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Sept. 2, 2022

How to "Recession Proof" your Real Estate Investing w/ J Scott (REPLAY)

How to "Recession Proof" your Real Estate Investing w/ J Scott (REPLAY)

J Scott - investor, author, and co-host of The BiggerPockets Business Podcast has flipped over 400 houses and written best selling books on the subject. The irony though is that over a decade later, he regrets flipping houses!

In this episode, J  offers valuable insights into why he wished he hadn’t flipped houses, how a fixed-rate long-term debt becomes an asset, and how you can take advantage of depreciation to offset your active income.

 J is the author of four best-selling books on real estate investing, including The Book on Negotiating Real Estate and Recession Proof Real Estate Investing.

Here are some power takeaways from today’s conversation:

[04:31] Four ways to make returns in real estate

[06:23] Why owning real estate is a hedge against inflation

[09:16] Levers, tweaks, and your parameters for your buying criteria

[10:29] The best hedge against inflation

[13:17] Recommended loan products and vehicles

[17:17] Understanding the market cycles

[21:11] Recession-proof real estate investing ideas

[27:16] Why he wished he hadn’t flipped houses

[33:29] Two big ways to get tax credits on your properties

[40:43] J Scott’s buying journey

[50:51] Why J Scott got into real estate

Notable quotes from the Episode:

“Life is all about all the relationships with people that have helped you along the way. “

“The real asset these days is the loan... it's literally the best hedge against inflation."

"Don't think about finding a property. Think about finding a great loan product. Apply that to a decent property, now you've got a great investment."

“Make sure all of your investments are basically recession-resistant for at least three years.”

Connecting with the Guest

Website: www.jscott.com 

Podcast: The BiggerPockets Business Podcast

Facebook: https://www.facebook.com/jscottinvestor 


Other Resources:

GoBundance

Are you an accredited investor and want to learn more about GoBundance?

www.gobundance.com

Book a call to learn more: www.calendly.com/brianluebben/gobundance


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Transcript
brian:

Jay Scott, how are you? My friend.

jason:

I'm doing well, Brian. Thanks for that.

brian:

Yeah, I'm very excited to have you one my first question, the most important question on everyone's mind is why Jay Scott? Why not? Jason, Scott?

jason:

Yeah, it's funny. I, so I spent my career at Microsoft, my tech career before I got into real estate and I worked for a guy whose first name was literally the letter J. Um, And I loved that. I thought it was so cool. And so I said, one day, I'm just going to go by Jay. And when I got into real estate I wrote my first book and I'm like, Hey, I can do a pen name. And so I did J people had called me that before. But I had never really thought about like the letter versus the name. And so I changed it to Jay and I stuck and I like it. And my wife calls me that my mom calls me that. So I was like, okay, I'm gonna go.

brian:

Just the power and the singular letter.

jason:

It, my wife is all about branding and she thinks it's an awesome brand. Me, I just think it's cool.

brian:

There we go. That's all I wanted to know. Thank you for coming on the act everyone's signing off. No,

jason:

I'll tell you. Nobody's asked me that question before in 12 years. That's the first time I've gotten the question. So I appreciate you asking.

brian:

There we go. It's that's a small win. Anytime that I can get somebody to say that's a good question or no, one's asked me that before then. That's how I know we win. So if you're listening and you appreciated that five star rating and review, please, and thank you. Moving on. Normally how we structure these interviews is we go into the life and kind of the design and like have a little chit chat in the beginning for the first 30 minutes or so. And then we'd go into business in the back half. I want to flip flop that. So on this, I really want to tell. Cold hard numbers data. I know that you hate data. I know it's just not your language, not your lovely, I'll do my best, but you'll do your best. And then on the back half back 30 minutes, I've got a timer here and then we can go into your portfolio, your story, how you went about this. But to start this off, I want to hit on one of the posts that you just posted on Facebook, where you're talking about your cashflow for your single family rentals versus appreciation. Every time for people listening. If you haven't followed Jay on Facebook. I would rec I would describe it as like when Warren buffet posts his I'm absolutely inflating J here, but I describe it when Warren buffet post his annual newsletter, whenever Jay does a state of the market, Facebook posts, everyone is up. Everyone's like it's time. It's like Groundhog day for the real estate investor. So Jay,

jason:

Tom, like the small town Warren buffet,

brian:

the small town Warren buffet. But Hey, he's he doesn't go by w he goes by Warren. So take it

jason:

away. So yeah I did a post I had a lot of people who were telling me that they can't buy single-family properties right now because cashflow just wasn't supporting it. And so my first question back to them is always what do you do with the cashflow? And they're like I save it. Or I put it into more properties. Very rarely. Did I get the answer? I needed to live off of a few. People are thinking I'm going to start buying single family properties today, and I'm going to retire tomorrow. I know back 15 years ago, a lot of people were thinking, okay, I want to quit my job overnight by buying a couple of properties. Nobody really thinks that anymore because we're not getting enough cashflow to do that. So very few people said to me, I need the cashflow to live off of. So I said, so what's the problem. And they're like I'm just not getting the returns. That makes sense. If I'm getting four or five, 6% cashflow, those returns just don't make sense. And so I've had to explain to people that cashflow is only one way that we make returns in real estate. And in real estate, there's actually four ways to make returns, cash flows. Number. And if, again, if you're going to live off of that, if you need that to pay the bills, if you need the, that to pay your mortgage, put food on the table then you need to focus on cashflow. But for a lot of us, we have another job or another source of income, at least for a while. And so we can focus on those other three types of returns as well. And so the first one of those is is amortizing. And amortization is just a fancy word for you. Get a loan against the property and let your tenants pay down the loan. And so I go out, I buy a $200,000 property. I get $150,000 loan. I'm five I'm $50,000 out of pocket. But every month my tenant is paying down that loan. I'm building some equity, they're paying partially they're paying or I'm paying interest, but partially they're paying down the loan, the principal of the loan that's

brian:

Rockefeller, right? Rockefeller said, what's the easiest way to make a million dollars buy a million dollars of real estate. Have your tenants

jason:

a hundred percent. And so over 10 or 20 or 30 years, My tenant's going to pay off that full $150,000 loan. And it's going to be painless to me. I'm not coming out of pocket. In fact, I'm still making my two or three or four or five or 6% cash flow. But in addition, I'm gaining equity. So if every month, $600 is being paid down on that loan, it's as good as, as long as I don't need that 600 to spend that $600, an extra equity is just as good to me as cash. And if ever, I really do need that equity, I go do a refinance and I pull up. So I can get access to it just takes a little bit longer and I'm going to do it in large chunks as opposed to doing it like cashflow Guinea and every month. So amortization or principal pay down is the second big benefit of owning real estate. Number three is appreciation. And when I talk about appreciation, a lot of people are like no, you can't count on appreciation. I'm the first person to say don't ever factor. Appreciation into your returns. Don't ever assume that because of the market went up 10% last year, that's going to go up 10% every year. But what you can assume based on over a hundred years of data is that your property is probably going to appreciate at least the rate of inflation. You may not get these crazy 5, 10, 15, 20%. Value growth every year. Like we've seen since 2015, but you're almost assured that over the next 10 or 20 years, the property is going to keep pace with inflation. She'll if nothing else owning real estate is a hedge against inflation. If inflation is 4%, your property is probably going to go up at least 4% in value over the longterm. So if nothing else, it's better to have your money in real estate. Then in cash or in some other non inflation hedged investment. So number two, is that appreciation. The other piece of appreciation, we often think about the the natural appreciation, just the market going up. And the other thing is we have this thing called forced depression. If I buy this property that I got $150,000 mortgage. If I bought that property for a hundred thousand dollars and then I get it to be worth $200,000 by doing a renovation on it, I've now built equity through that renovation. Let's say I put 50,000 into it and it's now gone up to 200,000. I've built $50,000 in equity in that property. So I forced appreciation again, that $50,000 is now locked up until I do when we find. But at some point I can pull that out and it's just as good as cash. So two types of appreciation you have the forest and the natural appreciate. Yeah.

brian:

And then also like you think about it and then context in regard to cashflow cold, hard on paper and on your balance sheet, it's like, how long would it take to acquire $50,000 in net cash? Exactly in that context. So it's just, I really enjoyed your, I really enjoyed the specific post on that and we can go get into the state of the market here in a little bit, but I know that you're going into multifamily right now. We'll get into that more in depth in the back of the show. I really want to talk about. \ right now I'm trying to speak to the person that's like, I can't find any deals. I can't find any deals. I would challenge them to say, that it's a game where the rules are always changing. So it's like before, you had, everyone was wanting to do a house hack with the duplex. Everyone was buying duplexes all across the country. And then that was the thing, everyone's I can't find a duplex. I can't how's that there's still ways to do. But you just have to tweak your parameter and tweak your criteria. Is there anything that you can give from the single family perspective and then maybe also for multi-perspective on like levers and different tweaks and your parameters for buying credit?

jason:

Yeah. Again, I'm going back to what I was saying before. If you measure it just by cashflow. Yeah. You can't find a lot of deals, but when you add in the amortization you add in the the appreciation either forced or natural, and then you add in the last piece, which is the tax benefits. I'm seeing double digit returns on my. Now again, I'm not getting double digit cash returns, but I'm getting double digit returns. They're just as good as cash. And I saved $10,000 in taxes. Yeah. It's not 10,000. It is 10,000 in my pocket. It's 10,000. I didn't have to split. And so these are things that are as good as cash. And so don't just look at like the amount of money that's going into your bank account every month. Think about the equity that you're building, the amount of money going into your bank account, and then the amount of equity that's not coming out of your bank account for taxes. When you add all those things up, what you're going to find is there are a lot of decent deals with. And I don't know, maybe somebody out there wants 30 or 40% returns. Yeah. You're not going to find those deals anymore, but you can still find the 10 or 12 or 15% returns when you add in all those benefits of real estate. So when we talk about pulling leavers and which ones do you pull? The big one for me these days is loans. And what I tell people is instead of looking for great real estate deals, Look for great loan products. Look for great lenders because these days with high inflation and relatively, still low interest rates, historically low interest rates. I know it's a little bit higher than they were a couple of weeks ago, but historically low interest rates between high inflation and low interest rates. The real estate, the property is no longer the asset. Yeah, it is. It's an asset. It goes up in value. But the real asset these days is the loan. That's where you're going to be. Making money alone is literally the best hedge against inflation. That's out there. If I take out a loan today for a hundred thousand dollars, and let's say, I have to pay a thousand dollars a month to pay off that loan. If in five years from now, my salary goes up. And I'm making twice as much money while I'm still because of inflation. I'm still paying a thousand dollars a month on that loan. Basically, everything's getting more expensive. I'm making more money on everything costs more with the exception of the loan. That's a fail. Monthly payment. And so as everything else goes up in value, if the loan stays a fixed monthly payment, I'm now paying off the loan with cheaper dollars. And so that is literally the best hedge against inflation out there. So what I tell people is when you're thinking about finding a good property, don't think about finding a property. You think about finding a great loan product, apply that to a decent property. And now you've got a great investment,

brian:

the home run, because it's almost like a mindset shift that you have to take to where now. But because everyone's like things debt, scary, negative word, negative connotation. We're talking about like consumer debt. Yeah. That's not good. That's no bueno. You don't want to max out your credit card, going and buying a new fricking Honda, the brand new car, but we're talking about long-term fixed rate. To where changing your mindset to where debt is almost encouraged on the balance sheet. That's like an asset now.

