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

Starting point is 00:00:00 This is the Bigger Pockets podcast show 374. Cash flowing real estate is protection. And so, yeah, there are a lot of things in real estate, and I'm not saying everything, and we can talk about this. There are a lot of things in real estate that aren't going to work well right now, but cash flowing assets, cash flowing real estate, are going to work well, whether you're in a recession, whether you're in an expansion or anywhere in between. You're listening to Bigger Pockets Radio,

Starting point is 00:00:27 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. All right. What's up, guys?

Starting point is 00:00:49 Jay Scott, Scott Trench. Hey, welcome to the show, guys. How's it going, guys? He's gone. Good to be here. Good, good. So the world is changing rapidly right now. A lot of our listeners, a lot of our members on Bigger Pockets,

Starting point is 00:01:05 on the forums, on the blog comments are asking a lot of questions. People are rightfully a little bit nervous and freaked out right now. Other people are looking and saying, is this the opportunity we've been waiting for in terms of should we start buying right now? Or should we start selling right now? So that's the whole point of today's show is just to really dive into what's going on with the current state of the world. Before I actually jump into all that stuff, guys, though, I do want to, first of all, welcome my co-host of the day, Mr. David Green.

Starting point is 00:01:33 Hello, David Green. Hello, Brandon. What's going on, man? Thank you for remembering that I exist. I was like, I am happy that you exist. And I know you're, what's the word in place? Shelter in place. Sheltering in place down there.

Starting point is 00:01:47 I'm down the hatches. What's all the other things that they say in the Midwest that are really cool that we don't always hear after? I don't know. Duck and cover. Yeah, it's rough. All right. So this show is going to be a little bit different. It's kind of a roundtable discussion.

Starting point is 00:02:01 Before we get into today's show, though, I want to get to today's quick tip. All right, today's quick tip is brought to you by Scott Trench. Go, Scott. Oh, you didn't tell me about this. My quick tip today is invest in real estate from a position of financial strength. All right.

Starting point is 00:02:17 Good quick tip. I like to throw quick tips at David at the last second without telling them. I thought I'd throw it at you today. I'd say like 40% of our quick tips are absolutely branding just like hot potato, boom, there you go. What are you going to do? Yeah, we probably should do more quick tips that are prepared ahead of time from our guests, I mean, from our users, listeners. That's what we should probably work towards. But we'll get there.

Starting point is 00:02:38 That's a great segue into today's show. That is a great segue, great segue, it's a great segue, guys, into today's show. And we're going to, again, we're going to talk about the virus, what's happening, how that affects real estate investors and all the good stuff. All right. Jay Scott is here. Hello, Jay. Hey, how's it going? Brandon? How you, how you doing, guys? Man, we're good. Jay is one of the smartest people in this room right here and also on Facebook in general. And I say that because if you guys follow Jay on Facebook, like his posts are like intelligent. He's a smart dude. So we had to grab him today. He also happened to write a book. Wrote a book. Yeah, he write a book called recession. What was a recession proof real estate investing. Yep, recession proof real estate investing. All right. And so we'll talk a little bit about that today. Here's the thing about traveling.

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Starting point is 00:05:19 And I wanted to put this in here for a really important reason. This is a super long show. It's like two and a half hours long. But the first hour we spend really talking a lot about like what's going on in the world right now. The economy from a macro level. We'd have a little bit into the micro step, but really it's like a macro level. The second half of the show though, starting at about an hour in is where we dive into questions from like listeners just like you. In fact, we actually ask people to send us messages like voicemails about their question.

Starting point is 00:05:49 And so we're actually going to play those questions and answer it for like an answer. hour and a half of just Q&A. So here's the deal. If you don't care about the macro stuff, you already know what's going on in the economy. You understand what qualitative easing. Is that the word I'm looking for is? Like, if you understand all that stuff, that's fine. You can skip ahead to the hour mark, right at about an hour, maybe hour one, hour two, like an hour in a minute or so in. Skip ahead there and just listen to the questions on how it affects real estate investors in today's world. You can do that. Or if you got the full 10-5 hours, listen to the entire show because you guys are going to love this. Let's get to this meat of today's show. We're talking about

Starting point is 00:06:19 the effect on the economy on what real estate investors should be doing. So I just want to start kind of get an idea so people know who you guys are in case you don't know who Jay Scott is. We don't know who Scott trenches. Can you guys explain real quick? Like just who you are and where do you live and what's the and we'll add on what does the world look like around you right now? I know we'll start with Jay. You're down there in what, Sarasota, Florida. Yeah, I'm down here in sunny Florida. So for those that don't know me, I'm probably best known for flipping a whole bunch of houses, written a few books for bigger pockets. including the flipping houses book, the estimating book, negotiating book, and the recession-proof book.

Starting point is 00:06:54 And I tend to be an economy nerd. So I think a lot of people think I'm really smart about the economy. I just read a lot. And I'm really good at processing data and regurgitating information. So I wouldn't say I'm that smart. I'm just well read. How about that? Okay.

Starting point is 00:07:13 So I am in sunny Florida. Down here is kind of crazy. We are, I'm in Sarasota, Florida. This is where kind of all the old people retire to in, yeah, this is just where all the old people retire to. So you would think that people down here would be taking tremendous precautions because that's kind of the at-risk demographic. And up until a couple days ago, we weren't seeing that. Like, this is also a very, we're the number one beach in the country. So we get a lot of tourism down here, a lot of people come out here.

Starting point is 00:07:44 Number one by population or by quality. That's the real question. So according to TripAdvisor, Siesta Key Beach, number one beach in the country, maybe it's only contiguous lower 48 states. We're not going to leave up. I'd much rather be where you are. But yeah, so maybe it's a lot of people come down here and they're on vacation. And so they're trying to get away from it.

Starting point is 00:08:06 But it's crazy. I mean, our bars are packed. Our restaurants are packed. And we really haven't seen the social distancing that I think a lot of other places are seeing, at least not until the last couple days. All right. Interesting. And I'd like to ask why that is, but before we get there, Scott Trench, tell us about yourself and what you're like.

Starting point is 00:08:23 Sure. So you may know me. I'm the president and CEO of Bigger Pockets. I've written a book called Set for Life on how to build a financial foundation capable of a financial foundation capable of a financial foundation capable of a financial foundation capable of a financial foundation. I'm excited to be here. And then, you know, we're here in the Bigger Pockets Money Show podcast with Mindy Jensen where we talk about how to build, again, that financial foundation capable of supporting investments like those in real estate. I'm excited to be here. And then, you know, we're here. Denver, Colorado. And Denver, you know, I think is probably one of the cities that is reacting pretty aggressively to this. All bars and restaurants have been shut down. There's no dine-in options anymore. Things evolved really rapidly last week. I think that was the week of March 9th. And, you know, Monday, Tuesday that week, I was thinking, hey, things are probably going to settle down into normal. We'll see how this goes. And by Thursday and Friday, I had opted to actually shut down the Bigger Pockets Office. I have all of our employees work remote kind of following the timeline of the NBA there in terms of my acknowledgement of the real impact this thing

Starting point is 00:09:22 is going to have. So maybe a little slow there to kind of admit that that was going to be the case, but then rapidly reacting from there. Well, the hard thing is, I think for all of us, is that like, for, I mean, how many times a month do we see these like posts from CNN, Fox, whatever that the world is ending? Like something is going to kill the world every single month. And so it's almost like the boy who cried wolf scenario where I think all of us, didn't quite believe it, even when this whole virus thing is coming out, it's like, well, I know it's probably a bad virus, but so is global warming. I mean, that's going to be rough too.

Starting point is 00:09:53 And so is, you know, this thing and that thing. And so I feel like anyway, like most people probably didn't take it as seriously as they should have. I don't know. Jay, when did you first realize like, oh, this is, like, this is bad? Well, it's interesting because I've kind of been tracking this since January. Again, I read a lot of stuff. And so there's been grumblings about this since January. but like you said, it's very much media is sensationalized so much these days.

Starting point is 00:10:22 And regardless of what your political viewpoints are, you're going to get news that is going to pander to whatever your beliefs are. And so I haven't known what to believe. And it's one of those things that even to this day I see a lot of people on my Facebook feed who are, they're questioning and they're doubting and they're skeptical about whether they should believe what's going on. It certainly feels like the more news that we're getting, the more data that we're getting from around the world, that this is something that should be taken very seriously. It's one of those things you don't blame people for questioning. You don't blame people for having some level of skepticism because like you said, every day there is a, the sky is falling. And generally it's a pandering to whatever economic or political belief your source of media might have. Yeah.

Starting point is 00:11:14 I was just commenting the other day when I was watching the news. I realized I can't remember the last time I turned on the news. This is years. And it didn't say breaking news on like the news channel, right? It's like back in the day, like breaking news meant like, you know, someone important got shot. And today it's like breaking news. Kim Kardashian, you know, did whatever. And so it's hard to believe that.

Starting point is 00:11:33 But I think we all agree today like we are in a, there is a problem today. Like there, I mean, things are rough. We're not the conspiracy theorist here on this panel here. So let's go ahead. Let me throw something down. And I don't want to, I'm far from an expert on anything medical or anything virus-related, but there was for anybody out there, there was a good article that came out, a study from Imperial College that came out yesterday. Today's Wednesday.

Starting point is 00:12:00 This episode's coming on Thursday. So the article came out on Tuesday, which kind of talks about the modeling that they use that led the government to kind of taking the precautions that they're taking. So for anybody that's really interested in, how did it? we get from maybe this isn't that big of a problem to we need to shut down the country. And I know a lot of people are skeptical because it feels like we got there way too quickly. This article, and we'll put it in the show notes, I'll send a link. This article does a really good job of talking about the models that have come out recently that have indicated that this really could be a huge threat.

Starting point is 00:12:34 It talks about potentially up to 90. If we don't take any containment efforts or procedures, this could potentially affect. up to 90% of the population, up to about 1% death rate for the highest at-risk category, especially because without precautions, we're basically looking at a situation where there are 130th the number of ventilators we would need to protect people. So people dying, not necessarily because the virus is killing them, but because our health care system is overburdened and potentially seeing up to 4 million deaths if we took no precautions whatsoever.

Starting point is 00:13:09 So it was really, it was a sobering article, and it had some really interesting. models. And it does a good job of explaining how we got from not really taking this seriously for a lot of us, including me, not taking it seriously enough, to now we're taking this tremendously serious. And so it answers some of those questions. Yeah. Hey, on that note, just a case, because again, a lot of people are wondering, like, what's the point of the social distancing? David, can you actually explain the analogy? Because you're the analogy guy. Like, you used about the restaurant industry. Remember that? We talked the other day. Oh, yeah. Okay. So when I worked in restaurants, one of the things that I remember was if tables, if I was a waiter, as tables come in, if I had a five to

Starting point is 00:13:49 eight minute break between tables, I had enough time to go get their drink order, put it in the computer, go do something else, go pick up their drinks, bring it out. Now they've had enough time to look at the menu. I can take their food order, put the next thing in, and then move on to the next table. When I would get four tables at the same time, I could handle four tables very easily, but not if they all came at the same time because I can't take all of their drink orders at the same time. I can't put all of their cocktail orders in. The bartender cannot make all four of them at the same time. Boom, you get a delay like a bottleneck. And a big piece of being successful in business, like Jay could probably attest to this, is managing those points where you bottleneck. If you have

Starting point is 00:14:29 a whole bunch of employees that all need to get paid at the same time, but you don't have money coming into your business, even though your business is overall profitable, you can get in big trouble. You don't have enough. So managing like the flow of money, the flow of work, if I have seven people that I'll call me today and said, David, I need to list my house, I would be in trouble because I have to go run seven CMAs and see what seven people's houses are worth and make time to go on seven appointments. And each of them has a bunch of fears that will probably take several hours to work through. And now I ran out of time in the day. But if I had seven appointments over seven days or even three or four days, not a problem. I wouldn't even feel the impact of it.

Starting point is 00:15:05 Which is why, yeah, I was going to say, which is why, like, you know, three or four million Americans die every year anyway, like just naturally. But if they all die within the same, it's based out. Yeah, it's all the same. And hospitals can handle a lot of people, but not all at the same time. You come in, you need a bed, you get better, and you leave. Well, what the government is worried about is that everyone's coming at once. We won't have beds for them.

Starting point is 00:15:26 And what I've heard is this is happening in Italy right now. And people are literally dying in the hallways because they can't get to, you know, the virus causes respiratory problems. They can't get to a ventilator. They all came at one time. So the point of the quarantine was to try to slow how many people are all coming in the restaurant and wanting a table at once. We're trying to keep everyone home because we're all going to get sick.

Starting point is 00:15:46 I'm just planning on I'm going to get sick. Most of us are going to get sick. I think no one knows, but the numbers I saw were half the population is probably going to catch the virus. But as long as that happens over an extended period of time, the health care system will be strained, but they'll be able to save a lot of lives. What we don't want is everybody in the same three-week period all rushing in there. and having a panic. So that's the idea behind the quarantine.

Starting point is 00:16:08 And where I live in the San Francisco Bay Area, they take that really serious. They've closed down basically like seven Bay Area counties and they don't want us doing anything that isn't essential. Yeah. A scary number that I saw yesterday. Again, I don't want to harp on this because I know we have other things to talk about.

Starting point is 00:16:22 But apparently they tested everybody from five NBA teams, all players from five NBA teams. And in theory, because NBA hasn't really been, their season hasn't started, they haven't been practicing, they haven't all been together. In theory, they're relatively disparate groups of people who aren't associating, giving the virus to each other. What they found was, I think it was 9.7% of the players had been infected by the virus.

Starting point is 00:16:47 And this is kind of the first time that they've done widespread testing on a group of people that didn't really think they were infected and that weren't necessarily closely related. And what they found was that we saw this, again, close to 10% infection rate. So it makes us wonder if there's a large percentage of the population right now that's walking around infected. Luckily, the mortality rate for those under 60 or 70 is really, really small. But if all of us are walking around infected, even if we don't know it, we're potentially infecting others who have a much higher risk, those that are older, those that have compromised immune systems. So it's just, I thought that was a really good data point. And again, I'll try and find the link to that that we can put in the show notes.

