BiggerPockets Real Estate Podcast - 963: BiggerNews: 6 Rules for Real Estate Investing in 2024 w/J Scott

Episode Date: May 31, 2024

Real estate investing in 2024 isn’t as easy as a few years ago. When interest rates are low, housing inventory is high, the economy is booming, and everyone’s happy, real estate investors can take considerably more risks with bigger payoffs. But now, only the most savvy investors are finding cash flow, appreciation potential, and wealth-building properties. So, with little hope in sight for lower rates or home prices, how do you ensure you’re building wealth, not getting burnt, in the challenging 2024 housing market? If there’s one person who knows how to invest during tough times, it’s J Scott. He literally wrote the book on recession-proof real estate investing and has flipped, landlorded, and syndicated through booms, busts, and the in-between periods. Today, J is laying down his six rules for real estate investing in 2024, which he’s following himself to ensure his portfolio doesn’t just survive but thrive, no matter what the housing market throws his way. First, we dive into the factors causing such a harsh housing market and whether J thinks home prices will rise, flatten, or crash. Next, J walks through the six rules for real estate investing in 2024. We’ll talk about appreciation potential, rising expenses like insurance and property taxes, the riskiest investing strategies of today, loans that’ll put your real estate deals at risk, and why you MUST start paying attention to your local housing laws.  Support today’s show sponsor, Rent App: the free and easy way to collect rent! In This Episode We Cover The six rules for successful real estate investing in 2024 from a time-tested expert Inflation, interest rates, home values, and why the housing market has significantly slowed down What rising expenses like insurance premiums, property taxes, and labor will do to your rentals The one thing you CAN NOT assume when analyzing real estate deals (big potential mistake) Adjustable-rate mortgages (ARMs) and why J is avoiding these at all costs Rent control, short-term rental regulations, and housing laws that could put your rentals at risk And So Much More! (00:00) Intro (01:30) What Affects the Housing Market? (11:20) 1. Don’t Bet on Appreciation  (15:46) 2. Expect Higher Expenses, Lower Rent (20:37) 3. Know the Risks of Flips  (26:46) 4. Avoid Adjustable-Rate Loans (28:48) 5. Buy What You Can Hold  (33:15) 6. Pay Attention to Local Laws  Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-963 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

Ever since the start of the pandemic, it seems like investors have to craft a brand new playbook for investing in real estate each and every year. Even for a seasoned investor, it's hard to determine what the best guidelines are for investing in this continually evolving and changing market. So today, we're going to be bringing you six rules for real estate investing in 2024. Hey, everyone. Welcome to this week's episode of Bigger News. I'm your host, Dave Marley. And today I've brought on my friend, a co-author of a book of mine and a longtime friend of the Bigger Pockets community, Jay Scott, to talk through his six rules for investing in the current real estate market. And if you guys don't know, Jay, he is a renowned flipper. He's the co-author of a book I wrote called The Real Estate by the Numbers. He's written four other books.

He's also a seasoned investor and keeps a super sharp eye on the market and the economy. And his rules that he's going to go over today will help you. determine which deals you should be going after and how you should think about investing in this type of market cycle. Before we bring on Jay, I just wanted to thank our sponsor for our bigger news episode today, Rent app. Rent app is a free and easy way to collect rent. And if you want to learn more about it, you can go to rent.com.com slash landlord. And with that, let's bring on Jay to talk about his six rules for investing in 2024. Jay Scott, welcome back to the Bigger Pockets real estate podcast. It's always great to have you here. I appreciate it. Thanks. It feels like it's

been a minute since I've been on the show. Thrill to be back. I'm happy you're back with us because I'm really excited to dig into your rules that you're going to give us on investing in 2024. But before we jump into those rules, maybe we should talk about what are some of the conditions that you're monitoring that have influenced the creation of these rules? What metrics, macroeconomic conditions are top of mind right now? Yeah. So there are a number of them, and the economy is constantly changing. The market's constantly changing. But there are a few big themes that we've been seeing over the last couple months,

even the last couple years, that are kind of driving how we as investors should be thinking about investing moving forward. And the first one, I don't think we'll surprise anybody. But that's inflation. And the fact that we have seen high inflation and even persistent inflation over the last couple years, normally we as real estate investors, we love inflation. Inflation means that rents are going up. And so if we're buy and hold investors, normally speaking, inflation is really good for us. The problem is when we see really high inflation, when we see persistent inflation, especially in this case where we see inflation that is higher than wage growth.