jason:

Yeah. Think about, back in the 1970s, somebody that had a hundred dollars a month mortgage, that was a huge mortgage cause people didn't make as much money. Let's say you could, let's say you could have taken out a 50 year loan back in 1972. Today, you'd still be paying on that loan. You'd be getting down to paying the last couple of payments on that loan. How much would you be paying on that loan? Still a hundred bucks a month. So salaries in that time have gone up a hundred times, but your debt hasn't gone up and that's the benefit of fixed rate. Long-term fixed rate debt. Again, it's a great hedge against him.

brian:

Is there any specific loan products and loan vehicles that you're looking at that are really catching your eye right now, maybe in the creative space, outside of traditional like fantasy.

jason:

Yeah. So I'm a big fan of portfolio lenders. First I'm a big fan of seller financing. So if you can get the seller to do a whole back typically those are the best term loans out there. But for those of us who don't have the time or the energy or the negotiating skills to really negotiate seller financing I'm a huge fan of portfolio loan products and a portfolio loan is basically a loan made by a small local bank. The small banks typically make their own rules for lending because they lend their own depositors money. They don't lend money from Fannie Mae or Freddie Mac. They lend their own money. They get to make their own rules and their own rules means you may not have to have as good a credit. You may not have to have as much income on the backend. They may be able to do literally 30 or 40 or 50 loans. Whereas Fannie Mae might only be able to do four. They're able to say, Hey, yeah, we'll do an 80% LTV. Whereas Fannie or Freddie may only do 70 or 75. They may be able to do blanket loans where they bring multiple properties under one loan. So you don't have to pay as much in closing costs or appraisals or whatever it is. And so they can be a lot more flexible. And so what I'm starting to find a couple of years ago, these portfolio loans. Tapping out at five-year loans or seven-year loans. I'm seeing a lot now that are 10 or they're fully amortized, which means that you keep the loan until they're fully paid off at 15, 20 or 30 years. So right now, most of my loans, because I don't like the idea of five years from now having to refi and what potentially could potentially be higher interest rates or a market where it's hard to refinance. I'd rather my loans right now be long-term loans that can be fully paid off. So I'm focused on those small local banks that are offering 20 and 30 year loans at still really low interest rates that I know I'm just going to keep the loan until it's.

brian:

I love that. I think that's an interesting segue point right there when you're talking about a five-year adjustable rate, which is what you're not looking for. I think that'd be a good segue into market cycle and where we're at, because I was talking to one of my friends, Andrew Cushman. He was on here. I don't know if you know. yep. And he'd do it. Yeah, he's doing large. Multi-families birds of a feather for you. And just a huge data guy, just a huge syndication numbers guys. So he was saying that you don't want to get caught with your pants down. And that may be like that two to five-year range. He slept, but anything that's 10 years or out talking high time horizon is it's hard to miss. So I think that's an interesting segue there to move into. Market cycle where you think we're at, because I remember I was listening to a podcast that you were on. Think that was when you're doing the bigger pocket business or something. When the yield curve inverted like a years change ago. And I remember saying, oh, Jay Scott said the yield curves inverted. I was like, we're toast guys. And then I accidentally tripled my net worth because everything is still going up and it's going bananas. So

jason:

everybody ignores the fact that we weren't a recession. Was it last year or two years ago and the government? Nope. Nevermind. Yeah. Yeah. So we printed our way out of it. But we did have a recessionary event. I was so convinced that a recession was coming in 2000, 19 and 20. And I wish I could go back and see what would have happened without COVID, because obviously COVID changed the trajectory of everything in the world. I'm really curious if all the predictions I was making back in 2017, 18 and 19 would have come true had COVID not happened. So I, I don't know how to reconcile the things I was saying with what happened part of me can say yeah, we did see a recession, so I was. And is like part of his life pandemic, right? Yeah. But nobody was right. Cause nobody predicted that. So in terms of market cycles, I think right now we are in a place and I think we have been for about a year and a half, two years now where we're not within any natural market cycle. Always market cycles in general are driven by. The government, whether it be the us government or the global economy and all the governments that kind of drive the global economy by doing things like raising interest rates printing money tightening fiscal policy or monetary policy, there are lots of things governments do to control. They don't purposely do it to control the cycles, but the things they do end up resulting in these cycles and Typically, if you're willing to do crazy stuff. You can start to control the cycles at least for a time period. If the goal is to put off a recession, yeah, you can continue to lower interest rates. You can to continue to print a ton of money. And basically consumers are built. Debt businesses will build debt. The money supply, the money supplies will go through the roof. You can basically push off the recession who knows how long, I guess we're gonna find out So it's really a question, not so much of where are we in the cycle, but a question of where are we in in the appetite for the government to not want us to go into a recession. And so the question is the government willing to literally destroy our economy in attempts to keep us out of out of the next year. And so far, both this current administration and the last administration it seemed like they were pretty hell bent on keeping us out of a recession. And we'd go to pretty great lengths to do we see basically printing of seven, eight, $9 trillion over the last year. Interesting. Can staying at historic lows. Despite the fact of inflation is at 8% typically raise interest rates to slow down inflation. But the government likes inflation right now because it makes them feel like the economy is strong. And yeah I don't think it's so much a question of where are we in the cycle as much as what crazy lanes is the government willing to go to to keep the next part of the cycle from happening naturally?