Starting point is 00:17:28 All right. So let's shift in a little bit and talk about what this means. First of all, Jay, maybe we can start with you on what are you seen in the economy. And then I'll ask Scott, you're the same thing. Like, what are you seen in the economy right now? Obviously, I mean, most of us know the stock market has been rough. But what does that mean? Yeah. So let me start by nobody has any idea. I mean, I get the question many, many times a day. Where are we headed? What does this mean? What's going to happen? And so I can throw out some data. I can throw out some ideas. I can certainly tell you what other people who are a lot smarter than I am are thinking and saying. But anything I say now is likely to change next week, next month, six months from now. But certainly what we're seeing is a whole lot of economic turmoil. Stock market is kind of crumbling. And a lot of people say that the economy is a reflection, the economy impacts the stock market. The stock market starts tumbling when the economy kind of starts to shift. But Ray Dalio, who is an economist that I highly respect, he likes to say that it's actually the other way around.

Starting point is 00:18:33 A lot of times it's the stock market that impacts the economy. Because when the stock market starts to shift, it changes our perceptions, our confidence in the economy. It changes how much disposable income we think we have, even though losing a lot of money in our 401Ks or losing a lot of money in the stock market might not impact us day to day. It changes our perception of how much money we think we have, what our net worth is, what our retirement plans are. And it gets us to start spending differently. So the stock market in this case likely isn't a reflection of where the economy was.

Starting point is 00:19:03 The economy was pretty strong a couple weeks ago. But now the stock market is shifting, that's likely to have a big impact on our economy. Additionally, I mean, we all know businesses are shutting down restaurants, bars, tourism, airlines, Disney World shutdown. I posted yesterday that basically Las Vegas is shut down. So all the casinos are closed. Just some personal anecdotes. I have a friend who runs a Hilton Hotel here in Florida.

Starting point is 00:19:27 and their occupancy has dropped from mid-90s down to about mid-30s. And so they laid off 50 people yesterday, and Hilton has told them that if it drops any further, they're probably going to lay off the entire staff, save for one or two people to flush toilets and keep the building safe. So that's going on around the country. I've read that we could potentially see short-term unemployment rate spike to up to 20%, which is just unheard of one out of five people, literally being out of a job. And that's just employees. If you think about it, a lot of us are also business owners. A lot of us are small business owners.

Starting point is 00:20:01 And I'm certainly not saying it's worse for small business owners, but they face their own challenges. Small business owners can lay off their employees and not have to pay their employees, but a lot of times they're still, they have inventory sitting on the shelves. It might be perishable inventory, especially if you're a restaurant. They're paying their property costs. They have to lease their buildings or they're paying their mortgages on their buildings. They're paying for their cars. They're paying for their insurance. So we talk about 20% potentially unemployment rate. That doesn't factor in the employers, the small business owners, who are getting crushed as well. So certainly short term, I think what we're seeing is going to be a tremendous shock to the system.

Starting point is 00:20:39 We often talk about the health of the economy being measured in what we call GDP, gross domestic product. And that's kind of a measurement of the entire output of our entire economy. And what we like to see is we like to see that grow quarter over a quarter of, quarter. Our economy grows a little bit every quarter, and generally 2%, 3% is kind of a nice normal number. If we see negative growth, if we see that economic output like contract for two quarters in a row, we typically refer to that as a recession. That's the technical definition of a recession. These days we're talking about in Q1, which is basically January, February actually had some very strong numbers, but March is going to have some extremely

Starting point is 00:21:22 rough numbers. In Q1 we may see 0% growth. We may see a little bit positive, a little bit negative, but talk is in Q2, we could literally see negative 5, negative 7, negative 8% growth, which is akin to what we saw in 2008. And it's akin to some of the worst times that we've seen back in the 80s. We saw negative 10% growth for a quarter. But the big question that everybody kind of asks is, okay, it's pretty clear we're going to see some really negative short-term impacts here. Unemployment, wages, people not having enough money, businesses potentially going out of business, GDP growth slowing. The big, big question is, is it going to be short-lived? Or when we get kind of over the hump of all this virus stuff, whether it be July, August, or later in the year, are we going to see a quick recovery? And that's

Starting point is 00:22:15 the question that everybody's asking. Are we going to see that quick recovery? And I think it boils down to one of two things. One, and we can talk about this, it boils down to what the government and our quote-unquote central bank does to try and alleviate the strain, and we can talk about what they can do. But the second piece is how are consumers going to react? Right now, we have the highest consumer debt in history at somewhere around, I think it's $9 trillion or $10 trillion. And we have the highest corporate debt in history, somewhere around $14 or $15 trillion. is this going to cause people to start not being able to make mortgage payments, not be able to make car payments, not be able to make credit card payments? And the answer is, if the answer is yes,

Starting point is 00:23:01 does that snowball, does that missed car payment or credit card payment lead to additional financial struggle that causes the next month missing it and the next month missing it? And does that whole thing have a domino effect that kind of pulls the entire economy down? Or can we stabilize things enough and do something so that we're helping Americans not miss their mortgage and card payments and credit card payments or if they are missing them, that it doesn't domino. And when we actually come out on the backside of this whole virus thing, can we start to grow again quickly without seeing that domino effect or that snowball effect downwards? You know, Scott and I actually interviewed Annie Duke on the Bigger Pockets podcast.

Starting point is 00:23:41 She's a friend of mine, by the way, very smart. Yeah, and he's awesome. And what her basic philosophy was, if you didn't hear that, is that life is. a lot like poker and there's a lot of lessons you can take out of poker that you can apply to life. And I think that that's very applicable to right now because poker is a way of being successful in a world of uncertainty. You do not know what cards you're going to get. You do not know what cards the other person has. You do not know what cards are going to come after this round of betting and what's going to come next. You don't know what other people will be betting. You are forced to operate in a world

Starting point is 00:24:12 of uncertainty using odds and reading different scenarios in order to be successful. And that's an incredibly good skill to have because as we're all seeing right now, the markets do not respond well to uncertainty. Why is the stock market falling? Well, it's not that the CEOs of the major companies in the world are all just going to get sick and die. It's because everybody thinks, well, the stock market's going to go down and that causes everyone to sell and then everybody else has to sell. And like Jay was saying, the market psychology is a huge piece of what drives the economy in the short term. So what I'd like to talk about is not just,

Starting point is 00:24:44 because what I'm getting at is we don't know what cards are coming. Like Jay said, it could become a snowball thing that gets really bad. It could just shore up in a couple weeks, and it's not that big of a deal. But we don't need to know what cards are coming, just like Annie doesn't need to know what cards are coming. What Annie has to know is how do I play the cards I have?

Starting point is 00:25:00 How do I know when I bet bigger and how do I know when I pull back? And I'd like to kind of steer the conversation in a direction where we talk about when you get these cards, this is the right move to make. These are principles that work no matter what when you're investing real estate or when you're playing poker

Starting point is 00:25:15 because there's always a move to make. Brandon and I talk about this all the time. We mean it. In any market, there's a way to structure deals. We're going into a change. Could be a long time. Could be a short time. There's a way to do it.

Starting point is 00:25:27 Like one thing I was thinking about today is right now is a great time to get seller financing because the sellers are going to be scared. I don't know if I can make my payment. That asset that they had that we all wanted could very quickly become an anchor to them that they don't want to have anymore

Starting point is 00:25:39 because they're worried that their client isn't going to be able to make the payment. Great times to say, hey, I can make the payment for you if you can give me the property. So on that note, Scott, can you talk to us a little bit about what the members of bigger pockets concerns are, what questions are being asked out there and how we can start addressing some of those? Sure, yeah. So you have to remember when you're thinking about a bigger pockets listener, right? You guys are listening, you know, and everyone's different. Everyone's got an issue.

Starting point is 00:26:05 But typically, our users are making between $50,000 and $200,000 a year. household incomes that upper middle class earner. Typically, they're investing in things like 401k, stocks, and real estate investments. Very few people are actually in that. There's a lot of small business owners, those types of folks that are in that kind of category, right? And when you think about the first people to be impacted by what Jay was talking about there, I think it's going to be your hourly employees, right? And they're the ones who are going to begin missing rent payments, which obviously could impact investors on bigger pockets. And that's a major concern and topic you're seeing going on in the forums. But, you know, for a long time, I thought, and I still continue

Starting point is 00:26:44 to think that if they're the first hit first and hardest, the second most hit folks are going to be your homeowners who do not own substantial other assets like investments in stocks or real estate, right? And so they're going to be the ones that are going to be the first to get hit by foreclosures and those types of things. And then the third group of people impacted downstream, you know, I think are real estate investors. Most of our users, I think, are reasonably well, capitalized. You know, you're not seeing a lot of folks out there that have no reserves whatsoever. Otherwise, they haven't been listening to the Bigger Pockets Podcast or the Bigger Pockets Money Show podcast. But we are, there is a lot of talk about, hey, how do I handle a situation around where

Starting point is 00:27:23 the government steps in and prevents evictions, right? Do I then begin to work with my tenants there? There's a lot of uncertainty is the word of the day. We have no idea what's going to happen going forward. So there's a lot of uncertainty around a lot of new investors or people buying their first, second, third property wondering, hey, should I close? Should I continue closing or should I try to find a way to back out? Should I begin getting aggressive right now? And I think that those are really the big concerns

Starting point is 00:27:49 that are going on in the community, and there's a lot of really good feedback on these discussions. We've got a post that's really enlightening around how the coronavirus will impact real estate that has 600 posts over the last 12 days. And it's kind of interesting to see the rapid evolution of thought in the community around, this is going to be no big deal to, okay, this is here, and it's going to have major impacts.

Starting point is 00:28:11 How do we prepare for that? Well, and that brings up a good point is like, you know, this is a rapidly evolving thing. And so even like, I mean, we should make this a scammer right now. This show right now, if you're listening to this two weeks after, I mean, we're recording this, what, on March, what is today? I don't even know. 18th. Yeah, okay, the 18th, 18th, you said? Yep, 18th.

Starting point is 00:28:30 I don't even know the date anymore. March 18th, a week from now, two weeks from now, like a lot of what we're saying here might be changing. So I actually would encourage people to go. And this is not like a selfish thing. Like we don't like go to the bigger pockets forums because that's going to be up to date. People are engaging every single minute of the day on there. And so get involved in that discussion as well as listening to podcasts and stuff. But for up to date stuff, make sure you guys are checking out that because again, this stuff might be outdated.

Starting point is 00:28:55 I mean like just five minutes before starting the recording of this, we get this news article, Josh Dorkin sent it to me. And it said that Donald Trump's having HUD shut down all foreclosures and evictions. during the for the next month. And it's like, well, what does that? We don't even know what it means.

Starting point is 00:29:09 Like, we were just talking about, should we even talk about it on this show? Because like, they haven't even defined what that means. Does that mean only HUD foreclosures? I mean, everything.

Starting point is 00:29:15 So it goes back to David's point of like, we don't know what cards are coming. But we can play them. However, I don't mean that, you know, we're going to, you know,

Starting point is 00:29:23 you know, profit off of this collapse necessarily. Though I'm sure there are ways that we can invest and we'll get to that. But just. And careful. And on that point with the cards, right? We can control our cards, right? We've had that power over the past 10 years to control the position that we're entering today with, right? Jay, you've written a book on recession-proof real estate investing.

Starting point is 00:29:43 My kind of, I would say, passionate in life and my career is helping people build a strong financial foundation. If you have reserves, if you have invested for cash flow, if you have diversified, if you have built a strong financial foundation, you spend much less than you earn, all things I'm sure we're going to talk about, you know, there are a lot of options for you to work through these things, right? For example, with the eviction front, right? If I've got a great tenant who loses their job as one of that 20% unemployment rate,

Starting point is 00:30:13 you know, I got, you know, if I'm not well capitalized, my only option is to evict as soon as possible, which is terrible business and terrible, you know, there's a moral consequence there as well, I think, in some capacities versus a well capitalized investor with reserves understands that this is all relative and how do I play this hand appropriately and work appropriately with tenants in certain situations and those types of things. Yeah, that makes all the sense. So let's talk about this real quick. So we at Bicker Pockets, like you said, Scott, we are pretty big on having reserves,

Starting point is 00:30:45 you know, being careful about what we're doing. Now we're seeing it like, you've gotten a little bit of feedback from, you know, I think it was like one person was saying, well, this is why the burst strategy is this a terrible idea. And this is why like you shouldn't do no money down deals because it just, this is the, we're in this position because of that. So Scott, can I ask you first? Like, is that an accurate criticism or is this why we've been talking about that stuff?

Starting point is 00:31:06 Yeah, well, first of all, I think the beauty of bigger pockets is that you can absorb the perspective of a lot of people and learn about what works and what people are doing and kind of make the decisions you want for yourselves, right? But as a whole, the folks that represent bigger pockets officially, the four of us co-hosts on other podcasts, the rookie show, those kinds of things. I believe we are very conservative, right? I have harped for years. If you're going to buy real estate, make sure you're investing for cash, you're investing for cash. You're investing for cash. cash flow, right? And long-term appreciation. Make sure that you are bringing your down payment. That down payment, by the way, can be 0%, 3.5%. I'll talk about that in a second here, you know, but you can bring a low down payment. Make sure you bring your down payment, any closing costs, any rehab costs that you need, and have 10 to $15,000 in reserves in addition to any credit lines that you might have, right? And so, you know, run the numbers. You've built our calculators and have harped in that for a long time. And then Josh, our founder, has been harping about a bubble and recession since 2013.

Starting point is 00:32:10 We love Josh, right? So I think there's a lot of conservatism in the community, and I think that our community as a whole is going to be largely reasonably well capitalized and prepared with a couple of people who may not have those things. And if you don't have those things and you're listening to this show, time to stock up and build up that reserve and shore up your financial position, you may still have some time here. So I'm not sure if that's answering your question.

Starting point is 00:32:34 No, I think it is. And I think to go to the equity thing, and we talk a lot about like the zero percent down. Like I'm like often known as like the no money down guy because I wrote a book called the book Uninvested in Real Estate with no and low money down. But the point I all have always made in there is the same one David makes in the Burr book is if let's say there's a $100,000 house and you go and put a $30,000 down payment on that house.

Starting point is 00:32:57 Now you have a mortgage for $70,000. It's worth $100. You owe $70,000 on it. The beauty of like the no money stuff is get that. deal for 70,000 all in with no money down. I would never say go buy that $100,000 house for $100,000, no money down necessarily. Like, I'm not saying like going over leverage like we did back in 08. The idea with creative investment or creative strategy is to get a better deal so that you have the equity. So the economy could drop 20 or 30%. Now, if it drops 50%, sure, sure, we may be under,

Starting point is 00:33:26 but none of us really expected that. But if you're well, if you have good cash flow, if you have good reserves, like we can weather that. And if you're just a good business owner, Like make good business decisions. We can get through that. Yeah. Well, I'll chime in there. You know, this is not, no one has been saying this entire time, right? I can't emphasize this point out.