So people are literally losing money because the things that they're buying costs more than the money that they're making. The cost of goods is going up faster than our wages. When that happens, people can't afford to pay higher rents. And with the super high inflation that we've seen over the last couple years, in many cases, we've come to the point where we've come close to maxing out rents. People are paying close to 30% of their income towards their housing costs, towards their rent. And when you get close to 30%, you get to the point where apartment owners aren't going to be willing to rent to you

because they want to see three times income for rent. And so we're just getting to that point where as investors, we may not have the ability to raise rent much further thanks to inflation. So inflation is the first one. The second one, simply the fact that we have seen such high real estate values over the last couple years. Going back 100, 120 years or so, we can see that real estate tends to track inflation for values. So from like 1900 to 2000.

So for that 100 years, basically we saw the inflation line go up and the real estate values line go up in lock step. Real estate goes up at the rate of inflation. Now, we know that before 2008, prices kind of got wide. real estate values went up much higher than inflation, but between 2008 and 2013, those prices came crashing down, and we were again right around that inflation trend line. So historically speaking, we can say that real estate goes up at the rate of inflation, and if we're much higher than that rate of inflation, one of two things is going to happen. Either we're going to see real

estate prices come crashing down back to that trend line, or we're going to see real estate prices stay flat for a long period of time while inflation. catches up. And so I think it's likely that over the next couple years that we're going to see one of those two phenomenons. And I do have a thought on which one it's going to be. But I think it's likely that we're either going to see prices come down or prices stay the same for the next few years. I think it's unlikely that we're going to see much higher real estate values over the next couple years just thanks to the fact that real estate values right now are so far above that trend line. All right. Well, Jay, I'm curious, just very briefly, do you think it was a pull forward and we'll just

see sort of flat appreciation, or do you think we're going to see a big leg down in terms of housing prices? I think the market's a lot different than it was in 2008 when we did see that big crash in prices. The fundamentals are different. Back in 2008, basically, we had a recession that was driven by bad decisions in the real estate industry, by lenders, by brokers, by buyers. We don't see those same conditions now. Secondly, there's a lot of demand in the market now, whereas we didn't see a lot of demand back in 2008, and there's not a lot of supply. There are about 80% of homeowners right now who have mortgages with interest rates under 4%. Those people don't want to sell. Why sell a property with a mortgage under 4% just to go out and buy an overvalued property with a mortgage now at 8%

or have to rent at extremely high rents? So people aren't selling. People are sitting on the houses that they own. So given the supply and demand, given that the fundamentals are pretty strong, and given the fact that historically, real estate doesn't go down in value. I think it's a lot more likely that over the next couple years, we see flat prices, flat values, while that inflation line kind of catches up to the real estate values. So that's my best guess at what's going to happen. I don't think we're going to see a big drop. We may see a softening. We may see a small drop in values. I wouldn't be surprised. But I don't think it's going to be anything like 2008. That does tend to be. the general consensus around most experienced investors and economists. And here's hoping you're right.

I do think something needs to change for us to experience more normal levels of affordability again. But obviously, we don't want a huge shock to the system. So far, the two conditions you've listed are inflation and high home prices. What are the other conditions, Jay? Yeah. So the next one is simply interest rates. We all know interest rates are high, at least compared to where they've been over the last 20 years. When interest rates are high, a couple things happen. One, there's a slowdown in transactions. So we've seen that with sellers. Sellers don't want to sell their houses because they have low interest rates from a couple years ago and they don't want to have to trade those low interest rate for high interest rates. And secondly, it's a lot harder for us as real estate investors to get

our numbers to work. It's hard to get cash flow when interest rates are higher than what we call cap rates, basically the cash flow we can expect from our property. And so just given the situation, I think it's very unlikely that we're going to see a lot of transactions over the next couple years, which as real estate investors, we want to see a lot of transactions because at the end of the day, the more transactions, the more distressed sellers we're going to have and the better deals that we're going to get. Yeah, I don't think you're surprising anyone there with interest rates. That is definitely a common topic. What are the last two you got? Yeah, last two I have. Number four is just a slowing economy.

