BiggerPockets Real Estate Podcast - 841: BiggerNews: Soft Landing or Hard Recession? How to Build Wealth in Both

Episode Date: November 7, 2023

Will 2024 bring about a soft landing or a hard recession? Tough economic times could be upon us as more and more economists disagree with the “soft landing” narrative of early and mid-2023. Even though the economy hasn’t broken down yet, top-tier investors like Fundrise’s Ben Miller believe that a recessionary “lag” is taking place that could give us some severe financial whiplash—and only the best of the best will survive what is to come. So, what does it take to survive a recession, and how do you know whether or not you’ve put yourself at risk of losing everything? Ben, David, and Rob all give their takes on what could happen in 2024, how they’re protecting their wealth, and why they’re taking fewer risks to ensure they make it out alive. This may be a HUGE wake-up call if you’re still actively buying real estate deals and leveraging your portfolio as much as possible. Ben will also talk about his lessons from the last two crashes, how the companies he worked with got crushed, and how he changed his investing perspective to build wealth far faster than almost anyone around him. Wealth is built during the downtimes, but if you don’t follow the advice of those who have been through past crashes, you could lose everything you’ve built! In This Episode We Cover: When the 2024 recession could hit and why it may be worse than most Americans believe The recession “lag” that is catching up to us and why it might hit you by surprise  A soft landing vs. hard recession and how bad the economy could get Impacts on real estate and whether or not you should be buying or holding right now Playing financial “defense” and how to ensure you don’t get wiped out during downtimes High mortgage rates and how they could lead to unemployment, a housing market standstill, and a tough economy And So Much More! Links from the Show Find an Agent Find a Lender BiggerPockets Youtube Channel BiggerPockets Forums BiggerPockets Pro Membership BiggerPockets Bookstore BiggerPockets Bootcamps BiggerPockets Podcast BiggerPockets Merch Listen to All Your Favorite BiggerPockets Podcasts in One Place Learn About Real Estate, The Housing Market, and Money Management with The BiggerPockets Podcasts Get More Deals Done with The BiggerPockets Investing Tools Find a BiggerPockets Real Estate Meetup in Your Area Davids's BiggerPockets Profile David's Instagram Subscribe to David’s YouTube Channel Rob's BiggerPockets Profile Rob's Instagram Rob's TikTok Rob's Twitter Rob's YouTube Fundrise’s Ben Miller on The 2023 Financial Crash A “Soft Landing” Looks Shaky as Recession Risk Starts to Rise Why 2023’s “Rolling Recession” is Almost Impossible to Predict Connect with Ben: Fundrise Ben's X/Twitter Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-841 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 841. What's going on, everyone? It's David Green, your host of the Bigger Pockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast on the planet every week, bringing you the stories, how-toes, and the answers that you need to make smart real estate decisions now in the current market. I'm joined today by my co-host, Rob Abas Solo, with an incredibly insightful show. On the topic of bringing you up-to-date information, we have Ben Miller of Fundrise. who is talking about our current economy, what's going on with it, and how we can positions ourselves

to survive or maybe even thrive in the face of some pretty serious changes. Rob, what are some of your thoughts after today's show? What should people keep an eye out to listen for? I think that we're going to get some mindset changes from the people that have been very aggressively acquiring, you know, that set of investors may change how they think and approach real estate over the next couple of years. but very good insightful philosophical talk from Ben. I mean, he really brought it, man.

This guy is, I mean, a recession genius, if you will, which is a very weird accolade to have, but he knows his stuff. Yeah, although this is a bigger new show, it's more like bigger conversations, and Ben brings a lot of insight as someone who has studied actual recessions. You don't find a lot of people who have dedicated so much of their life to studying something so depressing, but I'm sure glad we got them. So before we bring Ben in to talk about what's going on,

in the economy and specifically the world of real estate, today's quick tip is very simple. Take some time to redefine what success looks like. For a decade, we have only defined success by how much real estate you acquired. And it may be time to look at if keeping the real estate that you have or improving your financial position, if cutting down on your debt might be a bigger flex than just adding more. Real estate investors, the April 15th tax deadline is coming fast. If own rental property and haven't done a cost segregation study yet, you could be handing thousands of dollars to the IRS that you don't have to. These studies let you write off as much as 25% of your building and generate huge tax deductions. Costsegregation.com is an online self-guided software

that makes cost segregation fast and affordable. So it finally makes sense for smaller rental properties purchased for as low as $100,000. With pricing under $500 and an average savings of over 25,000, it's just a no-brainer. What's more, audit support is included by the number one cost segregation company in the U.S., but you must complete it before the tax deadline. Go to Costsegregation.com and use code tax deadline to get 10% off your first report. Don't overpay the IRS. Head to costsegregation.com before April 15th. Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action. the footsteps, the late-night fridge raids, yeah, when you're gone, your place is basically on

unpaid leave. It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property, you can hire a vetted local co-host with real hosting experience to handle it all. A co-host can handle guest communications,

it can manage reservations and keep things running smoothly so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax, knowing guests are taken care of, and your place is in good hands. You travel, your house works. Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. Most investors spend more time chasing deals than reviewing their insurance.

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Steadily, landlord insurance designed for the modern investor. All right, let's get into it. Ben has a long career in real estate and finance slash tech. He's the CEO of Fundrise that currently has over $3 billion in assets under management. A father of three who resides in Washington, D.C., and as a fun fact, his dog Zappa is the company mascot for Funrise. Ben, welcome to the show. Yeah, thanks for having me. What kind of a dog is Zappa?