Starting point is 00:33:43 It's not smart to buy the $100,000 house with no money down. Or $100,000. If you don't have any money. Yes. Right. And you have bad credits. Right? It can be a very reasonable thing to do.

Starting point is 00:33:54 Hey, I've got 30 grand. Instead of putting 30% down, I'm going to keep that 30 grand in cash and put no money down to finance the property. Now I've got a very, a much more conservative position. then if I'd put the 30 into the property and kept no reserves back. Assuming it cash flows at that point, because then you're not paying money every single month out of pocket just to survive on a property, right? Absolutely.

Starting point is 00:34:17 And this brings us to house hacking, right? So house hacking, some people talk about this as a risky strategy, right? And what I want to point out, though, is who's going to lose in a recessionary environment? Your first person to lose is going to be the tenant who can't make rent. The second person is going to be the homeowner who loses their job and can't make their mortgage payment. Your house hacker, right, is buying a house and is in relatively the same position as the homeowner, but has the potential for that income to offset that rent. So going into a recessionary environment, I think that house hacking is still one of the most conservative ways to go about your

Starting point is 00:34:51 living situation financially, right? And so I think there's a lot of, a lot of concerns out there about, oh, is that risky? Well, everything, everything has some form of risk, which is the least risky way to go about these things in going into a recessionary environment. I think those are the questions that we've got to ask and answer. That makes sense. And by the way, guys, we're going to get into it in a few minutes here. We're going to actually get real, like, actual calls from real estate investors who are listeners of the show and Bigger Pockets members.

Starting point is 00:35:19 We're going to bring that in a little bit. And we're going to go very specific on like, what should I do in this case? And we're all going to chime in. I don't know that that is coming. But first we want to get a little bit more of a bigger picture here. So before we jump into the specifics on how real estate investors should handle this stuff, A couple quick questions. First of all, Jay, I want to touch on the recent changes to the Federal Reserve.

Starting point is 00:35:38 So they just announced a couple big things recently, like quantitative easing and all these big words that I don't even know what half of them mean, but I know you do. So what's been going on with the Federal Reserve, the government, what have they been doing, and what do you see coming over the next week? Yeah, it's funny. I've been having this conversation with people for a couple years now. And previously it's always been, hey, here's some good information so you can sound really smart at a cocktail party. But these days, these days it actually matters. So

Starting point is 00:36:08 stepping back basically, and this is just kind of big picture stuff, essentially the government has three ways that they can kind of help the economy when the economy is faltering. And actually can also slow down the economy when the economy is doing too well, which actually happens sometimes. But the number one way is, or the first way, not necessarily the number one way, But the first way is that we have this kind of what we refer to as the central bank. You probably heard them called the Federal Reserve. Most countries, most big countries have this. But they can play with our interest rates.

Starting point is 00:36:38 And everybody's heard kind of the last couple days, last couple weeks, actually, last couple years, that our interest rates have been going down again. We got up to like three and some percent last year. And now we're as of last week, as of I think Sunday night, interest rates, what we referred to as the federal funds rate. And this is kind of like the rate that banks can lend to each other and the government lends to banks. the lowest rate is essentially zero now. So money is kind of flowing back and forth between the banks and between the government at zero percent interest rates. This is good in some respects. The reason that playing with interest rates can impact the economy is that it allows the Federal Reserve and the government to kind of incentivize people to do one of two things. It incentivizes people

Starting point is 00:37:21 to save or it incentivizes people to spend. When interest rates go up, what do we do? We throw our money in a savings account because we're getting decent money from a savings account. We don't spend the money. Secondly, when interest rates go up, it gets more costly to borrow money to buy a car, to buy a house, or to pay on credit cards, so we don't spend. So moving interest rates up basically encourages people not to spend, but to save instead. When we lower interest rates down, it does just the opposite. We don't want to put money in a savings account anymore because we're not getting any interest. So low interest rates, we're going to spend that money because we have no incentive to save it. Secondly, we can get mortgages for 3%, we can get car loans at 5%, we can get cheap credit.

Starting point is 00:38:01 So low interest rates, that encourages us to go out and start spending money. That's good for the economy. So the first thing we do, or the first thing the federal government does when it wants to spur the economy on is lower interest rates. Well, interest rates are now at 0%. And we can go to negative rates, and that's a whole separate discussion that we'll have on a different podcast. But right now, rates are about as low as they can reasonably go without doing weird stuff. Now, some people would say that's a really good thing, and in general, it would be. But it's weird to be lowering interest rates to zero now.

Starting point is 00:38:32 A lot of people are concerned that the government did this because they were worried about doing too little too late. Ray Dalio, again, an economist I highly respect, has recently come out and said that lowering interest rates now has kind of been the opposite. It's kind of done too much too soon. Because consumers really don't have the opportunity to spend right now, Brandon, you can't really go out and buy a car because most of the car dealerships near you were closed. David, your homeowners, your buyers probably can't go out and buy because they're having trouble like actually getting to the closing table because more title companies are shut down.

Starting point is 00:39:06 So even if we wanted to take advantage of these low interest rates right now, people don't have the opportunity to spend. So we could talk about whether zero percent interest rates are good or bad. But the first kind of lever that the government has to impact the economy is interest rates. And we've kind of exhausted that that leave. now at zero percent. The second one is what we, it's basically the money supply. It's how much money is floating around out there in the economy. And the benefit of this is when there's more money floating around in the economy, there's more money that we have to spend. Businesses have to spend,

Starting point is 00:39:40 consumers have to spend. So a larger money supply stimulates the economy. And there's this thing, I think David might have mentioned, or no, you mentioned quantitative easing. And we've heard that term a lot since 2008. We did a lot of that in 2008. And that's basically the Federal Reserve saying, we need to stimulate the economy. We're going to do that by flooding the market with money. We often refer to that as printing money. But essentially, the Federal Reserve says we're going to put a whole bunch of money in the hands of these big banks, which will then encourage the big banks to make loans, to businesses, to consumers, to really large industries.

Starting point is 00:40:17 So by putting money out there, quantitative easing is that printing of money and putting money out there. By doing that, we're encouraging banks to kind of spread this money around the country to give it out in terms of SBA loans, to give it out in terms of mortgages, to give it out in terms of big business loans. So QE is kind of the second way that the government can put money out there and stimulate the economy. Sunday night again, when we announced going to zero percent interest rates, we also, or the government announced that they were going to do $700 billion in quantitative easing. In other words, they're going to put $700 billion more money out in the market for banks to kind of give loans and keep the economy going. To put things into perspective between 2009 and 2014, we put $4.5 trillion into the economy. So it's a significant percentage of that. It's what's that.

Starting point is 00:41:10 That's like one-sixth, one-seventh of what we did back in 2008. So it's a decent percentage. But on a total scale, we could be flooding a lot more money into the market. to even get to where we were in 2008, 9, 10, 11, 12 levels. So we're kind of at about 700 billion now. We'll probably see that bump up over the next couple weeks and months. Then the third piece. And so those are the two levers that the Federal Reserve has,

Starting point is 00:41:37 interest rates and money supply. The third is one that is more the government's control. This is stuff that often has to go through Congress. We have to pass legislation to do this. But this is the more direct stimulus stuff. So this is, people have probably heard recently the government talking about bailing out airlines, bailing out Boeing, potentially giving $50 billion to Boeing over the next couple weeks to keep them solvent and keep them from going out of business.

Starting point is 00:42:02 But this also involves potentially giving bailouts and direct stimulus to consumers. So yesterday, the president announced that they're thinking about giving $1,000 to every American, or maybe it's every adult. I don't know the details, to basically allow them to continue to make their business. mortgage payments, to buy food, to live their lives. And so this is a level of direct stimulus that, as far as I know, we've never seen in this country, I'm not even sure what the mechanisms are to do that. Do they get a check? Do they stick it in your bank account? Do they send you a prepaid visa? I don't know. And these are the kinds of things that the government is so concerned

Starting point is 00:42:39 these days that we need to keep things going, that they're starting to think about, not necessarily for the first time they probably thought about it in 2008, but it may be the first time that we actually see the government handing money directly to consumers to allow them to continue to make their payments and to continue to survive until we get to the other side of this. So that's kind of the third piece that the government has to work with, the bailouts, the direct stimulus. And again, interest rates were probably past that. There's not much more we can do there.

Starting point is 00:43:07 Money supply, I suspect that we're going to see a ton more money flooding into the money supply over the next couple of months. You're going to hear that term, quantitative easing a whole lot again. we're going to start to see a lot more bailouts and stimulus aimed towards both big businesses, small businesses, and probably directly to us as consumers as well. Yeah. Well, in the $1,000, I was just hoping that they would just load up all the $1,000 bills in a plane and just fly over the country and just let it go.

Starting point is 00:43:33 That's what I would do if I were the government. That would always work. Yeah, it might be fun. It was just grabbing money. It's like one of those machines. Investors moving to the Midwest. The funny thing is they often refer to it as helicopter money for that very reason. That's funny.

Starting point is 00:43:46 Yeah. Like when we drop aid into other countries. Yeah, exactly. I envision, you know those machines where like you go inside this like tube, this glass tube and they like throw a bunch of money in there and then the fans come on. You got to try to grab the money in the air. That's about like how I'd envision that going. Can I speak to the fears of what's going on in most people with just as I don't know what's going to happen? Please. Okay. In one of the last episodes that Brandon and I just put out, we talked about the zoom factor that when you zoom in on any situation, any deal, any problem. and all you see is the problem,

Starting point is 00:44:17 your emotions are like, ah, this is scary. But when you zoom out and you look at that same situation from 30 years, you don't even remember that you had an issue during escrow. The stuff that caused so much emotional turmoil

Starting point is 00:44:27 disappears when you zoom out. And we are in a zoom in phase. Everybody is rapidly consuming as much information as they can possibly get and focusing on it and then panicking. And what Jay's talking about gives us a really good opportunity to zoom out a little bit

Starting point is 00:44:42 and recognize this is a patient, pattern. In my short time on Earth at 37 years, I have seen this happen. I remember George Bush did something very similar to this, where it was like a tax incentive, where they pushed money out and said at your taxes, you're going to get a bunch more money coming to go spend in the economy. I remember President Obama did this when we had the whole, if you buy a house, you get like a credit back of like $7,500 if you bought a house during this time. I don't remember we had some fancy name for that. This is normal stuff. Whenever people start to freak out, the government recognizes the negative impact on market psychology, and they do something like this that's

Starting point is 00:45:18 basically ceremonial. This $1,000 a month they're giving everyone is not going to change everything, but it will make you feel better. And that's what they're trying to do. They're trying to stop a panic. What will affect everything is what Jay's talking about with quantitative easing. This was a huge and not often talked about impact on our economy in general that we went through during the too big to fail phase. Okay, the government did not want to have to go. It's the equivalent of printing money. They're not actually doing it.

Starting point is 00:45:47 What they're doing is pushing like paper money or electronic money into the economy by buying bad debt that never should have been bought. But it has the same effect as printing money. I watch real estate prices almost double from the point where they did that to where they are now. And we all rode this in crazy, awesome wave of watching real estate go up, up, up, up, up.

Starting point is 00:46:06 And we just thought this is the way it's always supposed to go. But that was not normal. that happened because we put so much money into the economy, it had to find somewhere to go. A lot of people bought apartment complexes because raising money was really easy. A lot of people invested in, like angel investors, a venture capitalists, were able to raise a lot of money because it was all over the place and go put it into companies. It really did help prop our economy, but it comes with a price, right? Inflation eats into a lot of this. And it gives you this false sense of security because you've got extra money that's very easy to get your hands on.

Starting point is 00:46:36 At the same time, Jay talked about interest rates. They kept them really low. So now there's no reason to keep your money in the bank. So you need to go lend it to someone to get some kind of yield. And there's tons of money to be lending, raising money. This is why Brandon and I talk about, this is like the best time ever to raise money because it's everywhere. It's not hard. Well, when there's a lot of capital, it needs to find a home

Starting point is 00:46:54 and where there's more demand than there is supply like with real estate, we saw prices rise. This is a big reason why real estate's done super good. Okay? And the reason I'm pointing this out is we're about to go do it again. Okay? As a cop, we would see people that would be on a methamphetamine bender, and they would go for seven days without sleeping.

Starting point is 00:47:13 There was just a ton of energy, and they would just stay up all night, taking apart lawnmowers and riding their bikes all over the place and going on runs in the middle of the night because they've got to burn off all this energy. And then at the end of that, they'd crash and they would sleep for three days. Well, we're getting to a point where, oh, my gosh, there might be a crass happening,

Starting point is 00:47:28 and we're putting more energy into the economy. I'm expecting that when this entire temporary scare kind of passes, over, you're going to have another big wave of stuff becoming more expensive because of quantitative easy. And for anyone who doesn't quite buy into what I'm saying, what I would recommend you do is you Google US money supply. And you just look at a graph of at what point when the dollar was tied to gold, how many dollars were floating around. And then what was it, Jay, like 78 or so where they got rid of the gold standard? Yeah, officially early 70s, yeah. Oh, no, yeah, it was late 70s. You're right.

Starting point is 00:48:02 Late 70s. So they said, okay, now the dollar's not tied to gold at all. The government can as much as they want, it's backed by the faith and credit of the U.S. government, not by gold. And how quickly we started printing more money. And then in 2010, when they started quantitative easing, that charge, it just spikes almost completely vertical. That's going to lead to prices going up. Okay? So for the people that are really worried, what if this, what if that?

Starting point is 00:48:24 It's hard for me to see this turning into something that could throw us into a depression when we're actually, we're probably creating the opposite problem. We're putting a lot of money into the economy. It's going to make things seem like they're more value than they really are. Jay, do you have any objections with the way that I'm interpreting it? No, no, no. I 100% agree. I think that, and I know I'm probably going to be a little bit more pessimistic than a lot of people here.

