wholesale or get rid of it now. I like to say the same thing on the rental side. If you can't handle a 10% drop in rents or a 10% drop, drop in occupancy and you think that's the worst case scenario, get rid of that property. So don't ever go in thinking the worst case scenario is going to blow you out of the water because you don't want that. Restructure short-term debt. So I'm a big fan of interest rates are

relatively low right now. Low right now in two years. Not only could interest rates be higher, but if you have a loan that's coming due, if the market's bad, the lender may be hesitant to try and restructure that loan. They're just going to say, pay me off. I don't want to extend this. So if you have any loans that are come and do in the next year or two, see if you can work out something with the lender where you extend it for three or four or five more years, even if you have to pay an extra quarter point or whatever it is. Having longer term debt will help you weather any big storm. And then finally, and this is a big one, especially for house flippers, if you see the market start to turn in your area, cut your losses. I see way too many people. I saw way too many people during the last downturn who basically chased the market down.

They bought a property and one day they realized, oh, this sucks. I'm going to have to break even on this property because of the market. I don't want to break even. I'm going to wait a couple months. I'm going to keep marketing it and see if I can make just a little bit of money. And then a couple months go by and they're now down 1%. And they're like, oh, I don't want to lose money. I'm going to hold on to it and wait for the market to get me to break even.

And before they know it, they're down 5%. And three months later, they're down 8%. And they basically chase the market down because they don't want to lose a little, so they end up losing a lot. So big, big piece of advice for any flippers out there. Once things start to turn, you're going to lose buyers. You're going to have people that can't get lending. The market's going to continue to drop. It's not just going to jump back up.

So don't chase the market down. If you see you're going to take a little loss, nothing wrong with a little bit of a loss. It's better than a bigger loss after more time. So those are my six pieces of advice on how to prepare. Nice. I like that. So we got six rules for investing in this market. And then we got six things to prepare.

I love that. I think that's smart stuff. So, all right, now can you run over that list of six again real quick? Just sum up real quick. Yeah. One line each and then so people can take notes. Go ahead. Yeah, number one, hoard cash.

So move as much as you can to cash. Number two, open as many credit lines as you can that you're comfortable opening. Three, build credit. So if your credit's bad, get it good. Four, get rid of anything. Figure out what you think the worst case drop is in values, rents, occupants. and if you have anything that can't handle that, get rid of it now. Don't hold on to it. Five, structure, restructure short-term debt. So negotiate with your lenders to basically

extend any debt out further than a year or two at this point. And then number six, if the market starts to turn, don't chase your losses. Just get out. Perfect. I love it. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy, managing teams busy worrying they picked the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details, so you don't have to. In some cases, investors even receive 50 to 75% of their

down payment back at closing, and there are interest rates as low as 3.75%. They've been trusted partners with bigger pockets for over a decade. And if you want to learn more, or visit biggerpockets.com slash retirement. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model.

They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management and the details so you don't have to. In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are interest rates as low as 3.75%. They've been trusted partners with BiggerPockets for over a decade, and if you want to learn more, visit BiggerPockets.com slash retirement.

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They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score. And they have the results to prove it. Go to mine.co slash show me to see how mine performs and get your first month free, which is much cheaper than learning the hard way. Wouldn't it be great if your houseplants paid rent while you were out of town? I mean, they've got the whole place to themselves, lots of sunlight, zero responsibilities. But no, they just sit there waiting for someone to spray them with some cool mist like a bunch of leafy loafers.

But guess what? Your home actually could be earning you money while you're not there. Airbnb has a great feature called the co-host network, which makes hosting your home so easy. If you live far from your property or are away for extended periods, you can hire a local co-host to take care of the hosting for you. These co-hosts are vetted locals who already have experience hosting on Airbnb. A co-host can handle all the details like messaging guests, creating your host space, and managing reservations. So everything runs smoothly.

It's a practical way to earn a little extra money, maybe even some cash toward your next trip. Plus, you get to share your place with someone traveling to your area while you're off making memories somewhere else. Your home might be worth more than you think. Find out how much at Airbnb.com slash host. All right. Now you're going to let me talk about your book? Yes, books.