Come on. Pound puppy. Oh, I remember pound puppies. Rob, are you old enough to remember those? Are they puppies that weigh a pound? Just kidding. Just kidding. No, I don't know what a pound.

I mean, I assume it's, are you saying like a pound? Do I remember the concept of a pound? It was a toy for kids. It was like a type of stuffed animal that were called pound puppies. They still have my, actually saw it in the Target toy section. They made a comeback there again. Have you noticed those, Ben? I didn't even realize when I said that.

It was like dating me. Welcome to my life. Rob always pretends like he doesn't know anything I'm saying. He's only like five years younger than me, but he acts like he's 25 years younger than me. What are you referring to? A pencil? What is that? How does that work in a tablet?

I'm so sorry, a pencil. So, Ben, you mentioned you're obsessed with the recession. I don't think I've ever really heard those words in that order when it comes to a recession. So why are you obsessed or what are you obsessed about just to clear that up for us? Yeah. I guess it's a little bit like somebody who's like hit by a car or something and are afraid to cross the street afterwards. Like, I've been through two, like, major ones. I went through 2001 and 2008.

And I worked for a tech company in 99 to 01, and that company went out of business, and tech basically was, like, destroyed, destroyed for, like, three to four years after that. And then I was in real estate after that, and real estate was destroyed, absolutely destroyed in 2008, 9 and 10. And so, like, I came away from those experiences, like, saying, like, 80% of, like, what happens in the world happens during these crises. Like, we just saw it. I mean, the last few years has been, I mean, it's just been crazy. The amount of this happened in a short amount of time. And so it just made me obsessed with these periods.

So it's sort of the fear of it happening again and being exposed when the music stops and you got no chair to sit in. It's a combination of fear or like, I would say like appreciation of the full power of the ocean. Like if you swim, is the ocean so vast? And also like opportunity because I watched a lot of companies like survive and flourish out of recessions, a lot of people. And it's like most of the time you spend, you know, your day to day doing the same thing. It's pretty stable days. Like today is like tomorrow. Yesterday was like today.

and then sometimes it's not. And it's really like those times as not that's the greatest, you know, risk and opportunities. So, David, you mentioned you've been a skeptic for a while. The past couple weeks you've changed your mind. Specifically, is that because of anything that you're experiencing in your market or anything like that? I don't know if I'd say I'd change my mind yet.

I sort of hold these things with an open hand, right? As I'm looking at it, I see like, okay, it looks like we're heading in this direction, but I'm not going to be making these videos that, like, we are heading to doomsday and it's going to be the worst ever because you go back five years and there's people that have been calling for these crashes the whole time and they don't happen. And then some news comes out that changes things. Like what if tomorrow all of a sudden they drop rates from seven and a half to three probably

would have an impact on our economy? I can't guarantee that it wouldn't stop a recession, but it very well might. So it's hard when you're trying to predict what's going to come in the future with all of the moving pieces that we have. my take on a lot of this, or I guess to answer your question, Rob, of why do I see this happening? I'm noticing a lot of companies are laying people off. So when I, in my 40 years of wisdom in life that I've developed, what I've noticed is that a lot of the economy is a momentum thing and it depends on psychology.

When you feel wealthy, you spend money. When you spend money, you make other people wealthy. They feel wealthy, they spend money. So your real estate goes up in value. You feel like you're wealthy. Your stock portfolio goes up. You go out to eat more often, you buy a more expensive car. The restaurant owner and all the waiters, they get more money.

The person who sold the car, they get more money. So now they take a vacation. The hospitality industry does well. They start hiring more people. Those people start to get more money. They can pay higher rent on their houses or they go buy a house. Everyone does better when money is changing hands faster. When we raise rates, we slow the velocity of money.

Money starts changing hands slower. People feel less wealthy. They spend less money. And now the momentum is going in the opposite direction. But it's often psychological. It's very difficult for us to pin and say what we could do to stop it. It's often what you could do to make people feel like it's okay to spend money or how you get money changing hands.

And frankly, I've just noticed a lot of companies. I've been looking at their P&Ls and saying, we don't need this many employees and they're laying people off. People at one point were complaining about having a W-2 like it was the worst thing ever. And they were a victim because they couldn't get financial freedom by 25. And they had to have a job. And I think a lot of these people are now saying, oh, man, I wish I had my a job. Can I get another job? And it can get a lot worse. How does that sound, Rob? That's good.

And I think you're getting at this point that I call it magnitude, but you described it as a similar way, which is essentially there's a feedback loop. And what happens, I think, is that when things go well and things get hot, like they get hotter than anything could possibly make sense, right? We saw that with meme stocks and crypto and just things just got crazy in 2020. and like the exact reverse can happen too. When things go bad, they can just get totally illogically bad. And I think that when people are like looking at the odds of recession, they're not adjusting for the magnitude of how bad it could get.