Starting point is 00:48:49 But I think that in this particular case, we're going to have to see the government literally flood the market with quantitative easing. I think it's going to make 2008 look like kind of just a trickle of cash into the money supply. Now, don't get me wrong. I don't necessarily think that's a bad thing. I think that we're going to see such a cliff that we're falling off in terms of GDP, in terms of unemployment, in terms of just money not flowing around the country over the next couple months because everything's shut down, that it's really going to require, and I hope the government does this, because I really think it's going to be necessary. I hope the government floods the market with a ton of money. The nice thing is, we often talk about the gut reaction there is, well, if you do that, you're going to cause inflation. More money. means people have more money to spend. More money to spend means more demand, and then businesses start to raise their prices because there's so much demand. The nice thing is, during a recession,

Starting point is 00:49:43 you can have as much money as you want out there. People are still scared to spend their money, so you're not going to see the inflation. You start to see the inflation when things improve, when the economy starts to get better. That's when inflation becomes a concern. So the big question now is, is the government, assuming when they put in $4 trillion,

Starting point is 00:49:59 $5 trillion, $20 trillion, whatever that number is into the economy in quantitative easing, are they going to be able to take it back out before we start hitting massive inflation? That was the issue we had under the Obama years. We put $4.5 trillion in, and we weren't really keen to try and get it out because we were scared that was going to hurt the economy. My best case scenario here is we put a ton of money in to kind of stabilize the economy, and then we start pulling it out so that we have more of a controlled downturn. I don't think we're going to avoid a downturn here. I don't think it has to be a 2008.

Starting point is 00:50:32 or a 1929 type downturn. But I think we're going to have some type of downturn. And I think the government's going to play a large determining factor in how bad and controlled that is. And don't assume that that's terrible. Anytime there's a downturn that's unacceptable, right? Like there's times where you need a small forest fire, like a controlled one, to keep a rampant one from coming over.

Starting point is 00:50:54 Scott, I'm curious, you kind of study macroeconomic economics. What are your thoughts on what's going on and how this might affect BP? I think that Jay and you kind of have really good opinions on the economy there. And I don't like to offer opinions on the economy. I don't think it's not relevant to me. It's not a part of my strategy. I invest for the very, very long term in appreciating and cash flowing assets. And I capitalize my business such that I will never have to sell, never have to commit more capital to the business and can weather any store. In 30 years, right? It's just like you said earlier, David, I'm going to zoom out. and I'm going to say, is Denver real estate going to be worth more than it is today? Are rents going to be higher? And if I don't believe that, I shouldn't be investing. And if I do believe that, I should be investing for the very long term and capitalizing my business appropriately. So what I do is I invest in real estate.

Starting point is 00:51:47 I put a $15,000 reserve in my first property. I add $10,000 to that reserve each time. I invest such that I can produce cash flow. For earlier mortgages, I've been, you know, have continued to remain flat, even as rents have grown, in giving me a natural cushion. over my overall portfolio, and I'm just going to continue holding and dollar cost averaging like I have for the very, very long term. So I completely agree with your sentiments about the market. And I could never have predicted that a virus was going to hit that was going to force me to

Starting point is 00:52:16 potentially consider the possibility of working with my tenants to subsidize or forgive portions of rent due to their job loss from an hourly wage. But I'm capitalized for exactly that purpose without having to predict it specifically. And so I think that's the, the big takeaway for me is, hey, we know this is going to happen. We're all, none of us who are listening are investing for five years, planning to sell, build up a pile of cash, and move on from this business. We're all planning to invest probably for life in this business or other asset classes, and how do you capitalize your portfolio appropriately?

Starting point is 00:52:51 So I think those are the, that's kind of how I'm viewing the situation here. And I think it all comes back to good in sound investing habits, a strong financial foundation and a very long-term outlook. Yeah, and just to add to that, I kind of look at it as investing in long-term cash-flowing assets like real estate is the same as making a bet on capitalism. It's making a bet on the long-term viability of our country and our economic system of capitalism.

Starting point is 00:53:23 Basically, if capitalism survives, if our country survives for as long as capitalism and our country survives, cash flowing real estate is going to go up. Same with the stock market. A bet with an inflation hedge. A bet with an inflation hedge, exactly. Can you, yeah, explain what that means inflation hedge, if you would. Yeah, so real estate tends to be a good hedge against general inflation. Basically, this country in general sees prices of things go up year after year after year. We often talk about it going up 2% or 3%. So if you take a dollar and you stick it in a savings account, next year, because everything is two or three percent more expensive, that dollar is going to be worth less

Starting point is 00:54:04 than it is today because it can buy two or three percent less. To keep that in the savings account over five years or ten years or 50 years, that dollar may only be able to buy you the equivalent in today's money of two or three cents worth of stuff. So that's what inflation does to dollars. Inflation doesn't necessarily do that to certain other asset classes. Inflation doesn't necessarily do that to real estate because real estate is very good at keeping up with inflation, at growing with inflation. So the value of your real estate is going to grow every year because the price of things going up, because the price that your tenants are paying for your rent is going to go up with inflation. So it's a good way, real estate is a good hedge

Starting point is 00:54:47 against inflation. Because our mortgage payments are fixed, fixed and dropping. meaning not the payment dropping, but the balance is dropping. Right. And you have flexibility to refinance when rates go lower, but they can't make you refinance when they go higher. Correct. Yeah. As a landlord, if the cost of your milk goes up 3% next year, well, it's also safe

Starting point is 00:55:09 to assume that your tenants are going to be paying 3% more in rent, so that can, that will offset your costs. And this goes to Scott's point. It's like 30 years down the road. I mean, like, we, I talk a lot about the four wealth generators of real estate, right? Number one is cash flow, meaning extra money in your pocket every single month. Over time, on end.

Starting point is 00:55:25 average, your cash flow should grow every single year. Because like David said, you can refinance into lower rates if you wanted to. Also, rent goes up, but your mortgage payment usually stays the same. So your cash flow goes up over time. Appreciation or you can say equity growth, but appreciation, like the property values tend to go up over time, same thing we just said as milk goes up and inflation goes up. Real estate tends to go up, which means your mortgage payment is going down, which is the third wealth generator, your loan pay down. Loans get paid down over time. So now your equity is growing there. And then the tax benefits. You own real estate. You get a bunch of tax writeoffs and stuff. So really like it's hard to lose. I must say it's impossible to lose,

Starting point is 00:55:59 but it's hard to lose on a 30 year timeline as long as you're taking advantage of those four wealth generators. You're getting cash flow. You're in an area that appreciates. You're paying your loan down with a fixed rate mortgage ideally. And you're taking advantage of all the loopholes the government gives us. Scott? I love it. You're absolutely right. And I completely agree with everything you said, except for if you go bankrupt in the period, your entire portfolio goes to zero. Yeah. So you just can't, You can't do that. Which is why you buy conservatively and have that reserve, right? I just can't.

Starting point is 00:56:28 It's the same stuff we've been talking about for a very long time, but that is part of your overall long-term return. You never can be forced to sell or have to commit more capital to this at the worst moment because that's the way you lose. Yeah. You guys want a good analogy for this? Of course you do. All right.

Starting point is 00:56:47 People that are just purely invested in the stock market, like imagine building wealth. is like climbing up a mountain. Okay? Like you can literally go to work, make a paycheck, and that's like grabbing a hold and pulling yourself up. It takes effort, but you can move upward. Then you've got winds that come from underneath you to make that climbing easier. Okay, that's like when the economy's doing really good and it's pushing you upwards. If you invested in the stock market, when the economy crashed, you fell. You just lost your grip on that mountain and boom, you plummeted and you couldn't do anything to stop that. There's nothing that you can do.

Starting point is 00:57:16 And until the winds come right back up and carry you, you're kind of helpless. Why I love real estate, why even though I'm a conservative person, I invest someone aggressively in real estate, is I have a belay that you don't have if you're investing in stock. The belay is the part of you that attaches to the mountain and then to your waist so that if you fall, it catches you. And that is my reserves. And that is my cash flow. When my asset drops in value like the stock market does and my $200,000 house goes down to $100,000, I don't care because I still have rent coming in that catches me and allows me to weather that storm. And I control how much reserves I keep so I can survive that. Other asset classes do not have that. You're at risk

Starting point is 00:57:55 when you fall. The reason real estate's different is because it's generating money. And just like Scott said, if you focus on having money and reserves, creating cash flow, those are two defensive metrics that keep you from losing wealth. It might be possible to build wealth faster with real estate if you're super good at picking stocks or invest in the next Uber or whatever, but you don't have a belay to protect you on the downside. And then two additional belays that investors have, a lot of us, not everybody, but if you're in your local market, you can self-manage. Yep. Right?

Starting point is 00:58:24 That's a way to inflate your cash flow or offset some of the costs and preserve that in temporarily if you need to. And then second, you can DIY construction, right? This is a skill that you can learn. So there's a couple of things that you can do as well in a practical sense, or at least prepare to do going into a situation if you're a typical listener owning a couple of rental properties. Yeah, I've actually said that before we're like, if rents do drop and I actually want to

Starting point is 00:58:49 talk about rents potentially dropping or just not coming in at all here in a second. But if rents do drop, now I don't want to manage my own properties. I don't like that idea. I like having property managers and people. But if I have to, like great. Okay, rents drop by $100. All right. Well, sorry, property manager.

Starting point is 00:59:05 Like, I'll take that. If I needed it, if I needed the cash, I'm going to have to manage myself right now because I need it. I'll do what I have to, right? Rent's drop another $100 a month. All right. Sorry, handy man. I guess I'm going to go pick up that book from Home Depot.

Starting point is 00:59:15 So like you said, there are a couple things we could do potentially. If you're not local, if you're like David, long distance real estate or like Jay and I buying bigger stuff out of state, you know, then that's not quite as applicable. But yeah, I think that's a really good point, Scott, especially for most of our listeners who do just own a few rentals within 20 miles of themselves. It's another just protection against that you don't have in the stock market. And just to reinforce David's point about cash flowing real estate being a belay, if David were going to come to me now and say, hey, Jay, can I borrow $100,000 to put in the stock market? I'm going to laugh at him. Yeah. If he were to come to me and say,

Starting point is 00:59:50 can I borrow $100,000 to do a flip? I'm going to laugh at him. If it comes to me and says, can I borrow $100,000 to buy the Mona Lisa, I'm going to laugh at him. If it comes to me and says, can I borrow $100,000 to put into a piece of cash flowing real estate? I'm going to say, yeah, give me the numbers.

Starting point is 01:00:05 Yep. So I know, even as a lender, that cash flowing real estate is protection. And so, yeah, there are a lot of things in real estate, and I'm not saying everything. And we can talk about this. there are a lot of things in real estate that aren't going to work well right now, but cash flowing assets, cash flowing real estate,

Starting point is 01:00:23 are going to work well whether you're in a recession, whether you're in an expansion or anywhere in between. That's really good. 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.

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Starting point is 01:01:24 primary residence, you need to know about cost segregation. It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost segregation guys is the go-to firm, having done over 12,000 of these studies with 500 million in total depreciation identified. Hit to Costsegregationguise.com slash BP to get a free proposal and see your potential tax savings. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy.

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Starting point is 01:02:36 There's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of the show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com. Just go to Indeed.com slash rookie right now and support our show by saying you heard about Indeed on this podcast. That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. Why don't we shift gears a little bit here and head into some specific questions? Because that's actually one of the first questions here that I have on the list that we're going to talk through. Now as we go through this, keep in mind everybody, we're going to offer our opinions on this. This is not professional investment advice. So every situation is unique. Make sure you guys are like doing your homework, thinking this stuff through. And we do encourage you, jump into the forums, ask questions of the community, get other people's advice on this.

Starting point is 01:03:27 And definitely check that on. In fact, this week on the Bigger Pockets, the Real Estate Rookie podcast with Ashley and Felipe, they actually talked to like long time investors who have been through multiple recessions. So listen to that stuff. Listen to other people, get other people's opinion. But with that, I want to jump into a few specific questions from some people who called in. All right, the first question here is from Michael from Orange County, California. Hi, guys. My name is Michael. I'm from Orange County, California. And my question I ask you all is, given the current state of our economy and factoring in the global impact that this virus has,

Starting point is 01:04:03 would you purchase a buying whole investment property now, or would you wait a little longer to see what happens to the U.S. economy and the global economy as a whole? Thanks. All right. So that's the question from Michael. Yeah. Would you buy a rental property right now or would you just wait a couple months and see what happens here? And I want to actually add a little bit to Michael's question and ask the three of you in not just the rental thing, but would you also do any flipping right now? Like if you're in the middle of like buying a flip, like for example, if you're me and you're in the middle of you got a flip under contract, would you continue with that right now? So either flip or rental. Jay, you want to start that one? Sure. Let me start with the flip because

Starting point is 01:04:40 I think that's probably what people are going to be looking at me to address. So I have several flips under in process right now, and I am not thrilled about that. But I would not pick up a flip right now. I like to say that there are a lot of strategies that work in a lot of different markets. But honestly, flipping is one strategy that doesn't work well in a market that is falling or potentially falling. And there's a lot of risk in doing flips right now. Now, I know I'm going to hurt my book sales by saying that, but that's the honest truth. Actually, I'm not going to because what I'm going to say is,

Starting point is 01:05:13 If you're interested in flipping, now's the time to start learning about flipping. So go pick up the book on flipping houses and spend the next six months or 12 months or 18 or 24 months studying so that you're prepared when the market starts to come back. But for anybody out there that isn't an expert on flipping, if you're looking to me, for my opinion, on flipping, you're probably not enough of an expert to be flipping right now. I'm not enough of an expert to take on new flips right now because I don't know where the market's going. All right, David, what do you think? Would you buy a rental right now? I have a lot of clients that are trying to figure out that same question. Should we sell my house right now?

Starting point is 01:05:50 Should we buy a house right now? What's going to happen? What are we doing? The way that I'm advising my clients is the same way I would do it. That's kind of how I run my team. This is what I would do so I tell people that's what they should do. It's okay to put stuff under contract. In fact, in my specific market, this is a good opportunity.

Starting point is 01:06:05 We needed this. I have like 30 buyers that we are trying to put into contract. and every house is getting 20 offers. It's incredibly hard to get in a contract. This is actually a good thing when the breaks go on and it gives the right people the right chance to get in and buy something that they couldn't have before. But what we're doing is we're creating our contracts

Starting point is 01:06:23 with very long contingency periods and lots of ways out for the clients. So I'm talking to listing agents and saying, hey, I want to get this appraisal done as quick as I can, but if I can't find an appraiser that's willing to leave their house and go to the appraisal, we're not going to waive our appraisal contingency. I need to have like a 60-day period

Starting point is 01:06:39 where you can't keep our earnest money if we can't get the appraisal. There's always a way to structure the deal that's going to keep you safe. And that's what I'm telling people is if you're going to buy real estate right now, one, I wouldn't buy luxury real estate right now. That'd be something. And by luxury, that's different by market, right? A million dollars in San Jose is not luxury real estate, but in Sarasota, Florida that very well.