All right. But we are going to go to the deal. Yeah, I must. We are going to go to the deal deep dive in a second. And actually, I'm really, really fascinated by your deep dive topic today. I know what we're going to talk about. And I'm super excited to talk about it. But before we get there, I do want to mention that, you know, as you said, you can still invest in today's market. It's just like surfing, right? We've got to learn how to ride the wave. And right, is that why we are publishing a new edition of your two, I guess, groundbreaking landmark books, the book on flipping houses and the book on estimating rehab costs. Yes, thank you for bringing those up. I'm very proud of those books. So for those that don't. know, I published these two books. These were the first two bigger pockets publishing books ever published. They were very first. It was actually your idea. I mean, your idea, you came to us and

you're like, hey, and I wrote some books. Would you guys like to publish them? We're like, I don't know, is that a thing? Can we publish books? And it started to. I think we have to give Josh some credit that too. Okay. Josh gets some credit too. But yeah, I mean, like that started the entire thing of what has become the largest, you know, like, I don't know, most of the top real estate books now are bigger pockets books, including yours. And now we've got a second edition. So tell us about that. Wow, I get credit for the whole bill of the pockets publishing empire. So, yeah, I wrote these books, the first edition of these books back. I started in 2011, wrote through 2012.

So with the flipping book, it was very focused on the way the market was back then. And everything we've been talking about, back then, things were different. It was very much a buyer's market. So as a house flipper, you didn't need to know how to find properties. That was easy. You needed to know how to find buyers, how to market houses, how to stay. Houses, basically everything on the back end you needed to be really good at because the hard part was selling. And so the book was very much written from the perspective of somebody that was investing

in that market. As we know, over the last four or five years, things have changed. It's no longer a buyer's market. It's not very much a seller's market. And the key is figuring out all the up front pieces, the acquisition, the financing, all the stuff that's a lot harder now, the scaling. So I took this as basically an opportunity to go back and revise the book to kind of focus on the other part of the market, the seller's market side of things. And so basically focusing more on acquisition strategies and things like that. And also, I'll be honest, I wrote the first book and I didn't send it through a professional editor. And so I think the biggest piece of negative feedback I've gotten over the last five years and the biggest thing that I was disappointed in was there were just a whole bunch of grammatical mistakes and things. like that. So I've kind of been embarrassed about that for five years. So I'm very glad we got the

opportunity to rectify that. And so very proud of the new addition. On the estimating side, everybody knows that prices now are a whole lot different than prices were five, six, seven years ago. So I literally reached out to, it was about 50 investors across the country in all the big markets. And I sent them a survey, basically. Help me figure out what prices are in your markets. So I could get an idea of the ranges for, I think I said it was a hundred and twenty-eight or something data points and gave me an idea of like ranges that other investors were seeing in other markets. So that allowed me to basically update the estimating rehab cost book with accurate prices from around, again, it encompasses about 80% of the country.

Yeah, another 20% that are markets like Northern California and L.A. and New York and Boston that are going to be just whole worlds by themselves. But the price ranges we have in the book now kind of encompass like today's prices across about 80% in the country. That's awesome. I'm super excited. So that's very, very cool.

Again, the books are fantastic. I mean, I read them the first time around, and I'm super excited to be able to update them, new content, all this stuff. And also, there is a bonus book that you put together, like an e-book called What Every Real Estate Investor needs to know about the economic cycle. So if today's podcast interests you at all, is that more of that? Is that what's in there? Yeah, absolutely.

It talks all about the topics we've been talking about today, but it goes into a whole bunch more detail, goes into a lot more history of the cycle and what affects the cycle, and then jumps into if you're a real estate investor today, not just a house flipper, but any type of real estate investor today, here's what you should be doing to make money and here's what you should be doing to prepare. I love it. And one thing I don't think we talk enough about it, but, you know, there's a lot of flippers on the site, but there's a lot more rental property owners around bigger pockets.

That's a little bit more of a popular topic. A lot of people listen to this show are like, well, I don't care about flipping. But the truth is, the best deals generally in today's market are rehabs. So, like, these books actually helped me a tremendous amount on my, what I do with the birth strategy. I know David does it as well. Like, we buy nasty properties. We fix them up, we rehab them, rent them out, right? The exact same thing applies.

I mean, maybe one or two chapters in the flipping book, maybe doesn't apply. Everything else applies perfectly. The ARV, the figuring out all the rules, the analyzing, deal with contractors, all of its stuff still applies. to anybody who's looking for a good deal in rental properties today as well. And estimating is obvious. It applies to everyone. Yep. Cool.