brian:

That makes sense. And that's an interesting perspective. I haven't heard that one before, but that makes a lot of sense. Cause you're like the, government's the one that's pulling the levers. So then we see at that point and and that also goes off terminally. So what like Biden has another two years, right? Yep. Yeah. So it's then to that point, maybe once we hit an election year, things start getting a little dicier, but for the time being it's that's kinda, you know what he's trying to keep going. So I guess let me wait the question a bit too. We're in this wacky, almost like artificially created market cycle where both sides we'll call it a side cycle. We'll trademark it, trademark podcasts. All the leading scientists will use this in their literature. But so let's tweak the question a little bit. From a re an investor's perspective. Yep. You have, I'm in GoBundance. We have everyone in there talking high level about, okay, cool. What do we want to do with our money? Where do we want to allocate it? Especially higher net worth individuals, they're like, where do we put, what do we put this? Where do we park this? And it seems to consent. Your point where everyone's okay, cool. I'm getting as much cheap fixed rate long-term debt that I can possibly get and buying as much cash flowing real estate as possible. That seems to be the consensus. Can you maybe talk to some defensive maneuvers and maybe some portfolio reallocation ideas that you have, maybe that's you're doing. Just to play safe while we're going through this kind of transitory period, because this next couple of years be. It's going to be a ride.

jason:

Oh, no doubt. No doubt. So one thing to keep in mind people don't seem to realize this because of the crazy cycle that we've just seen from 2008, ever since the last recession. People think that these cycles that these up and down business cycles involve like. 10 years of the market going up and the economy going up and then 10 years of the economy going down and then 10 years of going up. Typically it's not the case. Typically what we see is we'll see five or six or seven years now, where if you if you discount the, that, that blip back in 2020, we're now at 14 years of the market going up, but typically the devil. Side of the cycle only lasts about 12 to 18 months. If you look back historically recessions, don't typically last more than 18 months, even in 2008, which was the biggest downturn we've seen since the 1920s, 1930s. The market recovered within about two years. We were out of from a purely data perspective. We were out of a recession by 2009, the end of 2009. And even though everything was quite a bit lower than it was before the recession we were recording. Within about 18 to 24 months of the 2008 group session. So even in a worst case scenario, and I shouldn't say the worst case scenario, I worst case scenario we can talk about that would be something like Japan that's been in, in in stagflation type environment for two decades. But in a realistic worst case scenario, basically the cycles we've seen over the last a hundred and 150 years we can expect about two to three years of that. In a worst case. So what I would suggest to anybody that is looking to insulate themselves from this type of downturn is make sure all of your investments are basically recession resistant for at least three years out. And I don't know if Andrew said this but he's absolutely right that over 10 years, You're going to be fine. Unless our economy collapses and we lose reserve currency status in the United States goes away. That'll happen one day. Historically it happens to every country, but hopefully that's decades or centuries away. Until that happens, we're going to. And so our goal is basically to find those investments that can weather a three-year storm. And so for me, every time I'm making an investment, I say, so what is the worst case scenario? And so let's look at that. The multi-family syndications that I'm doing typically we're expecting three to five-year holds, let's say on a typical deal, we're getting up towards your five we're at four and a half years in. We're just getting ready to say. And then the market collapses. Okay. That's the worst time for that to happen because I'm now four and a half years into the deal and I was getting ready to sell. So let's say, so let's say the worst case there is that we're going to see a downturn for three or four years until we recover. That means the total length of that investment has gone from five years out to nine years. So for that reason, when we underwrite a multi-family deal, what we may anticipate a three year or four year or five-year hold, we're always going to underwrite to 10 year. And ensure that our modeling works for a ten-year hold. So what does that mean? Number one, it means we have to understand what loan products we're going after. In order to ensure that we don't get caught from a lending perspective. I hate those three one-on-ones as you were talking about, or the five-year loans or the three-year bridge loans where literally the day before you refinance, everything can go to shit. And then. And then you're caught. And what are you going to do? You don't have any other options. If it's a a a hundred thousand dollar loan or $200,000 loan, you go borrow that from a friend of yours. But when you're talking about a 10 or 20 or $30 million loan you're pretty much out of options. If if a downturn happens at the wrong time. So we want to make sure that our loan terms are at least 7, 8, 9, 10 years. We want to make sure that we don't necessarily have. Resetting rate every year after year three, four or five. And we want to ensure that the projections for an 8, 9, 10 year hold still work for us in our investment.

brian:

Okay. And then it's this. So when you're presenting this product to invest. Is this going to be like a ten-year product where you're like, Hey, invest in this indication, we're going to 10 year time horizon. Or is this still like a three to five-year time horizon, but you're still doing it. You're just doing a 10 year product in a 10 year underwrite. So that way everything is baked in to where the investors will still get their preferred return that they're expecting regardless is

jason:

that. Exactly. Yeah, we did. We did a presentation last night for a new investment and it's a three to five-year investment. But what we said to our investors was in the case where something bad happens and we can't sell it five years, we're coming. That the eight year numbers look good. We're confident that the 10 year numbers look good. We have 10 and a half years left on this loan. We're not confident after 10 and a half years, because at that point we have to refinance, but assuming we don't have some major event that destroys the economy for more than 10 years, we're pretty comfortable with the worst case scenario for the. I love

brian:

that. I love that with the underwriting. So if anyone that's listening to this, that's in multi-family or multi-family syndication take notes and rewind that part because that is awesome. And hopefully that's what other people are doing. And I know people are being, I've also heard that people are buying with cash flow as the D as the. They're like, we just want enough cashflow to play defense so that when we're going through the cashflow was there to be able to cushion it as, so we don't have to sell our product at a bad downturn. But I think that this is actually a cool segue here. When we're talking about multifamily, we're talking about this process to kind of segue back into your backstory here because. Correct me if I'm wrong, but I believe I read a post of yours for your you're pretty pissed off that you spent so much time flipping houses. You're like, I wish I would've kept my every house that I flipped. So maybe maybe right now is a good time to introduce yourself to maybe some of that. I'll put an intro at the beginning of the discreet at the show. So people will have an idea, but maybe you now give an intro to this guy. That's been spitting out pure knowledge for the last 30 years.