Starting point is 01:06:59 Could be, I'd probably avoid that market. But if you have an opportunity to flip a property and if it doesn't work, you could rent it out and you know you have plenty of capital and you really like this deal, you really like this area, I'd go for it. I'd just write your contract with ways that you can back out to like have extended escrow periods, maybe a 60 day to 90 day escrow period just in case things go wrong and you need more time to get the deal put together. In my area, we just created an addendum basically, like a COVID-19 addendum that says a bunch of extra ways that buyers and sellers, if they both mutually agree to back

Starting point is 01:07:30 out, they can. Even if there's no contingencies in place, the buyer can still back out if they're unable to close because of COVID-19 related reasons. So it's just there's, here you go. here's your solution. What are you worried about? Okay. Now you have a way that if you can't record with the county, if you cannot find an appraiser, if the lender won't work and you can't get money, that's not your fault, then you don't have to worry. That took like a day for that thing to get put together. There's a lot of smart people that are moving really, really quickly. And I know I'm kind of harping on that, but I want people to hear it. I know there's a lot of uncertainty, but most of these, like, what are we going to do are not problems that are too hard for determined human beings to figure out.

Starting point is 01:08:07 That's why those things that if your first buyer isn't able to perform because an appraiser can't get into the property or the lender can't do their job or the title company isn't available, a second buyer, a third buyer or a fifth buyer isn't going to make any difference. So holding your buyer to something that no other buyer could perform is just. That's exactly what I'm telling the sellers when they're like, well, what if we don't, what if they can't do it? Well, do you think someone else is going to be able to find that appraiser that they can't? We're all in the same boat here together. Scott, what do you think? I think, you know, I invest in both stocks and real estate, right? And what you're seeing in the stock market, this is a lot of stuff we talk about in bigger pockets money, right? Is people are cautious.

Starting point is 01:08:46 They're not acting right now. They're waiting and seeing, right? And so what should you do and what are people are going to do? I think there's two points you're going to discuss here. What people are actually doing is I think your newbies, people buying their first or second property, those types of situations, I think that they're pumping the brakes largely. There's a great threat on bigger pockets on the forums right now if you want to go check that out and get a diversity of opinions on that. But that seems to be the consensus among our newer investors. The folks who are more seasoned, they're seeing this as an opportunity to potentially get deals and under contract in terms, to David's point, that they weren't able to get previously on that. For a long-term investor,

Starting point is 01:09:24 if you buy into my approach to investing over the very, very long-term in real estate, this doesn't really change anything because I'm effectively already dollar cost averaging into real estate. So I'm going to continue my search and keep looking. I am not under contract and have not submitted offers recently. That may change in the coming weeks if I see something that I like and that I think makes sense. But I think that that's the reality that's going to take place in the market. And so kind of do with that which you will. Yeah, that's good. Just to throw my my thoughts real quick. Yeah, I'm with you guys. Like I would not, especially like you said, Scott, like I would not be opposed to buying on the way necessarily the way down. Like kind of dollar cost averaging my investment

Starting point is 01:10:03 thing as long as the cash flow is there, as long as I believed in the economy long term here, as long as everything lined up. I'm a little worried about what the banks are going to do. I mean, I know they're getting money pumped in, but it doesn't mean they're going to lend it out necessarily. I think they will. But this also affects more on the commercial side, which I'm buying, you know, these mobile home parks, which I still think mobile home parks are a cool investment at this point. But like, what happens if the banks are like, commercial banks, like, yeah, you know, I know we were quoting you guys at four and a half interest rate, but we're actually at nine now. Like, I doubt, I doubt that's going to happen.

Starting point is 01:10:32 but that's the biggest fair I have, which goes to David's point of making sure that's contingencies are in place to be able to handle those things. Like, I worries me. I don't love the idea of flipping right now. I'm in contract on a million dollar flip right now. And I'm like, and I'm going to go through with it. But I've got a lot of reserves right now. I mean, I've been stocking cash for quite a while. So like, I can weather that if you were a brand new investor and you're putting your entire life savings into the down payment on a flip right now.

Starting point is 01:10:59 Which you should have never done in the first place. Yeah, correct. Yeah, you shouldn't put your last dollar into any deal no matter what the economy looks like, because it could drop at any point. And just to address that, a couple things. One, if you're in contract for a flip or I'm under, I'm in the middle of a few flips, hopefully if you've been buying flips in the recent past, knowing that we were, I mean, again, recessions happened historically every five and a half, six years. so nobody should be surprised after 12 years that nobody expected this event, this kind of black swan event, but nobody should be surprised that a recession was coming at some point in the next couple years.

Starting point is 01:11:37 Hopefully you were buying with a plan B, a plan C, a backup strategy. Hopefully that property could either make a maybe it's, well, you could turn a single family into like an assisted living facility or you could rent it long term or you could do something else to kind of tied you over until the economy returns and you can sell it as a flip. Hopefully you're doing that. I also want to address the whole question of buying cash flowing assets because, yes, I agree with Scott. Absolutely. I agree with all three of you. Always good time to buy cash flowing assets, even if you're dollar cost averaging on the way down. But there's another thing to consider, and that's class of property. Historically,

Starting point is 01:12:17 what we've seen is that not all residential properties act the same. not all of them react equally to a downturn. And typically we refer to properties by their class. There's A class, which is kind of luxury housing. There's B class, which is kind of the above average housing. There's C class, which is more worker class housing. And then you have things like manufactured and mobile home parks. Typically what we see is the higher up in class that you go, the more rent compression we see.

Starting point is 01:12:45 And what that means is in class A properties, we tend to see rents fall further than we do in class B. and in class B, we see rents tend to fall further than in class C. And the reason for that is pretty much common sense. I mean, people that are paying for luxury housing, if they're losing their jobs, if their businesses aren't doing well, they're going to downgrade. And they're going to go from that nice luxury penthouse maybe down to B class housing. People in B class housing, they might be losing their houses or losing their jobs or seeing their wages cut or their hours cut.

Starting point is 01:13:16 So they're moving down to class C housing. but everybody needs a place to live. And most people aren't going to go homeless. Most people aren't going to move back in with their parents. So that C-class housing tends to be pretty resilient because that's kind of the baseline housing. That's the most common type of housing. So if you own C-class housing, historically during recessionary events, you've probably seen your market rents go up. You've probably seen your occupancy go up because there's more demand for your housing.

Starting point is 01:13:45 So if you're looking for something to buy during a recession or leading up to a recession, my recommendation is stay away potentially from Class A housing, even potentially stay away from Class B housing and focus on that Class C housing or like Brandon has been doing and big high fives to Brandon, focus on mobile home parks because those tend to be even more recession resistant than all the other classes of housing. Yeah, I've been preaching. That's in my pitch for the last six months to investors in my fund. It's exactly that.

Starting point is 01:14:13 But that said, nobody expected quite this. And so I would actually go to the next question here because it's actually my response to what you just said, Scott. So let's hear from Jack Repke from Charleston, South Carolina. Yeah, hey, my name is Jack Repke. I'm in Charleston, South Carolina. My question is in regard to tenants paying rent. You know, we are looking at a property where some tenants are in the food and bed industry, which obviously is taking a big hit,

Starting point is 01:14:44 and we have concerns around their ability to continue making rent payments. So I'm wondering what other investors are doing out there to, A, mitigate that risk, and B, work with the tenants in these tough times. All right, thank you very much. All right, so I think that's a fantastic question from Jack, because although, like, I mean, I've been,

Starting point is 01:15:04 the mobile home park thing, I've been loving, the C-class thing I love, I don't think any of us expected that the economy would flat out, like, go from like, I mean, I expected rents maybe to drop a little bit in some areas, but I never thought tenants won't pay rent, period, right? We're like rent decline is one thing. My tenants don't earn money anymore, period is a whole different thing. So I want to address that issue of rents dropping.

Starting point is 01:15:29 So why do we start, I guess, with Scott, trench, yeah. Why don't you explain, like, what are your thoughts on what do we do? Yeah, so I think, I think that this is, this comes back to again. I always harp on the financial foundation, right? But like as a real estate investor, investor for the very long term, I'm not living hand to mouth, right? I am not going to be going belly up

Starting point is 01:15:50 after one or even two or three, maybe four months of any of my tenants paying rent, right? And that's the well-capitalized position. When you have a situation, there's two things going on. One is the law is changing. There's like martial law, or absence of enforcement of evictions right now

Starting point is 01:16:08 in certain cities. And the federal government may impose something like that. So what this is is this is not an excuse for tenants who are otherwise capable to just not pay rent indefinitely and hold your property hostage. Some might do that in that circumstance, and that's on them. But you as a landlord do have recourse in that situation downstream. You will eventually sue a tenant who's doing that for unpaid rent and create eviction. And there will be consequences to any tenants who do that.

Starting point is 01:16:38 in the discussion, I think, has to center around, hey, I've got an otherwise responsible tenant who's in the food and beverage industry, who's been there for a while and is now not paying rent. What do I do? Well, you work with them, I think, right? I think you say, what is reasonable? And how do I apply my judgment there?

Starting point is 01:16:56 I text to my property manager this morning, addressing this very issue. I said, I want you to keep an eye on the tenants. And if anybody's having issues, let's discuss, and I will eat some of that cost, some of my profit there in order to maintain that. That is both the right thing to do to help certain people that are otherwise good people who are coming on hard times and it's good business because it allows me to retain great tenants in the long term. They will remember that downstream. That's my opinion on this.

Starting point is 01:17:26 All right, David, what do you think? And I'll go to Jay. Very similar to Scott. I just asked myself, well, what's in my own best interest? Does it make sense to pay for an eviction because somebody was a month or too late? when they literally just couldn't work. It's not that they chose to be irresponsible. Or does it make more sense to say, okay, I'll take what they can give me half the rent or even if it's no rent.

Starting point is 01:17:46 And a month or two goes by and I don't get rent, but I have money and reserves. I can make the payment. And then I see what we can do to catch them up once they're back. Or if worst case scenario, I just had to go two months and I didn't get that rent. But I didn't, it's not that big of a deal when you look at it from a 30-year perspective.

Starting point is 01:18:03 It becomes actually pretty simple question. And another thing to point out is the system's kind of designed to absorb a lot of this. When you miss a rent payment, foreclosure does not start on you right away. It's often like four to six months of late payments before banks are actually starting the process of saying, okay, I'm going to go foreclose on your property. So if you had no money in the bank and you were just playing this thing like by the skin of your teeth, and you need that rent payment literally to make your mortgage and you miss a mortgage payment or two until the rent starts coming in, well, guess who's working overtime when this whole scare goes away

Starting point is 01:18:33 and you got to go start pouring coffee somewhere or work in a side hustle, drive an Uber to bake that payment that you didn't save up money for. And then just let that be a good lesson for yourself that you shouldn't be living, like Scott said, hand them out. Yeah. Yeah. And the government may step in at some point. I mean, if the government's going to make it so that tenants don't have to pay rent,

Starting point is 01:18:52 my hope is that they'll step up and somehow help with the mortgage thing as well. Because not just for landlords, but for every homeowner in America, 20% of them who may be out of work who aren't going to be and what's the quote like 40% of Americans don't have $400 in their checking account or something like that or couldn't survive one paycheck like we are going to see that in two weeks ago like all of us who are landlords are going to see in two weeks from now we will have tenants who are not working at this very moment right now and will not have rent two weeks from now so I think the most important thing and I'll go to you as well jay I think the most important thing is to have a plan if you're shooting by the city of your pants when

Starting point is 01:19:24 a tenant calls you and says oh I don't have rent money and then you're trying to decide then what to do, that's always a scary position to be in. So, like, my wife and I have been actually, I mean, texting back and forth all day to day and yesterday and, like, talking, obviously. But, like, what is exactly our plan? Like, if this happens, then this, if this, then this. So, for example, we are going to, first of all, tell tenants, you know, rent is still do.

Starting point is 01:19:46 That's our first, we're going to say rent is still do. Second, then we're going to say if they just literally can't do it because there's some people, who can you borrow it from? Third, here's some government aid. We're researching right now government assistance programs in our, our various counties. Do some research. That is your job, landlord. Do some research. Find out what the government programs are helping your tenants if there are any. And then fourth, if we really, really can. There's like there's no government. There's no family help. You know, we've really

Starting point is 01:20:12 exhausted it. Then yeah, we're going to work with our tenants. And we have a plan in place for that. One thing I don't want to do with my tenants to say, hey, let's just postpone your rent for a month and you can just pay two rent next time. That never works for tenants. Right. If you let a tenant get behind, they will never get caught up in that. I've never seen it happen. Because I should say a low-income tenant because it's not like they're suddenly going to have more money in two months from now. So what we're going to do is structure payment plans, which I generally never do. And I've always advised against payment plans.

Starting point is 01:20:39 But in this case, we're going to do that. Hey, we'll spread out your payment over a 12-month period. And so your rent goes from 600 a month to 700 a month after this is over, but you can take two months off or whatever. So that's my advice is. Have a plan in place for what you're going to do. because it's coming. Jay, what do you think? I like Brandon's response a little better than mine. Thanks. So I think you guys covered it well. I will throw on one additional thing, and I know this isn't the right time to be thrown out. I told you so's, but I have been saying to people for many years,

Starting point is 01:21:09 and we all know this on this panel, I imagine, that this is why it's so important to have good tenants in your units. This is so important, this is why it's so important when the times are good that we're not making exceptions for tenants that we're doing the right thing and we're keeping them accountable and we're screening them well because think about it right now if you have two tenants let's say you have two units in one of those units you have a tenant that has always paid on time they've never been difficult they've treated your property well they've been there for a couple years they've been respectful everything is great and they're at risk of missing a payment next month or maybe the month after the month after and then you have another unit where you have a tenant that has always

Starting point is 01:21:52 been late on payments. They've missed payments in the past. They've treated your units like crap. They've treated you like crap. They've taken advantage of you. And you know there's a potential that they could miss a payment or two or three or four. Which tenant would you rather have right now? You know with that good tenant, they're going to do everything they can to make things right, to make things whole. They're going to do a better job than any other tenant would be out there. And so you're going to be a lot more comfortable saying, okay, let's work at a payment plan, or let's skip a month, or let's double up next month. With a bad tenant, you don't trust that they're not going to try and take advantage of you.