So we've seen great economic growth over the last couple years, but we're starting to. to see the economy slow down. GDP came in a lot lower than expected. Don't know if this is going to be a trend or if this was just a blip on the radar. But assuming the economy slows down, that could impact real estate values. I talked before about how I think values are going to stay propped up for the next couple years. But if people start losing their jobs, if foreclosures start to increase, then it's really, it's possible that we can see real estate values soften and start to come down. So a slowing economy is the next one. And then finally, this thing called yield curve. And I know it's it's a somewhat complicated topic. I'm not going to go into the details,

but let me leave it at this. Banks like to borrow money at very low rates. They like to borrow what's called the short end of the curve. They like to borrow money overnight or for a couple days or a couple weeks. And then they want to lend it out for a long period of time. They want to lend it at the long end of the curve. They want to lend it for 10 years, 20 years, 30 years. And historically speaking, borrowing money at the short end of the curve, short term, is a lot cheaper than it is at the long end of the curve. So banks are used to being able to borrow money short term at very low prices and lend it out long term at very high prices. Right now we're in a situation where borrowing money short term is actually more costly than borrowing money long term. And so banks are kind of upside down on this thing called the yield curve where they're borrowing money at higher costs and lending them out at lower costs.

And when the banks are not making as much money on the money that they're lending, when they're not making as big a spread, what they're going to do is they're going to slow down. They're going to tighten up their lending standards and they're going to lend less money. And anytime banks lend less money, that's going to be bad for us as real estate investors. Yeah, it makes sense. And I know that this is something of a complex topic for people. But as Jay just said, this really makes sense. If you think about the way that a bank works, if they have to borrow money in the short term at a higher rate, it increases their risk. and they are not in a position to be taking on extraordinary amounts of risk,

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about to break down his six rules for investing in the current real estate market. Let's get into it. So thank you for sharing those conditions with us, Jay. And just to recap, we talked about inflation. We talked about record high, median home prices, interest rates, a slowing economy, and a yield curve inversion. Let's move on now to your six rules for how to navigate them. Because frankly, Jay, those six conditions don't sound great for real estate investors. There's not a lot of happy or positive conditions that you're tracking there. So how do you get around that? So let's start with the fact that most real estate strategies are long term. And most economic and market conditions are short term. So if we go back to 2008 and we think about the fact that,

yeah, 2008 was a really bad time to be buying certain types of properties. Same with 2009, even 2010. But if in 2008, you were buying properties for the long term, you're buying. to hold for three, five, seven, ten years, well, in retrospect, as we see, property values have gone up. Everything has worked out. And I would suggest that if you look back through real estate history, there's never been a 10-year time period where real estate values didn't go up. And so while today it's really easy to say, yeah, things are bad. It's not a good time to be buying. Consider that if you buy something today and you're still holding it 10 years from now, you're likely going to have made money.

So with that said, let's jump into some rules that I'm following today as a real estate investor. And I would suggest other people probably consider following as well. Number one, I wouldn't suggest anybody thinks about buying strictly for appreciation anymore. When you were buying in 2008, 9, 10, 11, 12, with values as low as they were, it was really easy to buy basically anything and say, okay, if I hold this property for a few years, it's probably going to come back in value. It's probably going to make me money. I'm probably going to get more cash flow. I'm probably going to get all the benefits of real estate.

But today we have real estate values that are tremendously high. And so buying with the expectation that they're going to go higher is a very risky proposition. And so the first thing I would suggest is that people who are buying right now don't factor appreciation into your deals. Don't assume that you're going to get appreciation from the deals that you're doing. Maybe you will, and if you do, consider it a bonus. But right now you should be buying for the fundamentals. You should be buying for the cash flow. You should be buying for the tax benefits.

You should be buying for the long-term principal pay down that you're going to get by holding that property long-term. But don't necessarily factor in the appreciation into your metrics. Again, hopefully you'll get it, but you may not. Jay, when you say don't factor in any appreciation, I think there are different ways people approach this. Some people treat quote unquote appreciation as above and beyond the rate of inflation, or are you saying actually flat, zero price growth for the next few years? Yes. So historically, I've always said don't factor in inflation. Don't factor in price appreciation. And that was even before we're in the market that we're in now. I've always been a big believer that, yes,

over the long term, we should see real estate values go up. But again, Historically, we see them go up at around the rate of inflation, which means we're not making money on real estate values going up. We're just not losing money. Real estate, holding real estate long term is a wealth preservation strategy if you're not getting any other benefits. And so from my perspective, I don't like to assume appreciation in any forms, whether it's current conditions or whether it was conditions 10 years ago or 10 years from now. That said, there is one other type of appreciation that we can factor in, and that's called forced appreciation. and this is where a lot of us make our money. We buy properties that are distressed in some way.