It's just not logical. It would get as bad as it does. Like in 2008 or 2001, like it just didn't make, it got beyond logical. And it's because it's not logical, right? You said psychological is emotional, is emotional. It's, you know, people are forced sellers by, by events outside their hands. And so that kind of magnitude, I think, it's really hard for people to appreciate without going

through, you know, one or two yourself. And so when I, every time I think of my odds, I always try to adjust them to sort of this, like the scale of the risk, the scale of the problem, not just the odds of it happening. Yeah, and you've studied data from the past nine recessions. And based on that, you've come to some conclusions. So what are some of those things that you've realized after looking at other recessions, patterns that you've picked up for what to expect? Well, so one of the things I've learned is that if you want to understand the future, you should look at the past. And so I was convinced there was going to be a recession. I've been convinced since, you know, since basically Ukraine, Russia and veda Ukraine. And I was perplexed

by why there hasn't been one yet. So I just went back and looked at the last, I guess you go, I went back to how far, you know, Fed data goes. And so Fed data goes to, like, mid-1950s. And there's been six, maybe if you think March 2020, seven recessions in that period since 1969. And they actually all follow a pattern. And the pattern's really clear. And this was the thing that surprised me because I didn't know.

So the Fed starts raising rates because they're trying to cool the economy down. They raise rates, like, slowly and it usually takes them about a year to 18 months to fully raise rates. And then once they finish raising rates at a peak, there's a lag. There's a lag that lasts on average 10 months from the peak of when they raise rates. So like they peaked raising rates in July. And the average lag is 10 months. So 10 months from July is when the recession would on average hit.

So that's like May 24. That's a long time from now. And that's just that's what happens like it happened in 2006, happened in 2000, in 2008, in 1980. And so it's like, I was like, oh, wow, this is, I didn't appreciate that's such a long, it's such a long lag. And why is that, Ben, why is there such a, why does it take 10 months or however long you're talking about? What's the reason for that? I mean, there's like general reasons and specifically what's happening today. So like the general reasons is that monetary policy is like a very indirect way to affect the economy. If you get into it a little technically like,

basically nobody borrows from the Fed, right? No people do. Banks are the one who borrow from the Fed, and so you have to sort of slow banks down, and then the banks have to then slow down consumers and companies, and that credit channel, they call it, it's really slow, and we've seen it, right? We've seen from 2008 to 2020 interest rates were basically zero,

and that's like almost, what is that, 12 years, took a super long time for all that monetarily, Is it printing trillions of dollars? It took a long time for that to feed him the economy. So there's like this, it's actually funny. I've been reading this paper. So Milton Friedman, famous economist. He's a conservative economist, some would say monetarist.

He has this famous quote, just found it reading this paper. The central empirical finding in my conclusions that monetary actions have a long and variable lag on economics, right, on economic conditions. And he wrote that in 1961. So that's a generally, like, that's how it works. And then specifically, right, we just have $5 trillion of stimulus, fiscal stimulus that went into the economy.

And that has to, like, kind of work its way through the economy. And then it's like we juiced the economy. And that's working against the monetary policy that's starting to slow everything down. Those two things will eventually that fiscal stimulus will and has. It's going away, right? The student loan payments are presuming. I don't know if you saw this, but like child poverty rates were at 5.5, I think, a year ago, and they've jumped to 12.2. They've doubled in the last 12 months because a lot of the program supporting, you know, SNAP and welfare and stuff have basically diminished. So there's a lot coming out of the economy.

But that's the essence of it is that just, you know, 350 million people, hundreds of millions of different actors, companies, it's slow. It's so slow. So is this something like where somebody eats a pot brownie and they're like, hmm, there was nothing there. I don't feel anything. Let me eat three more of them. There's a lag. And then it all hits you.

All that stimulus hits you at one time. Is that what you're describing? That is a, that is not the analogy I was imagining, but that's a decent one because like, and then like the problem is like you can't really unwind it. Yeah. Right? you just kind of have to work your way out of it slowly too. Because by the time it's hitting you, hitting the economy, to unwind it has the same long and variable lag.

And so the Fed, like, it's just to look at what's happened recently, right? Inflation hit the economy May 2021. If you're in real estate, you saw it, and your rents, your rents, just everything, the economy woke up May 2021 with a vaccine and all this stuff. And, you know, it just roared. We had inflation. I don't know what it was. I feel like rents were up 20.

20, 30 percent for us. And like that's May 2021. Fed doesn't start raising rates until a year later, a year. And there goes zero all through that period. And you look back and you're like, well, that was crazy. And so now just flip that, right, inverse it, is what Warren Buffett always says, invert it. So you flip that, okay, now all of a sudden everything's going bad and they keep rates high, despite all that.

And they just sort of like, there's a great quote. I don't know if you know this quote. The Fed talks like a trader. but acts like an accountant. Like they talk a good game, but they always look in the rear view mirror when they make their decisions. Oh, okay.

So if we're understanding the lag well, it's because when you make the decision, the effect is an instant. So again, an oversimplified analogy here. We took some caffeine, and it took a minute to kick in, and we just cap rate to zero, and then, who, we feel great,

and we realize we feel a bit too great. This kid needs to go to bed at some point. let's give them some NyQuil. And then there's a period of time after you take the NyQuil before the NyQuil kicks in. And these economic decisions that they're making are always, well, we have a problem. How do we fix the problem? And it takes a minute before that kicks in. But as we're sitting here making financial decisions, trying to decide what we should buy, what we should invest in, where we should put our money,

we're trying to make those decisions in real time. And your argument is that there's going to be a lag after the Fed makes big jumps. And so you're not going to feel it right away. Is that pretty accurate? Yeah, I mean, that's 100% accurate. And the debate I thought we were going to have, David, was like, there'd be a soft landing because unemployment's so low and job growth has been so strong and households are so healthy. And so even though that's always how it has worked, this time is different because, you know,

it's just like a special moment. Okay. Well, let me give you the fight you were looking for because that is going to be more fun. I don't want this to be clipped and someone puts it on TikTok and say, David's saying there's no reception. That's always the fear you're going to have, right? Let me play that hypothetical role. I do think there is a chance that some other president gets elected and says,

I need to make the economy look good. So I'm going to come in and I'm going to lower rates again and we're going to create some new form of QE. Maybe they don't do the exact same thing because that would look reckless, but they come up with a fancy name and they do it a different way. But it effectively is a new form of stimulus. And then just when we were supposed to crash, we go. And then the plane flies even higher than ever, which theoretically could cause even bigger crash later.