All right. Well, everybody go to biggerpockets.com slash flipping books. So biggerpockets.com slash flipping books. No spaces. Just flipping books, plural. And you can get it there. And you can get either book individually or you can buy them as a package, which I highly recommend one because it's cheaper.

But we have an ultimate package. It includes both books in physical and digital form and the audio version and the bonus book. And all that's like, I don't know. It's like $59 or something like that. So again. And a whole bunch of spreadsheets and checklists and documents, basically everything I use to run my business. Yeah, there you go.

So get the ultimate package. It's totally worth it. I mean, it's one of those things that's hard not to see that, making you a thousand times of return on that. So check it out, biggerpockets.com slash flipping books. And with that, we've got to move over to the next segment of our show,

which we call the deal deep dive. Deal deep dive. Deal deep dive. All right, let's get to the deal deep dive. These are, or this is the part of the show where we dive deep into one particular deal that the guest has done. And today we're going to talk to Jay about, I believe, a multifamily property that you bought. I don't know if we call it, you flipped it, but you bought it. We can call it maybe flipped it.

Tell us about it. Yeah. So, first of all, what was that property? Like, what was it? So this was a 38-unit property in what we referred to as a tertiary market. So small market, specifically it was Columbus, Georgia. I would call it a C-minus property when we bought it, maybe even a D property when we bought it. Rents were in the 4 to 550 range, a number of Section 8 or the equivalent of Section 8 renters down there, people getting government assistance.

So 38 units, we purchased this last November, so just over a year ago, a year and a month or two ago. How did you find that? Before I get to the price, how did you find this deal? Yeah, this was great. So I had two partners on this deal. And one of them, we'd been looking at multi-unit. We've been looking to buy multi-unit for like a year. So he's talking to people in some of the bigger markets.

We're talking to people in Riley, North Carolina. We're talking to people in Atlanta. I'm looking up here in Maryland. And we're realizing that the primary markets and the secondary markets just aren't really going to work out for us. And so he's talking to this. somebody in Atlanta who said, no, no, you've got to go to some of the smaller markets. I'm a big fan of Columbus, Georgia. You should look down there. And so basically, he hops on the internet and

he types in apartments for sale, Columbus, Georgia. And the very first thing that pops up is an expired loop net listing from like four years ago, from four years before, for this 38 unit deal. And he was like, huh, well, it's expired. It's been four years. I wonder if this guy still has it. Maybe we can put something together. So he calls the guy and the owner and the guy says, yeah, we, we sold that thing four years ago. But I just took it back in foreclosure. We did an owner financing. And I just took it back a month ago. I haven't figured out what I want to do with it yet. And so are you interested? I mean, if you can save me from having to like do any work on it or whatever, let's talk. And so I flew down there two days later and we went down to see the property. We negotiated a deal. So essentially, we found it by. doing apartments for sale, Columbus, Georgia. And that's how we found this deal. Crazy. Yeah, that's awesome. I love that. And actually kind of a cool strategy. Again, like, find properties that sold a number of years ago and go that route. Yep. Okay, so how much did you pay for this deal? We paid 609 for 38 units. You can do the math. So it was, it was about $17,000 or $18,000 per unit.

So it was, it was. Jay didn't trust you to do the math, David. You can do the math. Let me tell you what it is. That's right. He's a cop. I saw the smoke coming out of his ears. Yeah. He said, you can do the math.

Oh, God, David looks terrified. I need to jump in here and save him before he embarrasses himself on the air. Well, under 20K unit, which gives you an idea of the types of units it was. Although, let me tell you something, we met every tenant in the property, and these were some of the nicest people that you could have imagined. And like, if I had to imagine the type of tenants I'd want living in my properties, whether they were A class or D class, these were the people. So that's kind of what sold it for me. Like, I was a little scared going in to buy a C minus or a D class property.

But once we moved the renters, we were really happy. That makes sense. All right. So how did you negotiate it? Any fun negotiation strategies in there? Yeah. So this was interesting. We negotiated seller financing.