jason:

Yeah, I flipped a lot of houses starting in 2008. We're over 400 houses. I written a few books on the subject and I wished that I had all that time to do over again because I probably wouldn't have flipped a single house. I wouldn't have written a single book on flipping houses. I'm not, yeah.

brian:

Go by the book. You'll write the forward to it is things I wish I didn't do. Super

jason:

helpful in the short term. Exactly. Exactly. No. It's funny back in 2008, just before I still, when I, when I started flipping houses, I, this was right around the time of the downturn. I took this other investor out to lunch and he was the guide known for for flipping a lot of houses in the area I lived in and everybody wanted to be him. And I convinced them to let me take them to lunch. And you always, when you meet somebody like that, the first question you ask is what's the best piece of advice you have for me. And so I asked that question, his response was CEL. I said, what's the best reason to buy? She says my biggest regret in real estate is selling every property I ever heard. And at this point, I had flipped a couple houses. I was getting good at it. I was like, I'm making like 20, 30, 40 grand per flip. What am I wasting time talking to this guy for when he's he clearly doesn't get it anymore. Like flipping is the greatest thing ever. And here we are 15 years later. And let me tell you something. The biggest regret I have in real estate is every property I've ever sold. I look back and obviously I couldn't have kept, I've done 400 and some flips. I couldn't have kept 400 properties. I couldn't have afforded to keep 100 properties. I probably wouldn't want the overhead of keeping 400 properties, even if I could afford it. But I think that what if I would have kept one out of four? What if I would have kept one at a three? What if I would have kept one out of six? Literally houses I was flipping and I know this is I'm cherry picking data. This doesn't always happen over 15 years. But the. The lesson holds true properties. I was flipping back in 2008, nine and 10 for literally 80, 90, a hundred thousand dollars now selling for $300,000. And so I went back with my wife a couple of months ago and we said let's just ballpark. If we would've kept every one of those houses just to make ourselves feel better. Yeah, somewhere between 30 and $40 million inequity that we have right now from the appreciation. And from the cash flow and from the principal pay down on those loans, which would now be, we'd be literally halfway to that 30 year, like paid down. Literally we, our net worth would be 30 to $40 million more. If I only would've kept one out of four of those and one at a four was completely reasonable,

brian:

30 million more with one out of four

jason:

30 million more would have been all of them, but even with one out of four, there's another seven and a half to $10 million. Yeah, that goes right to our network. So I look back and I think, yeah I, at the time I was very shortsighted by flipping all those houses. And so what I would recommend to anybody that's doing this now, and you won't listen to me, if you're flipping houses, you're not going to listen to me. Cause I didn't listen to that guy. But one day you're going to wake up and you're going to realize you wish you didn't sell every house you ever owned. So that's my best advice to anybody that's getting started out there flipping house. Figure out a way to keep one out of three of them or one out of four of them. Because one day you're going to wake up and realize you were glad that you were building your portfolio because that's where the wealth really built. The belt wealth is built in assets and the cash you're making from flipping is great, but you're going to pay a ridiculous amount of taxes. That was the other thing. When I was 10, 15 years ago, taxes. I was like, who cares if I pay 40, 50% in taxes, that's still, I'm making all this money at 40 or 50%. I'll take it. I don't care. But these days I realized that's a lot of money that you're giving away. Yeah. I was a stupid kid. But I talked to a lot of house flippers that have that same attitude. If I can make $300,000 next year, who cares? If I pay a hundred thousand in tax, I'm still making 200,000 and they don't realize that a hundred thousand dollars is a lot of money. And Completely forget where I was. Oh, the re the way to build wealth is basically you don't pay the tax. Yeah. Number one, benefits even better than not paying the taxes. You get the tax benefits. If you can become a full-time real estate investor, you can become a real estate professional. Literally you can pay zero in taxes. Plus you're getting the appreciation. Plus you're getting the cash flow. Plus you're hedging inflation that all the money I took, that was left over after I paid taxes, I was still losing. Yeah so that's my best advice to anybody out there is start building your portfolio, start holding at least a few of those houses now, because your future self is going to be glad you did.

brian:

I know where you're about to take this. I know what you're alluding to and what you're prefacing is like cost segregation studies with multifamily and everything. And obviously, so I've got single family right now. I want to go into commercial. I want to be in the triple net lease space. That's going to be my next avenue that I'm going down. I know that there's some literature with the government right now, that's talking about cost segs, maybe not lasting too much longer. I'm curious about what you've heard about that. And if there's any kind of defense or any other kind of maneuvers that we can plan for the next one to two years, because I know that the two levers, the polar like a 10 31 exchange is a huge vehicle and the cost segregation study. And maybe you can go into what a cost SEG study is for someone that's listening to that's brand new and what that is.

jason:

Yeah. So there are two big ways to get a lot of big tax benefits these days on your properties. It's it works with single family houses, but generally the amount of money you're gonna make, isn't worth the cost of doing it. But if you own like even a, an eight unit or 15 unit or a mall, any multi-family it probably makes sense basically. You get this thing first, you get this thing called depreciation and depreciation is basically just like anything you own. It wears out of. And these buildings that we're buying, they wear out over time and the government recognizes they wear out over time. I buy a printer for my business. Basically instead of maybe a printer is a bad example, but if I buy like a car for my business the government will let me say, okay, the value of this car is going to drop every year for five years. So every year I can take the 20% of that value of that car as a deduction because the car is wearing out and I'm going to have to buy a new car in five years. They let us do the same thing with. So if I buy a house or an apartment complex, basically the government says that property in general is going to deteriorate over about 27 and a half years. That's the number that they picked up. That number comes from

brian:

27

jason:

and a half. So if I buy a property where the property itself, not just not the land, don't, you have to discount the land. Let's say I buy a property, that's worth 3 million to $2 million. And the land's worth a million and we estimate the property's worth a million dollars. The government's gonna let me depreciate or take a deduction for that million dollars over 27 and a half years. So about $40,000 a year, the government's going to let me take a deduction against it, just because my property is wearing out. And so I'll get a $40,000 deduction this year and next year, and every year for the next 27 and a half years. Now, when I sell that property, I have to pay it. But the nice thing is I get a deduction this year and next year and the year after. So I have all this money that I can now invest for several years before I have to pay it to the government. I'm deferring taxes by taking this deduction. But deferring is a big thing because we can invest for a lot of money in the meantime. So that's this depreciation that we, we keep hearing about. Now, there are two ways that we can increase that in this case, that $40,000 a year, there's two ways we can increase it. Number one is we can do, what's called a cost segregation study where the government's saying the building is going to wear out over 27 and a half years, but not everything in that building wears out over 27 and a half years. The cabinets and the countertops are gonna wear out over 10 years. The appliances might wear out over four years. The HVAC system might wear out over 20 years. And so what the government allows us to do is if we're willing to do the work or hire somebody to do the work they'll allow us to come in and say, okay, instead of depreciating the building over 27 and a half years, I'm going to say. The HVAC systems worth $20,000 and can be depreciated over 20 years. Cause it only lasts 20 years. So now I can get a thousand dollars of deduction this year for that, that HVAC system, I can do the same thing for each piece of the property. So instead of getting my deduction over 27 and a half years, I can actually get more of a deduction by taking piece by piece of the things that are wearing out in the property. That's cost segregation. And typically that allows us. To get our deductions much, much faster because most parts of the property were out in less than 27 and a half years. The second piece is back in 2017 with the tax and jobs act. There was legislation that basically said instead of waiting 27 and a half years to develop. All of this to take all this depreciation, we can accelerate it and we can take most, yeah, we can take most or all of it in your one. So we get this huge deduction in year one, which is obviously a huge boom. You don't need to hold that. You don't need to hold the property for 27 years to get all the benefit you get the benefit in your. And so between these two things, cost segregation and bonus depreciation. There's a huge tax advantage for the next couple of years where basically you can deduct, if you're not a professional real estate investor, you can deduct all of your passive income. So you can deduct all of your rental property, income, syndication income. If you're investing in real estate syndications, if you are a real estate person and you qualified by the definition of the IRS. You can literally use all of that depreciation to offset your active income and. For example, I'm going to have literally this year, probably over a million dollars in depreciation benefits, I could go out and make a million dollars doing anything else. I make money from writing my books. I make money angel investing. I make money selling properties. If I'm flipping houses, whatever I'm doing, let's say I make a million dollars. Typically I would pay three, four or $500,000 in taxes because of this depreciation. My income is going to look like zero. And I'm probably going to get money back. And so when we hear about, let's take the example of Donald Trump, everybody hears about how Donald Trump or tens of millions dollars a year, and then it comes out that he didn't pay any income tax back in whatever year it was. This is the way he was. Because he had all these properties that he was holding and you can't do that. If you flip a property, if you flip a property, the government's not going to let you take this tax deduction. But if you hold enough property, literally you can be deducted. Thousands of tens of thousands, hundreds of thousands, millions of dollars a year in, in, off your taxes. And that savings is money. You can invest until you sell the property and then have to pay it all back. And then

brian:

that's the that's another mindset shift to make is, the first mindset shift is debt is bad to fixed rate and long-term debt is an asset. So that's the first mindset shift. And then now this is the second one to where we can be like, oh, okay, let's do this so that we can write off all this depreciation and knock this out right now. First thing. Or if you're listening to this and you want a sexier way to do all of this, you can just do what I did and just lose like $30,000 in crypto. And then you can just write off $3,000 of your taxes for the next 10 years. That's all you can, that's all you can do. And loss is apparently,

jason:

oh, no worries. You make a lot in crypto and pay ridiculous amount of taxes in crypto. That's quite good.

brian:

Yeah. I was about to say I would not recommend the ladder. So now, so you go from you're flipping. So now you're in a multi-family and that's your vehicle? What brought you specifically to multi-family syndication, as opposed to all the other sexiness, you have yourself storage, you have mobile home parks, every single investor. I've talked to a lot of the people listed in this show. We're going from, I'm going to buy a laundry. Nevermind. I want a mobile home park. Nevermind. Aja Osborne, just posted a podcast. I really liked self storage now and I'm guilty. So I'm just curious about your kind of a buyer's journey here to figure out what's your vehicle.

jason:

Yes. I originally decided to move in that, into that space backing around 2016, 17. I was really burned out from flipping houses. It's just, it's tiring, it's tiresome. And so I, I thought about leaving real estate completely going back. I did, I. Bought a couple of businesses back in 2017, 18. I was doing some crypto. I was doing some angel investing. I was doing some advisory work. I was all over the place. Exactly. Like you were talking about what people were doing. I was. I didn't know what I wanted to do. And two things hit me at that point. One, I realized I missed real estate. I didn't miss single family real estate. I didn't miss flipping houses, but I missed doing real estate. It was something that I really enjoyed doing. And I was good at number two, I had this, all this cash that I was using to flip houses that was now sitting in a bank account and I needed to do something. And that's the natural thing to do was invest in syndications. Cause I know real estate and I know some people that do syndications that I really trust, but I'm not good at handing my money over to people and saying, invest this for me. I have trust issues. I'm a control freak. And so I found it very difficult to invest in other people's syndications. So what I said was, if I want to satisfy these kind of two requirements, one, I want to do real estate and I want to have a bunch of cash to address. Where's the best way to do that. And the answer was I should be doing syndications myself, so that way I can manage the deals I have the control, but at the same time, I can invest alongside my investors with my cash. So I have a vehicle to invest my own cash and I get to see the underwriting and I get to control the property. And so I'm basically just being. Good steward of my own money as long as well as my investors' money. And so at that point, just like you said, so how do I decide mobile home parks or self storage or multifamily? I know AIJ and so I, he like just watching him, got me excited about self storage. I'm friends with burner, and Brandon got me excited about mobile home parks, but at the end of the day I knew residential the best. And so multi-family kind of made sense for me. I had a good friend, Ashley Wilson, who has been doing multi-family for a long time. And so I basically went to her and I said, look, I'd love to do multi-family syndication, but I plan to put a lot of my own money into it. I plan to raise money from other investors. I'm not going to take somebody else's money and I'm not going to risk a whole lot of my money unless I really know what I'm doing. So I'll make you a deal. I will come to work for you for one year. You've got my time, my knowledge, my effort, access to my network. I'll put money in. If you want me to, whatever it takes, all I ask you that you've mentored me for that year. So we just make this trade. You get me? I get your mentorship. She jumped at it. She said, great

brian:

pause. Let's pause there real quick. Yeah. So for anyone that's doing this right now, let's listen to. Jay Scott, who after flipping 400 houses. And after doing writing, you had already written the bigger pockets books. You already had, the podcasts, you already bought the businesses. And throughout all of this, you found someone that you liked and respected, and it didn't just say, Hey, how can I provide value to you? Even you at your level, you said, Hey, you have a very specific skillset that I don't have. Let me, here's some specific ways that I can help your team. And then let's revisit the drawing board a year. That is huge.

jason:

Too many people have this, too many people get this big ego because they're good at something. And they assume that, that naturally makes them good at everything, or it makes them important enough that they can just go to anybody and say, Hey, teach me. And I try not to do that. I recognize there are certain things I'm good at. But on the list, I, if I list 20 things, I'm good at I'm really good. That just means there's 10 million things I'm not good at. And so I recognize 20 might sound like a lot of things to be good at, but there's always going to be millions of things in this world. I'm not good at it. And I'm not scared to admit I'm not good at something. And I also recognize, obviously I've had people call it to me over the years and just say, Hey, will you mentor me? And that's there. Yup. Hey we will, you, will you spend a couple hours on the phone with me and go through my business plan, teach me how to do this. And that's their pitch and that, sorry, that's not a pitch. While I love to help everybody, I have to decide every time I say yes to something I'm saying no to my family, I'm saying no to my business. I'm saying no to my partners. I'm saying no to my kids. So if you want me to say yes, you need to make an attractive offer. And so I recognize that if I want somebody to say yes to me, I need to make an attractive offer. And I felt that was a pretty fair offer to Ashley. Because I do have a pretty good network and I do have some cash and I do have some knowledge and all of these things. And so I felt like that was a really fair trade. She felt like it was a fair trade. And so for a year, basically I worked. And in that year, what we realized was one, we had tremendously complimentary skillsets. She was really good at some things that I was really not good at. I was really good at some things she wasn't really good at or didn't enjoy doing. And so we realized that we between us, we had a really good set of skills. Number two, we realized that we worked very well together. And number three, we realized that we had the same outlook on life. So we both put family first and we're both very community centric and we're both very empathetic. It just made for all the beginnings of a good partnership. So after about a year, she, she said to me, Hey, would you consider partnering with me? And I said, yeah, I would love to do that. And ultimately it turned into a 50 50 partnership. And so we've been working together for a few years now and I've done a bunch of deals. But that's kinda what led me into multifamily as opposed to. Non real estate or something else in real estate. And and yeah, I'm having a blast. It's a lot of new challenges and it's hard because I go from like something where I've written four books and people consider me an expert in, and here I am in something new where people think of me as an expert, but they. Because luckily I have a partner, who's an expert. But I'm still learning the business, but every day is fun because I get to learn the business. I get to do something new and yeah,

brian:

and that's what, that's the exciting thing about life. It's like success. I forgot like the literal definition of success, but it's like continual progress towards a new goal. So it's if you've already reached mastery, Then at so you've, I made the comparison to like a Kobe Bryant, mastery and basketball. And then he was like, I want to go into film. I want to go into writing. And then that was his new mountain to climb. So it's almost like the second mountain to climb. And I'm also selfishly it's I really want to hit, we'll spend this. I know you have to go. I'm here shortly. So we'll wrap it up here very shortly. But on the topic of. Instead of messaging someone and just ask for time. Cause that happens to me too now, ironically cause I have podcasts and I didn't anticipate that because I'm to your point where I'm like, I don't want to talk about me. I just interview very interesting people. But even when me reaching out to you, it's a different conversation than, Hey Jay loves your Facebook posts. Can we, can you spare an hour to chat? This is a different, it's a different conversation. I'm like, Hey, I've got a podcast we're talking at the same time. People are listening to this, that it would be a value for all. Parties is a win-win. So for anyone listening, I would challenge you to, before you send the message to people, ask, how can I get a win-win here? And then that's going to take you from. So as we finish up here in this last 10

jason:

minutes, let me do one more. Let me give one more example here real quick.