What do you think about that? Yeah. I mean, there's so different way to say it. It's like during these lags, right, new things can happen. Like we have peace in Ukraine. That's like another thing. I think that's actually, it would be the most positive disinflationary effect. But in your specific scenario, it would still be lag, right?

You're talking about 2025. And so, I mean, this is why it's so hard, because you have to take in the psychology of the institutions we're talking about. Is the Fed likely to want to drop rates again? And we know about the Fed. And if you read about their history, because there's a lot of history that, you know, I understand the Fed. There's great, great books about the history of the Fed. The institutional character of it is that they are slow, super slow. And they have biases or preferences, if you want to call preferences.

So, for example, they idealize Paul Volker, who was a Fed chair in sort of 79 to 88, I think. And so he's a Fed chair that sort of battles inflation and won and goes down in history. And so everybody wants to be like Paul Volker. And then there's another guy, Arthur Burns, who was Fed Chair before Volker, and he goes down, history as being like sort of disaster. And what he did, there was rampant inflation in the 70s, like 20%. There was a recession in 74, and inflation came down, and they then dropped rates. At 75, he drops rates again because inflation had come down. And inflation came back.

That goes down to one of the feds' sort of biggest mistakes in history. And so, like, all institutions always fight the last battle. You know, they don't fight, like, you know, that's just the bias towards the most recent. And so I just think there's a huge institutional bias or preference away. from dropping rates and QE, even if there's political pressure. Anyways, let me go back to the magnitude point. If anybody knows Nassim Tilibe, who wrote Black Swan and Anti-Fragile and Tons of really good books, I recommend all of them.

He has this point he makes, which is that, like, when you look at the risk of drinking a glass of water, I said there's a 1% chance, it's a really small chance, 0.1% chance that it's poison you're and die, right? what's the chance you're going to drink that water, right? So the magnitude matters more than the chance. And so whether you have a business or your career, we're talking about real risks here. We're not talking about if it's going to be really good or kind of good, like we were talking in 2020 or in 2019 or 18, right? We're talking about like real risks. And so the downside risk is just not worth what you're getting paid or taking it. And that's why I'm obsessed with the magnitude and that I always adjust my change.

chance by saying, like, I say 80% chance in recession, but I don't mean like, probabilistically, I just mean like on a weighted, adjusted basis because you look at all of the countervailing factors in the world, China, Russia, inflation, deficits, and I say, well, this is a time for caution. That's just sort of the, my bottom line. Yeah, I'd like to follow up on that. So the interesting thing in the real estate side of things, it seems like a lot of people are scared of selling their property because then they can't get into a new property and they're going to have a higher interest rate, right? So going into the recession, do you feel like real estate itself will be impacted pretty adversely? Or do you think the sort of housing stalemate will

continue? Yeah. So real estate typically highly impacted because it's very sensitive interest rates and things that are sensitive to capital flows are more impacted, right? So things that are not impacted, just an example, like food. Food, simply not very, or a liquor, not very impacted by this type of change in the economic environment. And typically real estate, which has a lot of debt, and that's why it's so interest rate sensitive, is heavily impacted by it. And then some real estate's worse than others, right?

So you asked about housing. Housing is actually usually less impacted, but it depends on what kind of housing. So it's already, real estate, at least in the commercial world, or an institutional world, is definitely in a recession. Like the institutional real estate's in a recession. That's a fact. Can you define what institutional real estate is for everyone at home? Yeah, I would say it's when it's being bought, owned, or sold by a company, by like a certain scale.

I would say, like, you know, when you're talking about in the tens of millions, or hundreds of millions or billions. So not an individual who's buying like a house or two houses. If you own a large or complex rental property, congrats. And I'm also sorry. One day you're building a portfolio. The next, you're reconciling six accounts,

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So you mentioned that typically things that are so interest rate sensitive are going to be, hit, right? So we're talking about real estate in this capacity. Can you help us understand, you know, because it tends to sound a little doom and gloom, which it's a recession. It's a very serious thing. But how can investors take ownership during a time like this? Do you have any tips for people that are looking to get in the real estate space or looking to just maintain what they have? Yeah, I mean, my theme here is caution. And I'll just go to the the greats, the goat here. So Warren Buffett and Charlie Munger, right? They always talk about being patient. They say sit on my hand, sit on my butt. I have this quote from Charlie Munger.