Starting point is 01:22:26 You don't trust that they're going to say, well, it's not my fault. I can't pay for the next six months. And now is not the right time to be going out and looking for new tenants. So this is why it's so important during good times to make sure that you're very selective about your tenants and to make sure that your tenants are the right tenants and being very picky. Yeah. And you're not going to be able to kick out the problem tenant. unrelated to rent, right, at this point in time, right? So that is going to be another part of the issue.

Starting point is 01:22:57 Yeah. Love everything you just said, Jay. I want to very quickly just address the mindset of if there's anybody out there who just fills resentment, like this is, nobody should ever miss a rent payment. Why do they not have money saved up? A big reason that there's opportunity to build wealth in real estate is because it's other people don't understand the value of it or don't manage their finance as well and they become tenants. Now, not everyone that's a tenant is doing it because they have no choice. Some people choose it. But a big percentage of them, if they could save up $20,000 in reserves, they would just go buy a house and you wouldn't be renting to them. Like, this is part of how the system works and you should be prepared for the fact that the whole reason there's a person to rent

Starting point is 01:23:32 your house is because a lot of people don't live fiscally responsible lives, which means you've got to be double responsible. It's the whole argument of why isn't everybody out there a business owner making lots of money? Why are there people that complain about working minimum wage jobs? But these are the people that allow other people to be able to get their food for inexpensively and their goods inexpensively because they're willing to work these jobs. If everybody were a business owner, things wouldn't be that great. Yeah. All right.

Starting point is 01:24:01 Next question from Hal Jones and San Diego. Good evening. My name is Hal Jones. I'm from San Diego. My question is this. If the economy does a quick downturn, like many of the signs and experts are predicting, what are some creative ways and non-liquid investors

Starting point is 01:24:17 can still hustle in that kind of economy? What do you guys think? And I guess we could take that both from a how to make more money on the side or how to hustle in real estate still. You kind of take either approach there. Well, one thing to point out is, as is often the case, Bigger Pockets has a book for that.

Starting point is 01:24:34 So for anybody that's on video, watching this on video, here's a copy of Brandon's book, the book on investing in real estate with no and low money down. So just a little pitch for that book. Great book. But it talks all about, and this is really important now, it talks all about creative financing,

Starting point is 01:24:48 it talks all about seller financing. And there's going to be a huge opportunity for this. For anybody out there that doesn't know what subject to is, might have heard that term, but doesn't know what it is. It's basically you taking over the payments for a homeowner and investor that just wants to get rid of a property. They're happy to just give it to you for you taking over their mortgage payments with their lender. Certainly there are some details there that are important. But that whole idea, Subject 2 was huge between 2008 and 2012. I have a feeling it'll be huge again. Another term to investigate there are what are called wraps. A rap is very similar to a Subject 2 where you're kind of taking over the loan from the lender, from the investor,

Starting point is 01:25:28 you're taking over their loan. Plus, you're also wrapping another loan around it. So you might pay them a few extra dollars every month. So Subject 2s and Raps and seller financing, creative financing, these are all things that now is a great time to start hop on bigger pockets and read about those things. Pick up Brandon's book and read about it. Love it. Cool. In the short term, I think that everyone's routine is getting reset right now. Everyone's working from home.

Starting point is 01:25:53 It's hard to go out and do those kinds of things. And so I would caution against adopting a routine that is going to be unhealthy or unproductive or whatever and say, how do you continue that aggressive self-education? How do you continue to stay fit in the confines of your home or wherever it is? that you're able to go out and just do not adopt that that lazy routine that could that could be tempting to devolve into here get those habits rights right away going into this and then the second thing more broadly about how to take advantage of it understand that marketplace power is going to shift in a variety of real estate related markets right so you know we would shift potentially from a

Starting point is 01:26:29 buyer's or a seller's market to a buyer's market in a recession what are the implications of that right in terms of getting loans. We just talked about the book on investing with no and low money down and creative financing subject to. Find ways to understand, hey, you as a borrower had all the power over the last 10 years. That is going to go away and the lenders are going to have the power and what's going to happen there? The capital raising markets, right? You know, the sponsors, Brandon, you've had a lot of power over investors in the past couple of years because they have, it's so easy to raise money.

Starting point is 01:27:04 recently. That could change. And so the power will be shifting back into the limited partners. You're going to have to go on the phone with some of these guys and guide them through the problems and walk them through things going forward, right? You know, contractors, they've had all the power in the last 10 years. There could be a shift in that market, property management. You know, so all of these markets are going to just have a natural shift that I think is pretty predictable in a lot of cases about, you know, if not specific to the specific degrees, just generally speaking, who's going to have the power and the relationships in these various markets and how do I use that as an opportunity? That's really good. Can I, can I, I had a tweet to that question. So let's say from a non-real estate standpoint,

Starting point is 01:27:46 how does somebody earn more money in this economy if their job, they're losing their job right now? They're in the service industry. They're in a hotel. They can't make ends meet anymore. How would you guys advise somebody else? I'll start with David, because you're really good with this question, David, generally is how do you just hustle to earn more cash to survive? Yeah, well, when you're in a situation that you've lost your ability to earn money the way you've been doing it, there's always going to be a transition period in between how you learn a new skill, get acclimated into a new environment, and then start converting that into revenue. It's not realistic to think you're going to lose a job and immediately become productive enough in a completely new thing or a semi-new thing to be earning revenue.

Starting point is 01:28:25 So first off, just understand and expect my revenue generating ability is going to go down either way. So what I like to do when you get into a situation like that is say, well, where's a job that I would love to have or a skill that I would love to have or an opportunity with more upside than what I have right now? And if I'm going to have a learning curve where I'm not making money, at least be doing it into an industry that is going to be better for me in the long term. So in every market, like what Scott was just saying, there's opportunity for somebody somewhere. In buyer's markets, buyers get opportunities. It's been really tough to be a buyer for the last couple years, especially where I live. sellers have just been in a ridiculously strong position, that could shift. Well, what's the same thing like in the business world? If you're someone who's like, well, I'm not going to have a job.

Starting point is 01:29:07 My whole hotel closed down and I'm not able to work in that anymore. Are there people who are still buying properties that you can go work for and intern for them or maybe make a little bit of money? Can you get on the phone and start pounding out phone calls to find sellers that, or sorry, owners of real estate that don't want to own it anymore? They're like, you know what? I only bought this thing because I needed a return for my money. It doesn't make sense anymore. I just want to get rid of it and go work for somebody else. It's going to be tough to be you if that's the situation that you're in. I'm not trying to sound unsympathetic. That sucks when you lose your job. But oftentimes those are the emotional hits that force us to kind of like have those life-changing moments. You rarely ever hear

Starting point is 01:29:48 about a person who did something amazing that didn't go through one of those, what am I going to do now type experiences. Yeah, I agree. I think it's going to be, I don't know the answer to it, right? But I do think that exactly what you guys have just said. And I also wonder, this idea just occurred to me, if there's an opportunity for folks to work for equity in potential deals, right? Is this a time where if you can, if you can figure out a way to cash for your situation and you're not, you don't have a lot of liquidity? You know, is this a time where you, you know, cash is going to be very dear? Is equity going to be cheaper in some, or lower risk for some people? And is there opportunity for that. I don't know. That would be a question I'd pose. But, you know, the four of us

Starting point is 01:30:27 have a privileged position here where we're not having to worry about this going into the next couple of weeks. Yeah. This might not be something that really answers the question of how can people stay involved making money in real estate. But for those who are out there that are just looking to make money and scrap up a few extra dollars, on the Bigger Pockets Business podcast earlier this week, we had a business school professor who talked a lot about in order for businesses to stay viable over the next several months. And even into the future, even when things get better, it's going to be important for them to change their business models. So, for example, restaurants getting better at doing carryout or doing delivery, things like that. If you have any skills or ideas

Starting point is 01:31:11 or the willingness to hustle to help businesses figure out how they can stay in business. If you can help others figure out how they can continue to make money in this market, that's something that can be very valuable. Maybe you have technical skills and you can figure out how to take a business that is basically brick and mortar people coming into an office and helping them get home offices set up, get the technology set up, get Zoom or video conferencing set up. Maybe you can deliver food for a restaurant that wasn't previously delivering food. I run a remediation company, firewater mold remediation company. We've started doing coronavirus cleanup. and we're literally hiring housekeepers from hotels that are very good with the cleanup piece. They know how to do cleanup and teaching them the biohazard remediation piece.

Starting point is 01:31:58 So we're keeping them employed. So get creative and figure out how you can go support other business owners or other people, maybe outside of real estate to help you continue to bring that cash in. Yeah. You know, one thing I'll add here is that, and this might sound a little bit cocky, and I want to be careful how I say this, but like, I have never worked. worried about my ability, no matter what the economy will do, I've never worried about my ability to succeed because I know that my work ethic is better than 90% of other people in the world.

Starting point is 01:32:29 So you don't need to be the best in the world. Like, you don't even need, like, if you're in the upper half, the other 50%, 50%, and I know people are going to say, well, I have a lot of things going for me, right? I'm healthy. I'm young. You know, like all those things that are good. That's true. But I have zero problem crawling under a house with spiders and fixing a plumbing leak.

Starting point is 01:32:46 zero problem with that. I will do that all day long to put food on the table. So what I would encourage people is to adapt or ask the question, am I willing to do what it takes to put food on my table for my family? If you are somebody who's struggling right now, don't get into victim mentality of, well, you know, I was working at the hotel and I lost my job. The government sucks because they're not bailing me out. But ask the question, like, you know, what am I willing to do to make sure that my family makes it through this okay? And I know that I will dig ditches. I will get dirty. I will do that. I work 20-hour work days if I have to to make sure it gets done.

Starting point is 01:33:15 And if you have that attitude, no economy can take that away from you. No government can take that away from you. Nothing can take away just solid good work ethic and continually trying to improve your position. Always asking, how do I make more? How do I do this more streamlined? How do I make this more effective? And if you're that person, you're never going to have a problem. It doesn't matter what economy you find yourself in.

Starting point is 01:33:34 Yeah, I just had a conversation with my real estate team about that yesterday because everyone gets worried. And what I said is the reason I'm actually not worried at all. My confidence is higher is I know our, like the real estate. estate agent world, that just got hammered. Yeah. Like we had 26 houses in escrow. And a ton of them are probably going to be having second thoughts or dropping out and you won't be able to stop that from people. I don't have a lot of control over it. But I'm not feeling fear because like what Brandon said, I'm like, there's no way that with my work ethic, I won't go find a situation and work in somebody else's

Starting point is 01:34:06 business and do really, really good. In fact, when the economy is going well, a strong work ethic is less valuable because you can get by without when lots of companies are having a hard time hiring good workers with good work ethics because there's so much money floating around. But when the economy goes bad, that's when a good work ethic is actually more valuable. But nobody else can get a job and you can or nobody else can get a raise and you can because you're working really hard, you should feel better. And I love Brandon's point. If you're feeling, okay, I work in the hotels, my hotels is going under, I'm screwed, there's nothing I can do in your negative. That's a interoperative. That's a inner problem. That's a problem with your mindset, with your attitude. And this can be a

Starting point is 01:34:44 positive thing if it forces you to look at that and become a better version of yourself. Very good. All right. Next question. I don't really leave anywhere for us to go with that, did I? It's good. It's like mic drop. All right. Next question comes from Cavelle from Brooklyn, New York. Hi, good evening. My name is Covell. And I'm calling from Brooklyn, New York. I was one. I was wondering, what impact do you think this pandemic is having on the ability to access capital via a line of credit or even a cash out refi? Thanks a lot. Have a good night.

Starting point is 01:35:24 Stay healthy. Bye. Jay, you want to start? Kick it that one off? Yeah, I think this is the $64,000 question or the million dollar question, depending on how much money you need. We don't know. I mean, right now, the government.

Starting point is 01:35:41 is implying that there's going to be lots and lots of money out there for businesses and people and everybody that needs money. So right now I'm kind of optimistic. I mean, interest rates are low and the president has talked about funding $50 billion for SBA loans. And I have to imagine real estate investors are going to be high up on the list of people they want to keep happy because we kind of push the economy forward pretty well. So right now, I see no reason not to worry about access to capital. That said, we look back at 2008 and we saw that lines of credit were being shut down. Some were being called due, people that had money out that were just, hey, you have to repay us right now. We don't care about your situation.

Starting point is 01:36:31 It was hard for our buyers to get loans. So I would say, right now, optimistic, but don't put things off thinking. that they're always going to be good and access to capital is always going to be easy. So if you've been thinking about refinancing, don't say I'm waiting for another eighth of a point drop before I refinance. I mean, if an eighth of a point is going to make that,

Starting point is 01:36:54 I've been telling this to people a lot. They're so excited that rates are down. And what I'm telling people is if an eighth of a point or a quarter of a point really makes that much of a difference to whether or not it's a good deal for you, it's probably not a good deal. Your deal should not be that sensitive to a small dropping rates.

Starting point is 01:37:12 And rates have actually been up. I mean, it's counterintuitive. We think of mortgage rates as being tied directly to that federal funds rate, that zero percent now interest rate. But actually, that's just one component of mortgage rates. Mortgage rates are also controlled by U.S. Treasury rates, and we don't need to go into that, but suffice it to say that treasure rates have gone up, actually, over the last week or two.

Starting point is 01:37:34 And it's also controlled by the banks and the lenders themselves just saying, hey, we want more money. We want higher margins. We're going to charge more. And over the last week or two, there have been so many loan applications going in that lenders have said, we can't keep up. So we're going to raise our rates. So over the last week or so, David talked about these 26 houses that he has an escrow, that he's having trouble closing because of title companies and inspectors and appraisers. We've actually had two buyers back out because their rates have gone up over the last week. And they now aren't getting the deal they thought that they were going to get. So don't wait to refide because we're not positive which direction rates are going. They're likely to go down a

Starting point is 01:38:12 tiny bit more or stay stable, but we don't know. Don't hesitate and hold off on getting a heel lock or a line of credit if you want to do that because who knows in a couple months you may not be able to. Move forward now. Be optimistic, but be cautiously optimistic. Love it. Yeah, I would just also kind of add in there, hey, again, this is a lot of the home loans that you are listeners are probably going to be getting our Fannie Mae fixed probably 30-year mortgages, right? So they're Fannie Mae insured, and that ability to access that type of financing is probably going to dry up at a much slower rate, I would imagine, than commercial financing or business financing and those types of things. And so that is kind of the big advantage here,

Starting point is 01:38:55 but like, there's no reason to wait if that is critical to your business strategy or you haven't done it. For me, hey, rates just dropped, so I'll probably refinance, not because I haven't been prepared for that, but because there's no reason not to refinance when I can just lower my payment. So just kind of think through those things and understand, hey, if you're well capitalized and you're a good position, there's no need to rush, rush, rush to go do it. But if you're, if it's, if you haven't short up your position, then I think that's the time to react immediately per Jay's point. Yeah, good stuff.