And so the seller was going to provide about $450,000. and we were going to provide the other 100,000, whatever it is, 170,000, when you include closing costs and everything. Day before closing, it turns out that the seller was planning. He had bought it owner financing, and he wanted to do a wrap with his lender. His lender got winded the deal and said, nope, I just want to be paid off. I've had this loan for like 20 years now. I just want to be paid off.

So seller financing went out. the window. We scrambled. We found a bank that we had worked with in the area a number of times before. And because of our relationship with the bank, they basically said, yeah, we can get this done. And they got the deal done in two weeks. So we had to extend closing a little bit. But basically, they lent about the same that we were going to get the owner financing for. So we were out of pocket about the same amount. All right. Okay. Cool. So what did you end up doing with this property once you actually bought it? Yeah. So management's definitely the most difficult thing for for these mid-sized properties.

We're not making enough money. In general, these properties don't make enough money that you can hire full-time managers to be on site. Sure. And they're, but they're making, like, they require more management than like single families do, obviously. So it's always a tough problem. What we did was, we reached out to a couple other apartment owners in this area

that own very similar properties, like somewhere in the 20 to 50 units. And we said, hey, we want to hire a manager. Do you want to do like a time share? You want to do a time split with a manager. Yep. So we ended up negotiating a deal with two other apartment owners where we hired this person who had a small team around them and basically we shared them. So we got them about a third of a time.

They got them about a third of a time. So we could afford them, but we also had somebody that was pretty much dedicated. It was kind of the best of both worlds. That's awesome. Oh, and so you asked what we were going to do with the property. Basically, we decided that we were going to, instead of putting a ton of cash into it, we were just going to let the cash flow because it was mostly, it was, It was about 90% occupied at the time.

We were going to do some cleaning house. We were going to evict a bunch of tenants that weren't paying. But we're basically going to use the cash flow from the property and just put it back into the property to renovate it over a year or two. So we were generating about 12K a month of that. I think about 6K was profit. And so we were rolling 6K a month in. And so doing some longer term stuff like some cap-beck stuff like roofs and siding as well as fixing up the units. and taking care of the tenants, all the maintenance issues that had collected over the previous

couple years. All right. So, Jay, what was the outcome of this property? Like, what happened with it? Were you at today with it? Yeah. So our goal was to hold it long term, but turns out that one of my partners decided that he wanted out of real estate, which was kind of crazy because he was, I've been working with

this guy for 10 years. But he decided he wanted out of real estate and was looking to sell off his holdings. He asked the other two partners, me and the other guy, if we wanted to buy. buy it from them and basically we said, no, we'd consider that, but let's see if we can put it back on the market and sell it for a premium because we bought it at like 12 cap. We thought that it was probably worth about a 10 cap and we had raised income a little bit. So we put it back on the market. Ultimately, we couldn't get a good offer because there was only about a year or less than a

year's worth of financials on the property. We bought the property without any financials because it was a foreclosure. And lenders just didn't want to lend on it without financials. We got loans because we had a good relationship with the bank, but none of our buyers could get a loan. So ultimately, we had a buyer come to us and say, hey, I'll give you your price. And it was around 780, which was a nice profit for us. He said, but I need seller financing for two years so that I can build up some financials to get a loan. And so ultimately what my partner and I did, the way we structured it was, we said, okay, we'll give you seller

financing on about the same that we had our bank loan on. We provided seller financing. I turned around and we charged him, I think it was like. like 8% for two years. I turned around and basically sold my half of the note to a friend of mine who I knew was looking for some cash flow, who had extra cash. And basically I turned around and I sold him the cash flow. So I sold him my half at the same 8%.

So basically every month for the next two years, I'm getting income in from the note that we originated. I'm handing it off to a friend of mine who I have a note with. So I'm breaking even on the cash flow. I got all my cash out. And now in two years, I'll basically get all the profit. That's clever. Yeah.

So I'm deferring the profit for two years, but I got all my cash back right away. So it was a good deal for me. You know, we- Well, so the tool about, right, Brandon? That's what it is, right? The more tools you have in your mental toolbox, the more things you can put in there. And that's why, like, you know, we published a book on note investing, you know, from Dave Van Horn, right?