He says, it takes character to sit with all that cash and do nothing. And so I believe that it's going to get worse before it gets better. Stanley Drucken-Miller, who's like a famous investor also, he says he's waiting for the fat pitch. And I think that being patient is very much underestimated. It's like undervalued by people because they feel like activity is what drives value. And then like sort of older you get, the more you realize that like it's activity during certain periods. that really matter. It's like, if you think back and look on your career, list the top five decisions you made that were most impactful to your life. You can know it's super concentrated. It's a magnitude thing again. I think it's not what generally like you get from social media

that's like all this like activity that's going to matter. It's actually like inactivity. Like in 2021, most people should have been more inactive, right? All those day traders. So it's a contrarian stance It's saying, hey, if you follow what everybody else does, you sort of join the party and then There's a lag that you may be jumping in during the lag and then once you planted your flag there The consequences hit and you're sort of caught off guard in a sense Yeah, there's another quote for you by Andy Grove, who's one of the founders of Intel He says make reversible decisions quickly and irreversible decisions slowly

Oh, you know what? I've heard of that described by Jeff Vezos in Amazon. He has a policy because Amazon's growing incredibly fast. They almost cannot keep up with the speed of their growth. So with his leadership team, he talks about one-way doors and two-way doors. And so a one-way door is the decision that once you go in that way, you cannot come back out. It cannot be reversed. A two-way door is a decision that you make that if you realize this isn't where I wanted to go, you can come right back out.

And so what he says is if this is a two-way door, if you could make the wrong, call and then reverse it, just make it. Don't sit here in six months analyze what to do. This is a one-way door. You need to stop and actually put the time in to making sure you made the right decision before you invest a significant amount of resources, capital energy, whatever the case may be. And I thought that was really good when it comes to our own point of making decisions. If it's a two-way door, it's okay to go a little bit quicker. So what I've told people before is when it comes to house hacking, for instance. Here's a practical example. I don't know. do I want to buy in that part of town or this part of town?

And what if I end up not liking my neighbor? And I don't know about the color of that. And so they just sit there and for five years, they're analyzing what they should do, right? When I look at it, that's obviously a two-way door. You buy that house, you rent out the rooms to other people or it's several units. And if you don't like it, you just make it a rental and you move out and get another one. So as long as you make sure it would cash if you didn't live there,

that does not require an intense amount of decision-making. or you start a business, very low actual money that you had to put into it. It's just going to be elbow grease. You don't like it. Throw it out the door. Go somewhere else. Versus some investments, significant down payment, going to be very difficult to sell to somebody else.

That's when you really want to take some time to think about. So then on that note, what are some areas where you see could be two-way doors and some that you see could be one-way doors moving into a potential recession? Yeah, I mean, I love what all the things you just said. a lot of times that first step, you don't realize it, but actually what you're buying is learning. You're trying to get up the learning curve to mastery. And I've learned this entrepreneurial. In the beginning of Funerize, I was obsessed with trying to plan things out.

And then I learned that you can't plan anything out and that you have to learn by doing. And so taking many low risks is really smart because you actually end up learning more than you think. So being inactive doesn't mean you're not putting yourself out there. A lot of people I find what they're worried about is actually looking dumb. They're worried about making a mistake. They're going to be embarrassed by. And that's a huge barrier because that doesn't matter. And the sooner you can get to that place, the sooner you're going to actually get to mastery and excellence.

And so, like, if you're trying to basically get started, I would just say, go. And then just size the opportunity to the amount you can afford, right? Don't get over your skis. So what about in terms of, if you are deploying? money right during this economic climate, where would you recommend people deploy money outside of real estate? Are there other ways that people can be diversifying outside of the real estate side of things? Well, we are a real estate investment platform. We have $7 billion in real estate and I think we have $37,000 doors or something. So we have a lot of real estate scale. And I can talk really specifically

about what we're seeing in real estate, which you asked, I got to the philosophy. We launched a venture platform, so we're investing in late stage tech. Because I think tech is actually going to do pretty well, even if we have a recession, because AI is like a generational breakthrough, like the personal computer. Goldman Sachs, it has, says it basically has a chance of being 500 times more productive than the personal computer. So I've been actively investing for our investors in high tech, I can name companies, data bricks and DBT, but, and that's been, I think, really, really productive, and I think it's been awesome. And then on the real estate side, probably going to have confirmation bias for you guys, but I'm a bear on downtown cities.

I'm old enough to remember when D.C. and San Francisco and New York and L.A. were just absolutely horrible. Like, just downtowns were just like, you didn't go there. Yeah, L.A. for sure. And that cycle is happening again. It's not going to be the same, but it's something like that's happening because the work from home, it's not going away. It's going to get worse, and better, worse whatever your perspective is, because, like, soon we'll have immersive VR and we'll have AI, and you're just going to be, you're not going to go to the office. So I think that, like, if I were buying and we are buying, I'd be buying in housing for families and riding a demographic trend, trying to build, like, you know, be in the suburbs. And I'd be focused on rental housing, not for sale housing, not flipping. Flipping, I think, has got a lot of risk right now because I think it's the music could stop,

absolutely stop. That's what happens usually in a recession. Music stops, and you don't want to be in a position where you have like an expensive loan and you can't sell the house. I'm feeling that a little bit. I feel like I've seen so much changes in the flipping thing. And what I like about the rental side of things is at the very least we're trying to break even here. But if it does go south and you aren't exactly hitting your numbers, it'll take it.

a very long time to really feel that impact. Whereas if you go into a flip, it's possible, you know, to lose a big sum of money, right? 30, 40, 50, 60,000. I know people that are going through that right now. And that's like, that's a very difficult thing to absorb in one gut punch. Yeah, that's actually one of my big learnings about real estate, I mean, now done it for 20 years, is that you really want to get in a position where time works for you in real estate. Like, time's at your back. It's a tailwind. And there's a lot of real estate. And there's a lot of real deals where you time, you know, times working against you, speed. And I think that's always a mistake. It may work out occasionally, occasionally, but really the power of real estate is this

compounding growth over time. And it's sneaky how much that can really, I mean, that can really work for you. And so I always try to look for deals that I'm like, well, if it doesn't go well, and I have a year, the next year's week will be better. Time's the most valuable asset, right? The bottom line, time is most valuable thing in the universe. And seeing it at that, it's so powerful. Once you see the power of time, whether it's, I'll wait the person out or I'll wait the rental. That's why rental housing, I think, is ultimately, though, much better risk adjust to return.