Maybe they are physically distressed, meaning that they need renovations, that they're in disrepair. Maybe they're in management distress. Maybe they're being managed poorly. The person that owns the property is a tired landlord or just doesn't have the time to spend or the attention to spend on the property.

And it's just not being managed well. They're not managing the expense as well. They're not managing the income well. If you can go into a property like that and you can renovate it, again, either physically or through management changes, you can increase the value tremendously well above the rate of inflation, well above the long-term trend of increase in real estate values. And so I'm a big proponent of that.

I'm a big proponent of forced depreciation to make money. But again, if you're just going to sit back and wait for the market to help you make money, historically it doesn't happen. The market will help you preserve your capital. It will help you kind of keep the same spending power for the value of the property that you own, but it's not going to make you money long term. Yeah, that makes sense. And I, you know, typically what I've done is underwritten deals at the rate of inflation. Like you said, it usually tracks inflation. And so I count on properties going up, you know, 2% a year or something like that to keep pace with the rate of inflation. So I'm wondering, Jay, if you were a investor listening to this and you're intending to buy something for 15 years and you're saying, you know, maybe the next few years we're going to have flat, would you just put 0% appreciation? for the next 15 years? Or how would you like actually go about underwriting a deal on that

time frame? I would literally put zero percent appreciation for the next 15 years. And to be honest, this is what I've done and this is what I've been recommending people do for as long as I've been in this business. So it's not just something I'm saying now. I was saying this back in 2008, 9, 10, 11, 12. My philosophy has always been if we get that appreciation, that's fantastic. but don't assume you're going to get it and don't factor it into your numbers. Consider it the cherry on top. Awesome. Great advice for rule number one. Jay, what's rule number two? Rule number two is we need to be super conservative in our underwriting assumptions these days, both on the income side of things and the expense side of things. I mentioned earlier that

inflation tends to be good for us as real estate investors, and that's true. Typically, during inflationary times, rents are going up. And what we saw in 2021, 2021, rents went up really quickly, really high. And that was because of inflation. Unfortunately, again, because inflation is higher than wage growth right now, there are a lot of people who aren't making more money. Inflation isn't helping them. And when people are making less money in real terms, they're going to have less money to spend on rents. And so we're unlikely to see the same historic rent growth that we've seen over the last 10, 20, 30 years. Historically, in most markets, we've seen rank growth somewhere in the two to three percent range. These days, I'm assuming that for the next year or two, rent growth is

going to be closer to 1%, maybe 2%. In some markets, I'm actually underwriting rent growth is flat for the next year or two. It's hurting my numbers. It's making it more difficult to get deals to pencil, but again, I like to go in conservatively. And then if everything works out and we do see more rent growth than we expect, then again, that's the cherry on top. That's the bonus that we weren't expecting. But if things happen the way we are expecting, which is little rent growth for the next couple of years, we're not going to find ourselves in a bad cash flow position or in a position where we're at risk of losing a property because we were over-optimistic or we were over-aggressive in our assumptions. All right. So similar idea here to rule number one is

you don't want to count on too much appreciation and price appreciation for home values. Same thing. in terms of rents as well. And I just want to call out, not only are rents growing slower than inflation right now, rents are also growing slower than expenses right now. And so that is something I think that really complicates underwriting a little bit in a way that at least I'm not super familiar with or used to in my investing career where you might have to forecast lower cash flow, at least in the next couple of years. Yeah. And you'd be. me to it. The rent, the income is one side of the equation that we as investors are kind of getting beaten up a little bit on these days. But the other side of the equation, the expenses we're

getting beaten up on as well. If you just look at normal operating expenses, things like electricity and water and other utilities, things like labor costs and material costs, all of those things are going up at the rate of inflation. And as we already discussed, inflation is pretty high right now. It's not the typical 2, 2, 2 and a half percent that we've seen historically. And so in our underwriting, we can't assume that those expenses are going to go up at the historical rate of 2 or 2.5 percent like we always have. These days, inflation is closer to three, three and a half, maybe even 4 percent. And so we need to be underwriting future expense growth at these three or four percent numbers. Now, unfortunately, it's even worse

than that. Those are our regular operating expenses. We're seeing certain operating expenses, and I'll use the example of insurance as the big one. In some markets, we're seeing insurance go up at many, many times the rate of inflation. I'm in the Florida market, and I've seen insurance on not only my rental properties, but my personal residence go up literally two to three times over the last couple years. And so do I expect that to continue? No, I don't expect that we're going to see 50 or 100 percent rate increases on insurance over the next couple years, but I certainly think it's likely that we're going to see rate increases above inflation.