Things like that. Like, they're just good tools to have in your toolbox. And the crazy thing is, Dave actually was the one that suggested it to me that I should be doing that. I should consider doing this with the property when I was trying to figure out what to do. So, yeah, great book. And Dave is a great guy. All right. All right. Last question then. Lessons learned. Lessons learned. I think the biggest lesson on this one is make sure you go into deals, when you go into deals with partners and I'm always skeptical of partners, but just make sure everybody's on the same page. In this case, we pretty much did. But it was kind of a curveball when eight months after we bought

this property, our partner said, hey, I'm looking to get out. Not sure. we could have foreseen it, but it was just a really good reminder that anytime you're going to work with partners, just have these tough conversations like what happens if and what are your long-term plans and things like that. So for me, the biggest learning besides just it was our first multifamily. So there was a ton of learning there. But the biggest takeaway for me is just be careful with those partnerships. All right. So we are headed to the fire round. It's time for the fire round. All right. Next up is today's fire round. Now, these questions come directly out of the bigger pockets forums asked by you, the members. Jay, we are going to fire them at you and you're going to answer. Okay. Well done. Okay. First question. I've been working to find, oh, this comes from Jackson Howell in Georgia, by the way. I've been working to make my first deal happen. With the numbers still working, but tighter, are you willing to pay a higher price to make the deal happen? And hey, how's it going? So that's a good question. And I would say that these days, again, five years ago, my answer probably would have been different. I would have said, yeah, if your numbers are tight, most likely the market's going to kind of help you out over the next few months and you'll probably sell it for more than you were planning to. These days, I'd say don't do a tight deal. Better to do no deal than do a deal that's really tight or a deal that's going to put you at risk. You don't want that first deal to go south and then you never do your second. So I would say as much as painful as it is,

to hear go look for a better deal. All right, good answer. Next question. This one comes from Ricky Wiley. He recently had a nightmare experience with a general contractor and he asks, what are the top things to look for when choosing a dedicated, reliable contractor? Yeah, if I knew the answer to that question, my life would be a whole lot easier. So if you're looking, so here's some things to look for.

One, get references and don't just call the references. Don't just email the references. say to the references, hey, can I come look at the job they did on your property? Because one, you have the risk of, yeah, he's just giving you the name of his best friend who's going to tell you he was a client, but really wasn't. But two, if you can actually see the work that they did, you can get an idea of like their quality. You can get an idea of the scope of the job. Is it the same scope that you're looking to do on yours? And also, when you're face-to-face with that reference, you can ask the tough questions.

You can ask things like, so did he show up on time? And was he on schedule and was he on budget? And these are things that if you're doing it over the phone, people can lie to you over the phone. You may never know. People are going to be less likely to lie to you in person. And it's a lot easier to tell if somebody's lying to you or kind of hedging when you're in person. So these days when it comes to, especially for big jobs, I have no qualms basically say, give me some of your references, calling those references and saying, hey, can I bring you a coffee and let's me to wet the property and talk about it there. Two, I always like to get my references from other investors.

So don't just call somebody off of Craigslist or some other social media site. Find another investor that recommends this person. And then three, the best way I found to get contractors, and I've been saying this for 10 years, is good contractors, hang around with other good contractors. So if you have a great contractor that you've worked with, he's not going to recommend somebody who isn't going to make him look good. I've never had a good contractor recommend a bad contractor to me. Generally, if a contractor is going to recommend somebody, it's just the opposite. It's like, I'll give you a name, but I can't vouch for the person. Even if he loves the person and knows he's great, they're always going to hedge because good contractors don't want their reputation to be hurt by somebody they recommend.

So the best way to find contractors is find one good one and ask for references. They're going to be good. Ask them for references and just build your network like that. David always says rock stars, no rock stars. RKR. Absolutely. Yeah. Hashtag RKR.

There you go. Okay. I need to not be so verbose. Good principle. I love it. Okay. Last question. When it comes to rehabbing, what are some ways to save money?

I'm thinking along the terms of using less thick countertops, smaller trim in the bedrooms, not paying the garage, cheaper cabinets, lower-end vanity, stuff like that. Where are the areas where you can make cuts? Yeah. So it's funny. I think I answered this question on the forums. Oh, funny. So here's the thing.

There's a direct relationship with how much you spend on the rehab and the resale value, the ARV. And so you can cut anything you want. You can use thinner countertops. You can use all white paint instead of using multi-tone paint. You can use cheap doors and cheap light fixtures. You can not replace the stained carpet. You can do whatever you want. But you have to factor in the fact that that's going to impact the ARV.