I don't think you make that more more money on flipping, considering how much more risky it is. And how much more, like, taxes that you pay, how much more closing costs you have. It's very inefficient way. I like to look at money like water in a bucket, just because to understand how much money is worth is so tricky when the value of the dollar moves around so much. So instead of trying to figure out exactly like how much money this would be,

I think about how much energy it would be. So in a flip, I buy a property below market value where I added some energy to a bucket, and then I improve the condition of the property, which hopefully improves the value, which adds more water in the bucket. then when I sell it, I pour all of that water into a different bucket, which would be my bank account. But during that process of selling, you've got all of these hidden costs that you weren't expecting.

You've got the closing costs of the realtor. You've got capital gains taxes. All that water spills. So even if you did a great job of putting the water in the bucket originally, which is the part you control, and the best case scenario, your win is still a lot less than what it should have been versus what you're describing, buying rental property and waiting for a long time. The energy stays in the bucket. When your property goes up in value, you're not taxed on that. You have options of getting the energy out of the bucket, like a cash out refinance that you're in control of.

You do that when you want to, when rates benefit you. You don't have to because you have to sell this property and where the market is is where it's at. It really gives you the control to monitor the stuff you're talking about, Ben, the condition of the economy, and make the decisions to extract your water and reinvest it somewhere else when it benefits you. Is that what you're getting at when you're talking about playing the long game with real estate? Totally. Totally. And also, like, think about it, if you sold in 2021 versus if you're selling in late 2023, you know, if you're selling in 2021, there's 100 buyers and it's really a good time to sell. I mean, I'm closer to the commercial real estate, but like, you know, I've sold stuff in 2021 where I,

you know, 30, 100 bidders. I mean, it just went for millions above the price we thought we'd get. If you sell now, there's like maybe two, and they're going to lowball you. And so having the ability to wait, you know, basically sell on your timing, you can be filling that bucket up, but if the tsunami comes and knocks you down, like my experience in 2008, like I learned that like the macro will swamp the micro. You can, and so much energy on, you know, doing that flip and having the perfect design and like 2008 hits or the pandemic hits or it's so much more powerful than you, you are. That's one of the things, frankly, that's frustrating about being a real estate investor because we listen to a podcast like this.

We take courses. We read books. We like the feeling as a human of control. If I just learn how to do this, that's why I think a lot of us like spreadsheets is they give you a feeling of control. Like you can create order out of chaos and it makes you feel safe. But the reality is like you said, it's maybe 10 to 20 percent how good of an operator you are. and 80 to 90% what the conditions are that you're operating in, and we just don't like it. It's uncomfortable.

I was thinking when you were talking about the nature of commercial lending. It's got balloon payments, and it's based on the NOI of a property. You can have a property that has a really solid cash flow. You're crushing it. But your balloon payment comes due, and you got in a 3% rate, now rates that are 8%, and it's not going to cash flow at that time. Or it happens to come at a time like right now where office space is not as desirable as other spaces. We're in this flux period.

There's a bit of a lag there. Like, is office valuable? Is it going to be valuable? Where are we going? Are people going to work from home? No one knows. So no one really wants to jump into that game until we get some stability there. So you could have a property with office space that you've increased the N.

Maybe you've doubled your N.O.I. You've done everything an operator is supposed to do. You're a stud. But like you said, the macroeconomic conditions work. you, the tidal wave wipes you out, no matter how much you were working out your legs and how strong you got. And it's just, it's a bummer. I don't know another way to say it when somebody has, like, committed themselves to mastering their craft. And then some of the decisions that happened from the overall economy just wipe it out. Is that what you're getting at? Definitely.

And they sort of like, you know, lemon aid out of the lemons thing. Is that like, that's definitely going to happen to you anyways in your life. It happened to me, you know, essentially the learning you get out of it and the reputation you get from how you behave during that period. And you see a lot about other people. You see how this person behaved in that situation. I mean, you get a lot out of those periods. It doesn't feel like it at the time. But like you're probably in your 30s, you know, that's actually pretty decades left to make it up. And that's why I'm obsessed with the recessions, right? Because you sort of like, you can, you can, lots of people work a decade to get here and and they can get wiped out just because of the title wave.

And so I don't think there's going to be title. I'm not saying it's going to be as bad as 08, but it's, it is for office. It's worse. The lack of control is something people emotionally is a cognitive bias. You don't want to believe how little control you have over your life. That's a solid point that you're getting at there. And I think we judge people that fail a lot of the time as don't look at this person they failed.

But based on what you're saying, you're making a good point. sometimes the best person to trust is the person that has already failed. They learn the lessons like who you can trust when something happens, how to maybe see it coming the next time a little bit better than the person that's never failed that has this, I guess maybe an analogy could be you have a fighter that's undefeated because they've only fought bad opponents. Gives this impression that they're the best. But the person who's fought the best in the world may have much more losses on their record,

but they're going to be the better fighter. I think when it comes to finances in real estate investing, there's an argument to be made for that. You see things coming that other people wouldn't. I know what I've been thinking about lately is just how do I start playing more defense, right? Like the last 10 years, the metrics of success we measured were how many doors did you get, how much real estate did you buy, how much cash flow could you acquire?