So personally, when I'm underwriting insurance increases on deals, I'm assuming that we're going to see four, five, six, even seven percent insurance increases year over year for the next couple of years. And so it's really important that on the expense side of things that were conservative as well, and we recognize that the numbers that we've been using for the last 10 or 20 or 30 years aren't necessarily going to be applicable this time around. Yeah, that's great advice. And I just want to add one thing on top of just insurance. I read an article recently that was talking about how property taxes across the country have gone up 23% since the beginning of the pandemic. But in the same period, home values went up 40%, indicating that even though taxes have already gone up, they're likely to go up even more because property taxes are tied to the value of homes. And so it shows that taxes are probably still lagging, although appreciation that we've seen over the last couple of years. So you definitely want to underwrite and understand what any properties that you're looking at, what they're assessed at right now, and if that's

a reasonable assessment rate, or if they're likely to go up in the future as well. All right, we've covered two rules so far, which are similar. One is don't assume appreciation and property values. The other is don't assume you're going to get rent growth in excess of inflation right now. Let's move on to our third rule, J. What is it's basically be very cognizant about the strategy that you're using to invest and at the end of the day there are essentially two investment strategies that that every real estate uh investment falls into it's either a buy and hold investment you're buying something um to hold for some period of time where you're going to generate appreciation or cash flow or tax benefits or loan principal pay down or

some other benefit from the property or you're buying something for the the purpose of just doing a quick transaction. You're buying it to flip or raise the value quickly and resell it. And so basically we have buy and hold versus the transactional flip models. And historically, both of those models work pretty well. But in a market where it's possible that we're going to see a reduction in home values and potentially even a significant reduction in home values, if we see a slowing in the economy and a lot of people lose their jobs and we see a lot of foreclosures, we could see a decent drop in the housing market. I don't expect it, but it could happen. When that's the case, you don't want to be in a situation where you're buying properties with the expectation of being

able to sell them for a profit in the short term, especially when you're buying those properties without the expectation of cash flow. So if I buy a property today and I expect to sell it in six months and I'm not going to have any opportunity to make cash flow from that property, what happens when the property or when the market drops and the property value drops five or 10 percent over the next few months. I'm going to be in a situation where I either have to sell for a loss or I need to hold onto the property. Normally holding onto a property isn't bad, but if I'm not generating any cash flow and I'm

paying my mortgage every month and I'm paying my utility costs every month and my property taxes and everything else I need to upkeep that property, what I'm going to find is I'm losing money long term. And so what I recommend to people right now is I'm not saying don't flip. I'm not saying don't do anything transactional, but recognize that there's a much higher risk for flips and transactional deals right now, then there has been in the past, and make sure that you are ready to deal with a situation

where values drop quickly. If that happens, do you have the reserves to handle holding the property a little bit longer? Or are you willing to sell the property quickly, fire sale the property, and break even or even take a loss on the property? Be prepared for those situations and know what you're going to do. All right, so that's the third rule.

Jay, I have some follow-ups for you there because I think this is a bit of a change. from how things have gone recently. First and foremost, just speaking to a lot of people, flipping has been pretty profitable over the last couple of months. And I'm curious if you think, if you were just cautioning against, you know, what could happen and just want everyone to be conservative, or you actually think that there's some risk that prices will decline three, five percent in a relatively short order? certainly there's that risk. Do I think it's a high risk? No, but we as investors, it's our job to assess all the risks and to determine is this something that if it happens, even if it's a 1% or 5% or 10% chance, for us to assess that risk and determine what we would do if it should play out. So I don't think it's a high risk, but I do think it's a risk that we should be looking at. Another thing to consider is that for much of the last 15 years, up until, well, even