Starting point is 01:39:27 All right. Hey, Scott, I have a question for Scott before we go on. And this is something I've been thinking about a lot recently. historically, I never, ever, ever, ever, ever, because I'm ultra-conservative, would have recommend people getting an arm, a 7-1 or a 10-1 arm as a loan. But these days, what we're seeing is some pretty big spread differences. Rates for 7-1 and 10-1 arms are a good bit lower than 30-year fixed. Typically, you're getting some lender credits or you're saving on points. And given that, rates likely aren't going to go up any time in the near future, do you have any particular thoughts

Starting point is 01:40:02 on whether anybody should even be considering arms now versus fixed rate loans? You know, and I use fixed rate loans. Let me just preface this with this discussion with that, right? But here's the advantage of an arm, right? If you hold on to a property for a very long period of time, right? And look, it looks like we're going into a recession. That's why we're recording this podcast. I think that's just generally the consensus is we should be wary of that.

Starting point is 01:40:24 But if you're thinking, if you're zooming out, right, if you hold on to a property for a long period of time, 10 plus years, right? you've now amortized that loan pretty significantly. And it's probably your return on equity is beginning to drop over that hold period. So it's probably time after seven to 10 years in most average market conditions to refy or sell the property after a 10 year period anyways. So an arm actually I think has a lot of advantages for a lot of investors. And Jay, I don't know the spread difference right now.

Starting point is 01:40:55 But that is something, you know, now that you've mentioned it, I'm going to go consider when I look at these loans. Sure, you're assuming that interest rate risk over time may arise, but that may not matter in the context of refinance unless rates go up a ton because you're going to have to pull out money somehow at some point if you want to keep a strong return on equity over the long term. Well, I think there's also some fine print we need to think about when it comes to like the arms.

Starting point is 01:41:19 So I have an arm on actually two different investment properties. And the reason why I was okay with it is because they changed a lot of stuff back in 08 and 07, And when the arms were like, you know, your payment's going to go from eight, you know, 3% to 29% overnight. Now all these people got lost their stuff, right? They changed a lot of stuff. So today's arms are a lot of times different. My arm that I have.

Starting point is 01:41:40 And for those I don't know, it's an adjustable rate mortgage. It can go up and down. It generally goes up, but it can go up and down a little. In fact, I actually just got a letter the other day from my bank saying my arm dropped, which I was awesome. Like my payment went down like $40 a month, but on one of my properties. Anyway, the thing actually says, though, it could only increase by 1% per year. one of the stipulated, I don't know if it's a federal law or that was just in my thing.

Starting point is 01:42:00 It only would go 1% per year and it capped at 11%. Now, that sounds like a lot, but I ran the numbers at 11% on that investment property. And it changed, I mean, it was a pretty cheap mortgage. It changed the payment by $120. That property cash flowed $700 a month. So worst case scenario, over the next seven years, it could bump from 4 to 11% over the next seven years. If every year was the worst increase possible.

Starting point is 01:42:25 And at the end of that, I'm only $120 more in payment. do I care? Not at all. And you can refinance that, you know, unless your property decreases in value by a large amount. resulting in a lower LTV or whatever, but a large point. So I think, I think there's a lot of good reasons to use arms. And I think that the big, but the fact of the matter is most people will use fixed 30 year mortgages because they like the idea of lock it into a low interest rate. So how's that? And arms hurt people for a long time. They became a dirty word. Like Helock was a dirty word because in the last recession, a lot of people lost their properties. And what I love about this conversation is I guarantee you, a large percentage of listeners just went, oh, really? Like there's a cap? Yeah, I didn't, oh, the difference between 7 and 11% for Brennan's only $120.

Starting point is 01:43:07 I can manage that. They had no idea that that's how the thing works, but yet they had very strong opinions about the fact that an arm is bad or a helic is bad. And there is so much bad information going out there from people that were just fearmongers that would say, never use an arm, don't ever do anything, don't fur, don't flip.

Starting point is 01:43:25 This is terrible because people use them irresponsers. or didn't look at the fine print and ended up getting in trouble. And then you hear information like this and you say, oh, wait, that actually isn't terrible at all. Scott just made a really good point. If my house is going to go up in value, which they typically do over a seven-year period, I probably need to sell it and reinvest that money anyways. What do I care if the rate could start to reset?

Starting point is 01:43:45 Oh, I could just fix it at a fixed rate mortgage so that I don't have to worry about it. Okay, so the downside is not really that bad. Jay, what do you think? You posed the question. So, again, I'm tremendously conservative. and I've, without any good data behind me, I've had this attitude for the last several years that arms are bad, fixed rate mortgages are good. And I just had a good friend of mine, who's actually in the Bay Area, David, who questioned

Starting point is 01:44:12 me on this and challenged me on this a couple, I guess about two weeks ago. And he forced me to actually confront the data and actually get rid of just my biases that arms are bad, fixed rate loans are good. And basically the data said to me exactly what you said, Scott, as you get to seven or ten years, build up more equity in the property. And so your return on equity, which is an important number that we can talk about a different time, but return of equity drops. And so it's generally a good time to refinance in the seven to ten year time frame anyway. You do get some good benefits. A lot of times lenders will charge fewer points so there's less money out of pocket up front.

Starting point is 01:44:52 You can get lower interest rates. so there's less money out of pocket every month. There's a lot of talk that we could be in a low interest rate environment. I mean, over the last 60, 70 years, interest rates have been going down. So it's possible we could end up in a low interest rate environment for the next five, 10, 50 years. And typically there are caps on how much rates can go up. So there are a whole lot of good reasons to be considering an arm right now.

Starting point is 01:45:16 I'm not telling people like, don't do your own research, make your own decision based on your own situation. But I'm no longer, and this is the reason I'm posing this, I'm no longer in the that mindset that one is necessarily always better than the other. It reminds me when I was a kid and I was told by everybody, don't eat eggs. Eggs are terrible. They raise your cholesterol. You're going to get killed.

Starting point is 01:45:34 Like, don't eat more than three eggs a week or you're going to die. And now you have all these fitness people that are. That's back now. As of like a month ago, like, I know it's back. I'm going to die pretty soon. Low fat was the thing. Like don't eat fats and now it's don't eat sugar and don't eat carbs. And like you just get this idea like, okay, people said don't eat eggs.

Starting point is 01:45:51 Eggs could kill me. And then you find like professional fitness people that say, Oh, like 80% of my diet is scrambled eggs with a little bit of kale. When I was a kid, I asked my mom one time what that was. And I pointed to that blue line that's at the top of a car windshield. And it's meant to be a little bit darker or like usually as a blue. But it's usually like a darker part of the windshield, right? It keeps from getting blinded by the sun.

Starting point is 01:46:13 And she said, don't look at that. You can go blind. And she thought I meant the sun. It wasn't until high school. I'm not kidding. It wasn't until high school that I began. looking at the top of a windshield because I thought all that time my whole childhood that I was not supposed to look at that the shaded part on a windshield. And there's so many things that we hear

Starting point is 01:46:35 in life, right? That that we hear and we take as gospel truth, but it might have been a specific case or an example. So the question I got for everybody listening right now is like, what is that shaded windshield in your life right now that you're not looking at? And maybe you should be. Question authority. Yeah. Question it. Mom. Geez. All right, next question. Let's go Emily from Long Beach, California. Hi, my name is Emily and I'm from Long Beach, California. Super new. I haven't even made my first deal yet, but I am actively looking. I'm investing so much of my time and learning what I need to learn. I have relationships with investors who are ready to give me that other half of the deal. and what's required with work and any leverage that they have and I have combining both. So I'm driving around, I'm looking for deals, I'm using Zillow, any free local NLS.

Starting point is 01:47:37 But given the virus and given the way everybody is now just, you know, keeping their space and not really going out in public, what do you suggest for someone as fresh as me in finding a deal, contacting owners, agents, and making that first offer? I am ready. I have created a list of actually homes that are for sale in my area. I have a script that I've kind of pulled together based off of listening to different Bigger Pocket podcasts, actually. So I'm just wondering how you would suggest or recommend or what you would recommend for somebody that's in the early stages like I am. Thanks. All right.

Starting point is 01:48:32 So I love this question from Emily because I'm dealing with the same thing. I'm teaching some wholesalers out here in Maui how to do driving for dollars and how to contact sellers. Like should we just back off for a while at this point? Do you think right now? And the same question I go, David, if you're an agent, the same thing applies. I mean, if you're a door to-door salesman for meat sticks, I don't know, whatever. Like the same question. Should we just hold off for a while until this settles?

Starting point is 01:48:53 What do you guys think? I'm a big proponent of that Warren Buffett philosophy be greedy when others are fearful and fearful when others are greedy. Doesn't mean be foolish, okay? Don't just go buy everything just because and assume that because we are in a recession, you're already in a place where you get great deals. But this is making all my long-distance investing formula look really smart. That's literally what we're using with our clients. It's, hey, David, what do you think about this house?

Starting point is 01:49:17 I want to go see it, but I'm not supposed to leave. You know what I'm going to do? I'm going to get the seller to make a video of the house, and we're going to send it over to you, and you're going to look at it, and you're going to give me the questions, and I'm going to ask the seller. There's very little that can't be done remotely if you're focused on it.

Starting point is 01:49:30 We just held our team meeting via Skype, and everybody, like, we just picked up a Slack channel. Like, I know that's really big for you guys at BP. Like, business will still move if you're determined to make it move, and everybody else is going to be sitting on the sidelines. Now, that doesn't mean this works in every market, okay? in my specific market, a slowdown is a blessing right now. There's a chance to get just a person who wants to own a home,

Starting point is 01:49:52 the actual chance to get it, because there's not 20 other offers coming in. There's three other offers. And my clients are more prepared. They understand the options of the contract because I've talked to them. So they're looking really good. But I'm looking at this whole thing like, you know, you got to see the house at some point if you're going to live in it.

Starting point is 01:50:07 I'm definitely advising them. If this is an investment property, you don't have to see it. But if it's a house you're going to live in, you probably do. That's something you want to make sure you feel comfortable with. But you don't have to see it in the next two or three weeks. What if we just write the contract to be over 60 days? And when the shelter in place is lifted, then we go look at it. And we've already got your appraisal.

Starting point is 01:50:24 We've already got your loan. We've already got all the paperwork done. We just get that last little box checked. And boom, we move to the finish line. And this is one of those things where, oh, I didn't even realize that you could do that. This is just, I thought you were supposed to do this and then this and then this. And now you question why it's that way. And that's usually where efficiency is born.

Starting point is 01:50:41 One of my favorite quotes is necessity is the mother of invention. And that's exactly what you see in times like this. Yeah, so, Scott, what do you think? I mean, should we be out there hustling and, you know, working to find deals still right now? Well, I think for, you know, what do you mean by hustling, right? You shouldn't be out spreading the virus, right? That's the whole point of what we're doing here. And it's not about your health.

Starting point is 01:51:03 It's about the health of the people that are particularly at risk in addition to your health, right? But, you know, should you be buying real estate deals and those kinds of things under safe conditions? Yeah, I think if you're a newbie and I haven't, you know, I haven't done my first deal yet, but I'm actively looking. You know, I think it's a question of assessing reality, right? And the reality is I think a lot of newbies are not going to actually follow through on deals in the next two or three weeks, right? If you're one of the exceptions to those rules and know yourself and you continue going

Starting point is 01:51:33 about things. But I would say it's also fair to say, hey, I'm a newbie. I'm looking to get into real estate. It's uncertain right now. So I'm learning. I'm looking. I'm waiting. Whatever if that's your reality.

Starting point is 01:51:44 and contact people in that context, but don't mislead people if you're not going to be seriously interested in buying or you're going to be scared of the current economic situation. Now is a great time to read, learn, you know, network over Skype or Zoom or whatever it is. You analyze a lot of real estate deals during the time. Yeah.

Starting point is 01:52:01 It's also potentially can be a good time to continue your long-term investing strategy, but know if that's you and if you're seriously going to go through with it. How's that? Jay, do you have any thoughts on that? No, I think you guys have covered it. I mean, I think now is a great time to practice, if nothing else. For those people that are scared to make offers, well, this is your opportunity to kind of make offers that might be low, might be, what's the saying?

Starting point is 01:52:32 If it's not insulting, it's not low enough. Basically, this is your opportunity to kind of practice in situations where you might have a built-in out, where there's probably not going to be a lot of transaction volume anyway. So you use this as an opportunity to kind of keep moving forward if you're not an experienced investor. Use this as an opportunity to put together your plan to kind of think through, hey, when this all passes, what am I going to do? Create that marketing campaign, but don't deploy it yet. Start writing those seller scripts or practice you're negotiating. Start thinking about what your your skew list is going to look like for your flip. Start thinking about how to run an analysis on a rental property or a multifamily if you want to do that. This is a great time. Too many people, I think,

Starting point is 01:53:18 are going to be sitting around not doing anything and then we're going to get to the other end of this and either things are going to get better, things are going to get worse, but there's going to start to be opportunity and a lot of people are going to say, oh, okay, what do I do now? Well, spend the next six months deciding when that day comes what you're going to do so that you can start executing. My wife just shut down her business. She basically, well, one of her businesses, she shut down her staging business. Basically, she got to the point where she either needed to make a big investment in inventory and furniture or she had to stop.

Starting point is 01:53:49 And basically that industry right now is at a standstill. People aren't, they don't want furniture in their houses, especially if they've been in other houses. So she stopped. But that doesn't mean that she's just going to go and not think about it for the next six months. It's still a very viable business model. It's a business model and a business that she wants to be in. So she's going to spend the next six.

Starting point is 01:54:06 months, figuring out where she can get the best deals, building systems and processes for the business, figuring out how she's going to market and start sewing those seeds or planting those seeds for marketing so that when six months from now, when the business becomes viable again, she's going to hit the ground running and she's going to beat everybody else that's just starting. So if you're a real estate investor, do the same thing. Use this as an opportunity to really prepare yourself and be ready for when the time comes. That's really good. And on that note, Jay, I want to talk about this real quick before we get out of here. A few months ago, we're going to look like, you know, like we're, uh, our psychics here.