And that's what everybody at every meetup or every event or on social media. Everyone was posting the same stuff. Like this is how much I acquired. And as we're slipping into what could be a recession, And by the way, we didn't get into it, but I do think we could go into an economic recession and residential real estate could still stay strong. That might have been. I agree with that. The fight. Okay, so we can't fight over that either, unfortunately.

But as we're heading into recession, victory to me looks like surviving. Okay, like a lot of the competition is going to get wiped out. How many of our assets, our businesses, our net worth? How much can we hold on to? You just have to assume you're going to lose some. So, Rob, what are some steps that you've been thinking about taking when it comes to a recession, the fact that, that you and I are both heavily exposed with short-term rentals. And that's probably going to be a factor that's more sensitive to people feeling like they're less wealthy. They're less

likely to go take a vacation to an ice property if they feel like they're poor. Now is it time to start thinking offensively. Let's get some ideas from you about how you've positioned things. Sure. Well, first and foremost, most of where I invest are like national park markets, right? So the Smoky Mountains and stuff like that, right? So I think, that those markets tend to be a little bit more resilient simply because people are always going to go to the Smoky Mountains, but maybe they can't buy plane tickets for eight people in their family and go to Disney World, but they can go to what I always call, Mother Nature's Disney World, like National Parks, right? So I think for people that are looking to maybe get into the game,

those for me always seem to be markets that perform relatively well. I'm not acquiring quite as viciously as I was, but for a multitude of reasons, it's not necessarily because I'm scared or I'm like, don't want to buy things during a recession. I actually am such a big believer. I've just had this realization over the past few months, which is a very simple realization, by the way, so like what I'm about to say isn't really the newest idea. But I think the best defensive tactic, anyone who's already heavily invested in short-term rentals or really anything, is just portfolio optimization. I think that this is a huge, huge thing for me right now. So when you put it into perspective of a short-term rental,

let's say you're buying a $400,000 house, well, you're going to need 20 to 25% down, right? So you're looking at $100,000 to close on that loan plus another $20,000 or $30,000 to actually set it up and get it ready. So $130,000. That's not a small amount. And then on that $130,000, you're trying to make a 10 to 20% return, right? That's what we're fighting for in any deal these days with the short-term rental side. But what I've come to the conclusion that instead of doing that and spending a ton of money trying to get a great return on a new house, what can I do to actually raise the revenue of my current portfolio? How can I make more money with my portfolio? I've talked about this a bunch of different ways, but I'm adding amenities

to my properties that cost way less than buying a house, but will have a really big impact on my revenue. So I built this really crazy tree house deck to an outstanding amenity at my house at the Smoky Mountains. And I think that it will increase my revenue by 15 to 20,000 because we added a hot tub. And if that is true, I'll have like a 50% return on that specific investment, right? And so when I start calculating my portfolio, I'm like, okay, what are these five to $20,000 investment I can make to make that much more every single year in gross yearly revenue. So my defense is just really solidifying every single property and maximizing revenue to the highest extent.

I think a lot of people do get into this mindset of like, I need to get another short-term rental, I need to get another door. It is a very, very popular methodology and mindset, but not enough people focus on just making the most amount of money from the actual properties that they already have. So that's what I'm doing right now. What about you? I think I'm operating under the pressure that inflation's probably going to keep happening even as we raise rates.

That it's odd that we've raised rates this much and residential real estate values haven't dropped and food is still more expensive and gas is still more expensive and cars are still more expensive. It's odd that raising rates hasn't actually dropped the price of a lot of things. It's just caused money to change hands less frequently, which has caused people to feel less wealthy. So I feel like you have to still put your money in smart places. Now, that doesn't necessarily mean buy more real estate. That could mean putting it in reserves. That could mean doing exactly what you're describing. Rob, if I spend X amount of dollars here, I can increase my R.O.I. In this place,

but I'm thinking about the type of asset I'm putting it in, much more than just how do I maximize ROI? I think that when your economy is doing very well, your thoughts are how do I get the most return on the money I possibly can. As we head into a recession, I operate under the understanding that I want to keep as much of this as I can and be positioned when we come out the other side to be able to go, you know, run after the stuff you're getting and get into acquisition and play offense again. Ben, what's your thoughts on victory in a recession is winning at defense? Do you think that I'm just, am I off on that? You've studied this a lot more than I have. I think you're right on the money. You know, you just said this, Rob, been making, you know, your goals make 10 to 20.

percent on your investments. And like, you can go get, you can go get that in the market today. There's good mortgage rates that have yields of 13 percent current. And if interest rates fall, which I think they will, that will appreciate in their liquid, you can then sell that and get into property. So with treasuries at 5 percent, it just seems like the Fed wants you on the sidelines. And there's, you know, the saying, don't fight the things. fed, like, you know, go on the sidelines because they're going to punish you for not being on the sidelines. And you go to sports team, they're good at defense and offense. And the team that only can play offense, like, you watch them, you're like, and you just, they just get beat

time and time again. So I think that's right. And I wanted to say one more thing, David, you said about two-way doors. The funny thing about two-way doors is that a lot of times people, they get invested in the decision they made. It's called the endowment effect. and it means basically once they're they're they made a decision they feel like to unmake it they made a mistake like if you may if you have if you own i don't remember rob you maybe you own 10 short-term rentals and you just sell one in a loss and now you have cash to hold the other nine that's okay that's the long game and and so like interesting you said portfolio portfolio thinking it doesn't matter what you paid for something it look at this exact moment what's the best decision

Are you a buyer, are you a seller? And because interest rates are so high, it just pushes you into the liquid market. Yeah, this is mega, it's mega interesting that you say that. Because as real estate investors, I think over the last few years, we have been like in this mindset of deploy, deploy, deploy. If you have cash in your bank account, you're a dummy. You need to be moving that cash and making money. Right. So that's sort of this mindset that I've always had that I've been deploying a lot.