including today, for much of the last 15 years, real estate's gone up in value. So we didn't need to be good house flippers to make money flipping houses. We could take a house and we could do a poor job flipping it. We could do not the best renovation. We could overspend on the property. We could overspend on the renovation costs. And even with all of those things conspiring against us, we probably made money because the market was just going up so quickly. And so over the last 15 years, a lot of us as flippers have gotten into some bad habits. And we've gotten the attitude that no matter what we do, good or bad, is going to result in profit. And so I think we need to recognize that even if prices don't go down in the near term, they probably aren't

going up very much higher. And if prices stay flat, then we as house flippers or we as transactional investors need to get really good at what we're doing to ensure that we're making money based on our efforts and doing the right things with our renovations and with our management improvements, as opposed to just hoping that the market's going to bail us out because prices keep going on. And what would you say, Jay, then, to this narrative that seems to be everywhere, that if and when rates drop, that we're going to see this massive increase in property values again? It's possible. I think if and, well, not if and when we see rates drop, we are going to see rates drop. But the big question is, when are we going to see rates drop? And I know a lot of

People were expecting that it was going to happen early this year, and then people were expecting it was going to happen in the summer of 2024. Now people are talking about it happening at the end of 2024. But the reality is we don't know. And it could be a year away. It could be two years away. For all we know, we could see rates actually increase before they eventually drop. I mean, the Fed Chairman Jerome Powell came out last week and said there's not a high chance

of it. But for the first time, in many months, he's acknowledged the fact that we made. have to raise rates or they may have to raise rates again before they lower rates. Again, I don't think it's a high chance and I don't think that rates are going to be this high for the next five or 10 years, but it is possible that we're going to have high rates for the next several months or for the next year or two and we may even have a spiking rates between now and when they start coming down. And so we need to factor that in, especially if we're going to be flipping houses, because remember flipping houses, we don't want to hold properties for longer than three or six

month, and I think it's unlikely that we're going to see rates drop in the next three to six months. All right, so we've got to take a quick break, but stick around. We've got more of Jay's investing guidelines for you right after this. The rise of the tech savvy investors here. You don't need a huge team or tons of overhead to manage rental properties, just the right tools. So I want to tell you about how I use rent ready to get ahead. For landlords who treat their time like capital and recognize the cost of sweat equity, this tool gives you everything you need to scale. Rent collection, tenant screening, maintenance account, so that you're organized come tax season,

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on this podcast. That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. Hey, investors, welcome back. Jay Scott is here and he has more golden rules. to follow in today's housing market. Let's jump back in.

All right. Let's move on to rule number four. What do you got, Jay? Rule number four. And I'm going to be channeling my 2008 investor self when I say, avoid adjustable rate debt. So we saw a lot of this back in 2004, 2004, 2005, 2006, where investors were assuming that interest rates were going to stay low, long term. And I know right now we're thinking interest rates are going to go down a good

bit long term, but we were surprised back then, and I think there's a risk of being surprised right now. So adjustable rate debt basically puts you in a situation where when that debt expires, whether it's a year from now, two years from now, five years from now, you're going to be at the whims of the market to see what your new rate is. And I'm hopeful that rates are coming down over the next five or seven years, but I'm not positive it's going to happen. Not to mention a lot of adjustable rate debt is five to seven years out. A lot to can happen in five to seven years. Maybe we see rates drop over the next year or two, and then three or four or five years from now, we find ourselves in another recession or, I'm sorry, in another

expansion, market's booming and the Fed has to raise rates again. And so we could be in the next cycle by the time adjustable rate debt adjusts if you bought it today. And so I highly recommend that anybody that's getting mortgages today, take that hit. I know it costs a little bit more. you're going to get a little bit higher interest rate on fixed rate debt. But personally, I sleep better at night knowing that I don't need to worry about what's going to happen three or five or seven years from now. And knowing that even if I get fixed rate debt, if rates do drop a good bit in the next couple of years, I can refinance and I can take advantage of it. But I want to know that the deal is going to work today at today's rates. And again, if I get that benefit of being

able to refinance at the lower rate, again, just another cherry on top. I'm definitely with you on that one. And honestly, right now, the spread between adjustable rate, mortgage rates and fixed isn't even that big. So it just doesn't even feel worth it, given everything you're talking about. All right. Rule number five, what do we got? Rule number five, don't buy anything or hold anything right now that you're not willing to hold for the next five or 10 years. I kind of like this rule, regardless of what market we're in. But especially when we're in a market where we don't know where values are headed, only holding things that you're willing to hold or able to hold. And There are two very different things, willing and able to hold for the next five or ten years.