And there's nothing you can do. There are no shortcuts you can take. in the rehab, at least ethically, where it's not going to impact the ARV. So ultimately, what I tell people is run different scenarios. So run a scenario where you use cheaper countertops and you use cheaper flooring and use cheaper paint and this and that and model out what your profit would be with that ARV. And then figure out what the ARV would be if you used marble countertops and nice hardwoods and whatever.

And then model that out, model that scenario out with that AARV. ARV and then model out 10 more scenarios where you add square footage or where you tear the whole thing down, you can run lots of different scenarios, but just keep in mind, whatever work you do is ultimately going to impact the ARV. So just do the model. And so yeah, if it turns out that you can make more money by using thinner countertops, great. Just don't expect that you're going to sell it for the same price. Yeah, that makes sense. I would add that if you're inexperienced and you don't know how to tell if it's going to affect the ARV. You don't need to know.

Ask someone who would know. Ask the agent who's going to be selling it. Ask another investor who flips a lot of houses. Ask someone experience with it and go by their advice. You don't need to go try to figure all this out and stretch yourself out. Yeah. Find the closest house that's on the market that's a flip and go walk through it and see what they did.

All right. And just real quick, if people want, like Jay suggested running multiple scenarios, which I think is a fantastic idea, just to throw this out there. If you are a bigger pockets pro member and you're using the bigger pockets calculators that we have, the flipping calculator, rental, burr, wholesaling, whatever. You can actually, not many people know this, but you can duplicate a report. So you can run the report one time. And then you can actually make a, it's called make a copy.

You just click on, I think it's more actions or something like that. And you make a copy of it. Now you have two, and you can relabel that one, you know, version two or high end, low end. And you can make as many copies you want. It keeps them all. And then you can adjust them separately. So you don't have to rerun the numbers entirely if you're using the bigger pockets calculator.

So just a little quick tip for you there. And with that, I want to share. shift and head over to the last segment of today's show, the world famous. Famous for. All right. This is a part of the show where we ask you the same four questions that we ask every guest, every week. Number one, Jay, what's your current, and I'll say besides your own book, which I'm sure you love,

besides your own book, do you have a favorite real estate book right now? Besides your guys' books? Well, we'll say besides your book. You can still say it's my book, but I'm kidding. Did you ask, I'm sorry, did you ask real estate book or book? We'll go real estate book first, then we'll go a business book. Yeah, absolutely. Well, real estate is business.

I don't know how you do. No one's ever called me out on that. We're going to go, we're going specific first. What's your favorite real estate business book, followed by non-real estate business book? Yes. So these days, it's funny. I'm always kind of shifting, like, what I'm trying to learn. I like to learn about all different things.

And last few months, I've been really focused on learning everything I can about notes. So I've been really focused on note investing. So I've been, here is it backwards here? No, it's right. It's right. Oh, that didn't have, okay. Real estate. So Dave Van Horn's book is fantastic.

And what's it called real estate? For those who can't say the video, real estate, note investing. There you go. Complicated title. They really should have called it the notebook. I know. We talked about a lot about that. We actually went back and forth a hundred times.

Should we call it the notebook? Because it would be funny. Yeah. And then as a. math guy and this book is not well written but it's a classic for anybody that's looking to learn about notes and the math behind it or whatever invest in debt by Jim Napier. Napier Napier. So those are the two that have come kind of reading simultaneously going back and forth. You're one of them too. I'm always reading multiple books at one time. Yep. He is too. Brandon,

you can't even keep up with them because he's always like, oh, I'm reading this cool book and it's one of 20. And he's like he's got multiple personalities and they all have their own book that they want to read. He's got to feed them all. That's the way I am as well. Okay. What is your favorite general business book? My favorite general business book. These days, it's funny.

I'm not a huge Tim Ferriss guy. He's okay. But he's got a book called. Yeah, he's okay. He's got a book called Tribe of Mentors that I'm really loving. It's one of those books that literally, so for anybody that doesn't know, he interviews some, some, awesome people and ask some awesome questions about these people. And this is one of those books that you can just open up, turn to a page, and just be inspired. Just pick a random page and start reading.