Starting point is 01:54:39 But the reality is, we just know that recessions happen. Like you said earlier, whether or not we knew this black swan event was going to happen and just destroy everything. It doesn't matter. Like we knew that it was coming at some point because that's what happened. So we did an episode about a year ago, early 2019, it was episode 311, 311, where we talked about six rules to prepare for a recession. And I think those actually adequately applied to today's potentially being in a recession or one

Starting point is 01:55:03 that's, we believe potentially might be coming. Can we just review that? real quick. And again, I want people after this episode, go listen to 311 and because it's still applicable today, in fact, more so. But what are those six rules to prepare for recession? Yeah, just to give a little bit of context here, that episode, we talked a little bit about the book that Bigger Pockets release, recession-proof, real estate investing. And basically, the book lays out for every piece of the economic cycle, and we break the economic cycle into four pieces. For each piece of the economic cycle, there are things that you should be doing, there are things that

Starting point is 01:55:35 you shouldn't be doing. And then there are things that you should be doing to prepare for the next phase of the cycle. So back in January of 2019, I think it was when we did that episode. We were, we were well into the expansion. I was thinking probably close to the top of the market. We'd be hitting the recession within a couple years. And so we talked about the things that we should be doing to prepare for the recession. And I think the six things that we talked about, number one, hoarding cash. So during a recession, having cash is really important. And we talked about the fact that that in 2008 credit lines were tightened, Helox were called, it was tough to get loans. Right now, we don't have that problem. So that's great. So right now, we're not facing that issue.

Starting point is 01:56:14 We still have the opportunity to kind of build up cash and we still have the opportunity to use credit lines. So that's something that we can still continue to work on. We can still continue to cash in investments that aren't performing well, selling off things, maybe just go on eBay and sell all the things that you don't need or don't want and save that cash. Number two, we talked about opening up credit lines. And again, for the same reason, when we get into a recessionary period, a lot of times lending tightens up. It's harder to get credit. It's harder to get loans. So luckily, again, we haven't seen that yet. It's still a good time to be opening credit lines. If you have equity in your house, if you have equity in an investment property,

Starting point is 01:56:54 if you have good personal or business credit, now's a great time to go open credit lines. Because if things start to get bad, you may not be able to get access to credit, but things don't necessarily get bad enough that they close those credit lines. So having access to that cash, even if you don't need it right now, is really important. So go open those credit lines if you can, don't necessarily take the cash out, but have it available for when the opportunities come. Next, we talked about building credit. So if you have bad credit, or if you're young and you have no credit, now's a great time to be building credit because lending isn't necessarily going to stop, but the criteria for those getting loans is probably going to go up. Back in 2008,

Starting point is 01:57:32 I remember before the crisis we were seeing FHA loans. I think you could get at like 640 or 620. I mean credit scores at pretty low credit scores. By 2009, 10, 11, I think you needed like a 720 credit score to be able to get those FHA loans. So your creditworthiness is going to need to be better if you really want to take advantage of lending in a recessionary period. So go out and build credit. Go if you're young and you don't have a credit card, go get a credit card or two.

Starting point is 01:58:00 go buy some things on that credit card. Pay it off every month. But using your credit and paying it off every month is the best way to build credit. Don't wait to do that. Number four, we talked about getting rid of properties that can't sustain a worst case hit. So if you have flips that you don't have a backup plan for them, try and sell them now. Even if you have to sell them for less profit or even a small loss, don't chase the market down. Cut your losses.

Starting point is 01:58:27 If you have rental properties that aren't cash flowing well and you're thinking, I was probably going to sell those in a year or two, well, maybe now is a good time to be selling those or thinking about selling those. If you have other assets that you're thinking about getting rid of because you're not comfortable holding them three or five or ten years, now's a better time than getting a year in and saying, I really wish I would have sold that a year ago. For anybody that has short-term debt, if you have debt that's going to come due in a year, or two years or even three years, now is a really good time to restructure that debt for a couple

Starting point is 01:58:59 reasons. One, we talked about interest rates being really low. If you got debt any time prior to the last month or two, you can probably restructure that debt for less. I'm not saying you should refinance just something that you bought six months ago, but if you have anything that's going to come do in the near future, you would prefer to be in a situation where you don't have to worry about a loan coming due during a recession because during a recession, you may not be able to refinance. So So restructure that debt now. If you have private debt, if you have lenders, private lenders, go talk to them and say, hey, if we get to the point where this loan is due, will we be able to renegotiate?

Starting point is 01:59:35 Can we restructure now or can we put in place a plan to restructure when that comes along? So be prepared. And then finally, and I mentioned this a little bit just a second ago, but cut your losses. The biggest mistake that I saw a lot of investors make during 2008 was they chased the market down. They said, oh, I'm not getting the profit that I'm not. that I was expecting two months ago. So I'm going to hold out for that perfect buyer. I'm going to hold out for that profit.

Starting point is 01:59:59 And then the market drops a couple percent. And they say, oh, market dropped a couple percent. Okay, I'll drop my price a little bit, but I'm still not ready to like sell at a fire sale. And they drop with the market instead of getting ahead of the market. I did that. I went from a 170 sale price on a flip and just every week would drop it by a few thousand. And I chased it for nine months, 10 months, something like that.

Starting point is 02:00:21 So I sold that like 110 or something. It was. Yeah. I talked about the fact I used to work for eBay, and I remember when eBay wanted to buy PayPal back in the early 2000s, and they made an offer of like $500 million, and PayPal said, nope, we won $800 million. And eBay was like, nope, not interested. And so a couple months later, like, oh, they're doing well.

Starting point is 02:00:40 Okay, we'll give you your $800 million. Nope, we want $1.2 billion. Nope, not interested. We want $1.5 billion. Uh-uh. And they chased it up, and eventually eBay ended up paying over $2 billion for PayPal because they refused to get ahead. They kept trying to play catch up.

Starting point is 02:00:54 Don't do that with your real estate. If you need to sell, get ahead of it, even if you have to take a small loss, better to take a small loss now than a big loss later. So just that's my, those are my six tips. Again, let's see, hoard cash. Open up credit lines now while you still can. Build your credit now because you're going to need it pretty soon or potentially need it pretty soon. Get rid of any properties that can't sustain a worst case hit by the market. Restructure any short-term.

Starting point is 02:01:24 debt any debt that's coming due in the next year or two or three and if you see the market starting to fall cut your losses get ahead of it and just lick your wounds and move on and i actually have a number seven i want to add to that is is and this is totally self-interest of BP pick up a cop well that shouldn't say total because it should help you as well pick up a copy of recession proof real estate investing that j scott wrote because this is just a sample of what's inside that book and with a recession coming we should be looking into that so all right guys will we got a wrap this thing up here. So kind of some closing thoughts here. I'm wondering, can you guys offer just one piece of advice from each one of you on the next steps we should be taking? Like what,

Starting point is 02:02:04 what should we do next? Sure, I'll start. My one tip, which encompasses a few things, is just continue your long-term work on your financial foundation, right? The goal that we're all trying to work towards in one way or another is financial freedom and the ability for our portfolios generated enough wealth to replace the dependence on other types of income, right? So continue to spend less than you earn, track your spending, build up a cash reserve, both for your real estate business and your personal life, and invest for the long term from a position of financial strength. All right. Jay.

Starting point is 02:02:38 So I'm going to take a page from David's book and give a little analogy. Any of you guys ever drink alcohol? A couple of you maybe? I'm not a sinner. Thank you very much, Jay Scott. Okay. Well, then I'll assume David and Scott are. Anybody out there that's ever drank too much, I remember my college days.

Starting point is 02:02:57 There were a couple nights that I drank too much. I remember stumbling home and climbing into bed and the room's spinning and I'm feeling nauseous. I'm feeling horrible. And I say to myself, I will never, ever, ever do this again. And the next morning I wake up and I still got that visceral feeling of being hungover. And I'm like, yeah, I'm never going to do this again. A couple days later, I'm probably the memory is kind of fading. And a few weeks later, I'm just like, oh, time to go out and drink.

Starting point is 02:03:20 again because I've forgotten what that visceral feeling was. I've kind of lost it. You can't maintain that feeling, that feeling of pain long term. I do that when I go to a buffet. I'll never go to a buffet again. Yes. Unfortunately, I can make that. Six hours later. Every day. Yeah, exactly. Exactly. I see a lot of people who are doing the same thing with real estate investing in 2008. I remember getting out of 2008 and a lot of us like talking, licking our wounds and saying, wow, that was rough and we made a lot of mistakes. I'm never going to make that mistake again. I'm going to keep perspective on what can happen and how bad things can be. And here we are 10 years later, and I fall victim to this myself, we're forgetting how bad things can be. And we're forgetting

Starting point is 02:04:04 that things can be a lot different. I talk to a lot of people, this is interesting. I talk to a lot of people who didn't live through 2008. And we talk about this impending downturn. And what I realize is there are a lot of people who, when they imagine it in their mind, it's exactly like today. And when I say today a couple months ago, when everything was great, they're happy, their business is going well, their investing is going well, everything is good. And they imagine a downturn, a massive downturn, is exactly like that, except that real estate's half price. And they don't get that during a downturn, it's not just real estate prices that are going down.

Starting point is 02:04:42 Everything feels different. everything feels bad. And so I guess this kind of leads me to my actual tip, which is things are never as bad as they seem when you're in the middle of them. And things are never as good as they seem when everything seems great. So if things are going well, plan for when things aren't well. When things are going poorly, keep in mind the perspective that things are going to get better. Don't ever assume that your situation, it's too easy to fall into a situation. Forget about the past and think whatever's going on to, today is going to last forever. It's never going to last forever. It's never as bad as it seems. It's never as good as it seems. Good stuff. David Green. What do you think? That really, that echoes my point earlier that you need to zoom out. When you feel emotions are up and down. We were just talking about this. Like with every piece of news, it's, oh, it's not that bad. Oh, wait, it's worse than I thought. Oh, wait, it couldn't be that bad. Did you hear this? Your emotions are all over the place and it's not a healthy way to live. If you zoom out, you will then get clarity on the best move for you to make.

Starting point is 02:05:44 You should be assuming that recessions will come. For a lot of people, this is a very good scare if it isn't a bad problem where they realize I didn't have enough money in reserves. I was depending on zero economic vacancy. I mean, there's a lot of multifamily investors that are putting a lot of money into deals assuming they just won't have vacancy because you haven't had it for eight to 10 years now. The rents have gone up every single year, and then they build their model based on that, and that is not realistic. You have to expect things to go wrong.

Starting point is 02:06:13 We've had a wonderful rising tide. You shouldn't expect it to continue. So zoom out, think about worst-case scenarios and prepare for them, but don't plan on it always being a worst-case scenario. Don't use that as an excuse to not take action, but I think Scott's given really good advice. If you just continue to get the fundamentals right,

Starting point is 02:06:30 you're still going to build wealth through real estate. And then the last thing is, when you're trying to figure out what is going to happen with our economy, because who knows when this air is what's changed since when we were talking? You can't know. But what you can do is ask yourself just wise, prudent, pragmatic questions. If you were the coach of an NBA basketball team and you had a player who was doing really, really well, and then for two or three games in a row, they started to perform very poorly. You wouldn't be freaking out saying, should I pull him, should I keep playing them? I don't know what to do.

Starting point is 02:07:00 You would start to ask yourself, why did their performance change? is this a person who just aged out their athletic ability is decreasing are they suffering from an injury that they're not going to come back from did they lose interest in playing the game and I need to like substitute a new player for this person or trade or wave this person

Starting point is 02:07:17 or are they somebody who didn't get enough sleep last night because they partied too hard and they drank too much like what Jay was saying and they're not focused are they fighting with their boyfriend or their girlfriend and so they're not focused on what they're doing and that's a temporary thing that will pass I'm asking myself the same thing about the economy Are the fundamentals of our economy in the United States right now terrible to where we're not going to recover from this?

Starting point is 02:07:39 Our jobs being lost, like remember the dot-com bust that we had in the 90s where all of a sudden, like, everybody, like they were working, making websites and then nobody needed a website anymore. That really affected the economy. There was jobs that people did not have to go back to. Or is this a temporary thing where people are not able to go to work? They're going to stay home. We're going to have a decrease in performance, but those jobs will be there when they want to come back. Ask yourself questions like that when you're trying to figure out what move should I make. What is causing this problem? Is this a temporary problem? Is this a permanent problem?

Starting point is 02:08:11 And give yourself something to think about from that perspective. Don't just respond to every new piece of news and let yourself get jerked from one side to the other side and live in chaos like that. Zoom out. Look at the big picture. And for most people, that really helps bring clarity on the right move that they should be making. Good stuff. All right. My final word for the day. No, no. We need to get your tip. Your tip. All right. My tip.

Starting point is 02:08:33 Yeah, you're not sneaking out of this one. My final tip is what I'll just reiterate what I said earlier. The economy cannot change your work ethic. The economy doesn't change what time you wake up in the morning. It doesn't change whether you go to the gym or not. Or you will work out or not. It could change whether you're going to the gym. It doesn't change whether you work out or not.

Starting point is 02:08:49 It doesn't change whether or not you make those phone calls. It doesn't change any of that. So regardless, like we are playing a game of poker. Like we said earlier, there are cards being dealt right now. And every car changes what we can play with our hand. If you're thinking, you know, a good game of poker. poker, right? Like, you have a few cards on your hand, and then as cards get dropped one at a time on the table, that affects your game. So, but it doesn't, like, it doesn't affect what we do

Starting point is 02:09:10 in terms of our lead measures and what we as people do. So just remember that and you'll be fine. That's all I got. All right, guys, well, let's get out of here. I hope you guys enjoyed today's show. I hope you learned a lot. I hope you feel a little bit more good and secure about what you can do going forward. Jay and Scott, thank you guys for joining us today. David and I here on show. So you guys are rock stars. Thank you. This was awesome. Thanks, guys. Have a good week, everybody. David Green, you want to take us out? Yes, this is David Green for Scott entrenched in real estate trench, Jay, the Professor Scott and Brandon, the DIY Guy Turner, signing off. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small.

Starting point is 02:09:57 If you're here looking to learn about real estate investing, without all the height, you're in the right place. Be sure to join them. millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes, 10% below market value,

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

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