And recently, I've been holding on to a lot. I've been saving a lot. I've got multiple companies. I pay a lot of people now. Like, I have a lot of real estate. I just like to make sure that I have reserves. And I was talking to Cody Sanchez a couple weeks ago. And I told her, I was like, I kind of feel weird being a real estate investor that has any amount of liquidity because I've always been trained to just deploy it.

And she was like, yeah, real estate investors are kind of weird like that. You know, rule number one, don't go bankrupt. And I was like, wow, that's a good rule. She's like, keep money, hold on to it, don't go bankrupt. That's rule number one above all other real estate principles or investing principles. It's never going to be a bad thing to have some cash in your savings, right? And so I think I am starting to move into this mindset a little bit more of saving. And it's interesting that you say, oh, okay, maybe I sell a property at a slight loss or take an equity hit so that I have reserves for the other 40 properties.

I think that's honestly something I hadn't really considered. Yeah, the CEO of Zoom, if you ask your advice, he's seen him on podcast. He said, survive. Survive, survive, survive. He repeats it like 12 times. And look at Zoom. I mean, just like he was in the right place at the right time.

But he had to get there. And that fat pitch came and it worth whatever tens of billions. Such a good point. And you know what? Ben, it comes back to your perspective that the macro economy is so much more impactful than the micro. Okay.

So in an environment of plenty of prosperity, and peace, winning is about acquiring more wealth or more friends or better relationships, whatever you're measuring. It's by getting more. If you're in a war, winning is about surviving. Nobody is in a war worrying about I want to be driving a Ferrari instead of a civic. They just want to live, right? I think the environment dictates what the rules of success are.

And what the question that we'll get a lot here is, okay, David, how do I make money in this market? Well, that's a good question. It also presupposes that the goal is, if we're going to be a lot of the question, if we're going to going into a recession, you should be trying to make as much money as you can. I would tend to think the goal is how do you keep as much of the wealth as you've been able to create? How do you survive this and position yourself so that when we come into a time of peace,

you're ready to go forward. Now, none of us are going to turn down an opportunity to make money in a recession. I think my expectations just drop that I don't feel bad if I'm not increasing my net worth by as much or I'm not adding more doors as it would be if we were in a time where it was easy to do that. Right now, holding on to the real estate you have, not losing as much money, seeing your revenue not drop as much is a win. Have you, have those thoughts crushed your mind yet, Rob? Yeah, definitely. I mean, that's the big one now. It's like you grow at such a fast rate when things are going well. I guess it is just a weird feeling to say, hey, it's still a victory to

just have what you got, you know? If you're staying, if you're keeping your net worth, where it's at, that's much better than losing it, right? So I think it's just a lot of people are having to kind of, they're being forced to settle a little bit. And I think that makes people feel like they're failing. But it's the opposite. I think it's the very opposite of failing to hold on to what you have. And it's like kind of a new thing that I'm going through myself.

Like a race car driver, I mean, if you never hit the brakes, you would definitely crash. An all-around player can play the highs and the lows. It's a great point. Nobody in a race car is smashing on the gas when they're in the middle of a hard turn. It's when you hit the straightaway. I love that analogy right there. There's some economies that are a straightaway and it's all about how fast can you go.

There's other economies that are dangerous with a lot of twists and turns and it's all about how safe can you go. You make wealth in the straightaways. You maintain wealth when you're in these turns and studying the track lets you know what you should be doing. And I really appreciate being here, Ben, to kind of explain why this is important to study. If people want to reach out to you and learn more, where can they get? I'm on Twitter, Ben Millerize, and we're on funerize.com. Hit me up. Awesome. Rob, what about you? You can find me over on YouTube at Rob Built, R-O-B-U-I-L-T on Instagram, too. Depends on what you want. You want short-form funny reels, or do you want long-form videos that teach you how to do real estate?

You can pick your poison. What about you, David? Find me at David Green, 24, the most boring yet stable screen name in the world. world and going into recession you definitely want stability so go give me a follow on social media david green 24 or visit david green 24.com and see what i got going on we here at bigger pockets are dedicated to giving you the real the raw what's actually happening and racking our brain to come up with strategies that will work in times of feast or famine there's always something to study and there's always something to do to improve so ben thank you for being here today and sharing your wisdom it's not often we get to talk to someone who actually studies worst case scenarios and how to

survive in those. So everybody go give Ben a follow and reach out and let him know that you appreciate him on today's show. And if you're watching this on YouTube, leave us a comment. Let us know what you thought. This is David Green for Rob, the short term speed racer Raba Solo. Signing off. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive a producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoe content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up

for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, or consequential or other damages arising from a reliance on information presented in this podcast.