And you're going to walk away 10 minutes later, more inspired than you were 10 minutes earlier. He asks a lot of these people like, what books do you recommend and what tips do you have for living a better life and doing better in your business? And so I've walked away with some awesome tips. Half the books I'm reading right now are based on recommendations from tribe of mentors. I'm sure somebody's mentioned that book before, but I'm enjoying it. I'm actually not sure. You know that if anybody's ever recommended it, but go ahead, David. Well, I was going to say, you know that you're already successful when you're listening to Tim Ferriss because you have four hours of downtime to spend listening to one podcast of Tim waxing on and on and on about things that you need to know.

So I mentioned the tool of the, what is it called? The Tribe of Mentors book is probably like 9,000 pages. So it is really big. Yeah, exactly. Okay. What are some of your hobbies? Some of my hobbies. So these days, I'm focusing a lot of time.

This is kind of an investing hobby, but I've started buying racehorses. So the last year or so, I bought 10 racehorses, and I'm really getting into the investing side of racing. And I love the horses. So I spend a lot of time at the barn actually visiting my little guys and girls. That's awesome. But yeah, that's probably been my biggest kind of side hobby for the last year or so, has been racing and race horses. Do we have a book coming out in the future for how to invest in the book on breads? The book on thoroughbreds. I don't, I, I won't write a book unless I think I can do

it better than anyone else. And I don't think I can do, I'll ever be able to do that better than what's already out there. That's funny. All right. Vital question of the day. What do you think sets apart successful real estate investors from those who give up, fail, or never get started? There's so many things. But I would just say taking action, doing that first. first deal. And I know everybody probably says that, but let me throw something out. And I probably threw this out there on my, uh, on my 2013 podcast, but, but I really, I need to drive this home. Um, for anybody that's listening that hasn't done a deal and is like thinking about giving up or is getting discouraged, I have yet to meet or it's probably an exaggeration, but I very, very, very

rarely meet anyone in this business that has done one deal. So I meet tons of people that have never done a deal. People that have given up before they've done a deal. And then I meet tons of people who have done lots of deals. And what you'll find in this business is if you can get that first deal, you're not going to stop. You're going to get the second. You're going to get the third. You're going to get the 10th because the first deal is infinitely harder than all the rest. So my biggest piece of advice to anybody out there that hasn't done a deal and that's getting discouraged, keep going because once you get that first one, it's going to snowball and you won't do just one deal.

Get that one and you'll do 100. Yeah, I love that. I love that. We talk a lot about that. There's a thing I call the stack, right? The stack basically means if you just buy that first deal and then later on, you'll, you'll understand, you have knowledge of experience. You can then buy maybe two deals and then you maybe go to four deals and then eight,

16, 1332. And like, yeah, people, like it's a lot faster than people imagine and a lot, not I don't call it easier, but more simple than people imagine to acquire a number of flips or number of rentals because you just, you know, you're getting a little bit better every time. Basically, the summary of this entire podcast is I threw out an idea over five minutes then you guys give me the word or the phrase or the acronym that means the exact same thing. You got to study geometric progression versus linear progression. Real estate is not linear progression.

You feel like you're getting nowhere. And then the next thing you know, you're going so fast, you can't even keep up with it. Absolutely. Yeah. Okay. Well, Jay, this has been fantastic. The last question for those of us that are fascinated with you is where can we find out more about you? You can find out more about me on biggerpockets.com, first of all.

So I think I currently have the distinction of being the most posts of anybody on Bigger Pockets. So Jay Scott on Bigger Pockets. If you want to check me out on Facebook, you've got a great group of people that talk about real estate and the economy on Facebook. My handle is Jay Scott Investor. And my website is One, Two, Three Flip. And if anybody ever wants to send me an email, the letter J at one, two, three, flip.com. All right, good deal. Well, Jay, this has been fantastic.

Thank you so much. We're going to take this show out right now and just, I guess we'll take it out nice and easy. This has been fantastic. I don't want to belabor the point because it's just so good. So thank you for joining us today. I'm going to go take care of my dog who won't stop barking by my feet. And, you know, we'll see you all around. Thank you, Jay.

Thanks, guys. And thank you, David. Thanks for sharing your wisdom. Check out the new book. It's going to be very, very good. You want the revised edition of what Jay has done, learn from the master. This is David Green for Brandon, the buy-in- Hawaiian, Turner. Signing on.

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