On the willing to hold side, you want to make sure that you have properties right now that are cash flowing to the point that you can continue to survive if they cash flow a little bit less. Or your return on equity is high enough that you don't have much better options. But also your ability to hold. So are you going to need that cash? Are you five years from retirement where you're going to need cash flow from something else because you're not going to get it from your job? Well, what happens if we find ourselves in a recession in the next couple years? Values drop and it takes seven or ten years for those values to come back like we saw in some markets after 2008. You could be in a tough position. So right now, assume that you're going to need to hold for five or ten years. Hopefully that won't be the case.

But if you make all decisions with the expectation that your horizon is five to ten years out, you're probably not going to be disappointed because, again, if you look historically speaking, real estate tends to only go up. over any 10-year period. I totally agree with you on this one and also agree that this is just a good principle when you're buying buy and hold investments in general. There's just usually, even in good times, it takes several years for buy and hold properties to earn enough equity and money to overcome just some of the selling costs there. Also, as you hold on to debt longer, you pay down more principal relative to the interest you're paying. And so there are a lot of benefits to holding on for a long time. And in this type of uncertain economy, I often tell people if you're uncertain about the next year, if you're uncertain about two years from now, sort of look

past it and think about where the housing market might be at your time horizon, five years, 10 years from now, 12 years from now, at least for me, that makes it easier to make decisions. But that sort of brings up the question, if you're someone who's retiring in five years, Jay, you've said you don't think flipping is particularly safe right now and you've got to be extra careful. If you're a buy and hold investor, you've got to be thinking on a five-year time horizon. Are people who have that short time horizon, you know, out of luck in this type of housing market? I'm going to be honest. It's a bad time to have a short-term time horizon for real estate investors. That said, if you have a short-term time horizon, what are your

alternatives? Your alternatives are the equities markets, the stock market. also at halal time highs. Exactly. I think there could be a lot more volatility in the stock market over the next five years and there could be in real estate. The bond market, well, maybe there's some opportunities with bonds, but most of us don't invest in bonds. What else are you going to invest in where you're going to get the consistent returns, even

if you don't get those outsized returns that we've become accustomed to over the last 15 years? I can't think of any other asset class where we're going to get the consistent returns, the cash flow, again, the tax benefits. the principal pay down, having our tenants pay down our mortgage month after month, I can't think of any other asset class where we're going to get that. So yes, it is going to be a tougher time for real estate investors over the next few years to make as much money to make as much cash flow or as appreciation as they made the last 15 years,

but I would still rather be in real estate right now than any other asset class. Yeah, it makes sense to me. And I appreciate your honesty. I don't want people who have that short horizon making bad decisions. And so if that is you, take this advice carefully and think about where you want to allocate your resources, because although there are risks in every investment, every asset class, there are more risks in real estate, as Jay has been talking about right now than there has been for most of the last 10 or even 15 years. Just to put a finer point on it, I think we're going to see a whole lot fewer people over the next 10 years quitting their jobs to become full-time real estate landlords than we've seen over the last 10 years. But what I would tell anybody out there is that doesn't mean you should sit around and wait for times to get better. Those 10 years are going to go by whether you're buying real estate or not.

And you're going to be much happier if you bought real estate now than waiting 10 years for the next bull run or the next good market. All right. Let's get to our last rule, Jay. Yeah. Last rule is an interesting one. And one that I hadn't really talked about until the last few months. But that's we really need to start paying attention to some of the legislation that's governing us as real estate. investors these days. And there are a couple categories of that legislation. Number one, and a big

one that everybody's talking about is short-term rentals. Short-term rentals have been a super popular asset class over the last couple years. A lot of people have bought a lot of property, made a lot of money. But what we're seeing in some markets, and again, I'm in Florida. I'm in a beach town in Florida, Siesta Key. And even here, where you would expect that the government should be very friendly toward short-term rentals, because we love tourists here. That's where our income comes from, that's where our revenue comes from, what we're finding is that a lot of citizens and therefore a lot of government officials are now taking kind of a negative stance against short-term rental owners. And so we've seen, again, in my area, we've seen short-term

rental legislation. The tides turned, and we're now seeing longer periods that landlords are required to rent for. We're seeing tighter restrictions on short-term rentals in which areas they can be employed. And so if you're a short-term rental owner, definitely be cognizant of the fact that where you invest, your local government may or may not be friendly towards you as a short-term rental owner. And that could impact your ability to make money long-term. What I say to anybody who's still thinking about buying short-term rentals and what I've been saying for the last couple years is your plan B should always be to be able to hold that property as a long-term rental. And any time I look at a short-term rental, I underwrite a short-term rental. If the numbers work,

The very next thing I do is I underwrite it as a long-term rental, and I say, do the numbers still work? If the laws were to change in my area where I could no longer rent this thing short-term, could I rent it for a year at a time and still make money? And if the answer is yes, well, then you've got a good backup plan. If the answer is no, then you need to figure out what your backup plan might be. Well, definitely agree with you there, Jay, in terms of short-term rentals. But I do want to just underscore Jay's point here, which is that you need to understand regulations and legislation because they can be good. both detrimental to your investing strategy, just like short-term rental regulations, and there's some other ones that we'll talk about in a minute. But also, they can be positive, too. There are

now things on the West Coast where there's upzoning and you can build ADUs, or there's more municipalities, state governments, enacting things that can help you afford a down payment, especially if you're a first-time home buyer and looking to house hack. So I think the point really here is to understand the particularities and details of what's going on. in any market that you are considering investing in. Absolutely. And like you said, there are good things going on. We've seen affordable housing grants and affordable housing laws popping up in a lot of states.

Federal governments starting to spend more money on affordable housing. Local state governments, again, are spending more money there. But then there's other negative regulations that we need to consider as well. A lot of states and a lot of cities are starting to implement rent control and basically impacting the ability to raise rents, which might be good for tenants, but isn't good for us as landlords, especially when we see operating expenses and insurance and property taxes going up as quickly as they are, if we don't have control over our ability to raise rents and allow the supply and demand, the market forces to determine what our rental increases are going to be, we could be

at a disadvantage. There are a number of other pieces of legislation that have been proposed in a number of states. Again, as you said, some good for us as real estate investors, some bad for us as real state investors, but it is important that we know what legislation is likely on the table and how that legislation is going to affect us, not only short term, but long term. Yeah, that's very good advice. And I think people, there's good ways to do that. And you should be looking not just on a national level, but on a state level and really on a municipality level. I think a lot of the very specific things like short-term rentals, rent controls are

often handled by states and local governments. And I know it's boring, but going to those types, of meetings or subscribing to a local newspaper, something like that so that you're constantly informed is really going to help your investing strategy. And let me just summarize here, the six rules we discussed. Number one was don't assume that you're going to get appreciation in terms of property values. Number two was don't assume rent growth for the next couple of years. Number three, was be very cognizant of what strategies you're using, particularly if you're

considering buying non-cash-hilling properties. So that's properties just for appreciation. also strategies like flipping. Four was avoid adjustable rate debt. Five was consider your time horizon and don't buy anything you aren't able to and willing to hold for five to ten years. And lastly, we talked about understanding potential legislation and how it can affect your investments. Jay, thank you so much for sharing your thought process and your rules with us today. We appreciate your time.

Absolutely. And let me just end by saying that I know a lot of that sounds. overly negative and maybe a bit alarming to a lot of people. But my attitude has always been be conservative, assume the worst that's going to happen. And I'll say it again. When the worst doesn't happen, just consider that to be an additional bonus or the extra cherry on top. So if we go in with that negative attitude and the skepticism and then everything works out, everybody's going to be happy. It's much better than going in with an optimistic attitude and then finding something bad that kind of throws us off. I totally agree.

I always say I love putting myself in a position where it's great when I'm wrong. And that's exactly what you're talking about. Just be conservative. And if you're wrong, it's only a good thing for you. And if you think underwriting with these types of strict criteria is not possible, I'll just tell you from my own personal experience, it is still possible. I underwrite very similar to what Jay is talking about here. And I've still been able to find deals this year.

You do have to be patient. You do have to work hard to find good deals, but it is absolutely still possible to stick to these conservative underwriting tactics, to stick to the fundamentals and still invest here in 2024. For anyone who wants to connect with Jay, he of course has five books with Bigger Pockets. You can check those out. We'll put all of his contact information in the show notes below. Thanks again, Jay, and thank you all for listening to this episode of Bigger News. We'll see you again soon for another episode of the Bigger Pockets Real Estate podcast. 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 producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calico content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to, to sign up for our free newsletter, please visit www.biggerpockets.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

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