brian:

You could give more advice, Jay, go for

jason:

it. Absolutely. 2010. This guy randomly contacted me and said, Hey, I'm starting to flip houses. I don't want to to take up any of your time. But I have an offer to make, and he's I've got all this. And I'm looking for something to do with it. And you know how to flip houses. I want to learn how to flip houses. He goes, I want to finance every one of your deals. And you just tell me what the bank rate, what the rates you're getting at the bank are the terms you're getting at the bank are, and I'll finance. Every single deal. You do the same terms. You're getting at the bank, but you won't have to go through appraisals and you won't have to go through any of that stuff. And you'll never have to like, justify your loans. I'll ask in return is can I ask some questions or follow you around occasionally? And I'm like that's more than a fair deal. That's solving my biggest problem. Like getting access to as much cash as I need easily. I was like, I'll do whatever you want. Like I'll mentor you. I'll teachers. I know. No. Just let me ask you some questions. That was 2010. He and I still partner together on businesses, angel investments, real estate basically everything we've done over a hundred million dollars in deals together over the last 10 years. There's not a deal that he'll do that. He won't say, Hey, Jay, you want to come and partner with me on this. There's not a deal that I'll do where I won't say, Hey, do you want to come partner with me on this? Because he just decided to come to me and he was able to provide value to me. Didn't ask anything in return. And immediately it was somebody that like I knew I could trust and knew I wanted to work with. And here we are. We've literally added millions of dollars to each other's net worth over the years because he was willing to do that.

brian:

Yeah. And it's just a little bit, so it's even we talked about having all of these. Like you have 27 and a half years of depreciation. You can take advantage of it. You're one it's upfront, front loaded, same thing here. So maybe instead of doing that, just be like, Hey, I'm going to lead this interaction and lead this relationship off with, I'm going to provide as much value as humanly possible. And if it's reciprocated fantastic, if not, that's okay. I still put out value into the universe and then the universe tends to reward that back. As we finish up here, why do all of. What's the point? Why are you doing any of this?

jason:

So several reasons. Number one, one, I enjoy it. So I. For me it's just a part of me. I like trying to achieve things and it doesn't have to be monetary things. But I like to be able to measure my success. And so real estate is a good way and money is a good way to measure your success which is a really horrible answer. That's the selfish answer, understand

brian:

where you're coming from. It's it's metrics. You're like, how can I know that I'm progressing towards a. Yeah, I give you numbers

jason:

for it. Yeah. Yeah. I am I winning or losing? It's and again it's a very selfish answer to the question, but it's an honest answer. I'm competitive and I like to win and that's money is a good way to keep score. But I also do it in the reason that I got into real estate or the reason that I got out of the corporate world was 2008. I got married and my wife and I were both working ridiculous hours. And we said, this isn't sustainable. If we want to raise a family or at least not a good, healthy family. And so we said, look we need to create a lifestyle where we can be with the kids where if the kids have soccer practice or piano practice, or we want to go on vacation or we want to go on a field trip with them. We can do that anytime. Anything. And there's no restrictions. And I originally got into entrepreneurship in general as a way to basically be able to build a family in a way that I thought was best for my family. And I guess the last piece is I love to be able to give back there's nothing, and this was partially selfish as well. But there's nothing nicer than being able to write a check for a charity that you care about or help a friend or help a family member. And so just knowing that I can do that is very rewarding in and of itself. And again, it's selfish because it feels good to be able to do those things. I'm not saying we all do it. It's nice to be able to do more of it. And so those are the big ones.

brian:

I love it. And there's a gentleman coming on the show named Chris harder. I don't know if you're familiar with him, but he he's he runs a lot of businesses, very successful guy. And then his kind of tagline is when you give good people good money, they do great things. I like that. And that is like my whole moniker. That's what I'm going to lead with. When I interview him, I'm going to be like, Hey man, let's talk about this quote because we can sit on that for the entire show, because it's the difference between a pebble hitting a lake and a fricking meteor, hitting a lake. It's going to be a much bigger ripple effect. With Nope. We just use money as a tool. Money is a tool here. So as we wrap up, Jay appreciate that, appreciate this conversation today. Where can people find you? What do you have going on right now for anybody that's interested in partnering with you, investing with you.

jason:

Yup. So we actually just launched a new deal. We're almost fully subscribed to probably will be by the time this comes out. But if you're interested in learning more about me or connecting with me or investing with me the best place to start is www.connectwithjayscott.com. And it'll that'll give you all, that'll give you all the links out to everything. I have 30 of those URLs, like for everything. Just because the worst thing in the world is having to look things up. We're having to give people a long URL. So yeah. Connect with Jay scott.com. That'll take you out to everything. Or if you just want to invest with me, you can go to invest with jay.com

brian:

to your point. It's a hasn't has an email address that he would send with people where it's novel. I don't do coffee.com. That's awesome, brother. I appreciate you. It's been awesome watching your journey and your transition from your first zone of genius to what your next zone of genius is going to be here. Absolute you just dropped so much value in this episode in so many different areas and especially towards the end. I know it seems small, but just to draw out the point home. It's just all about leading with value. And it's really cool because people at your level and people at a successful level, they rarely talk about special on these podcasts because they want to, puff the chest they don't talk about. Oh yeah. So when I moved into this completely new thing, I reached out to this mentor and I'd worked with them and for them, and no one talks about that. So thank you for sharing that and thank you for your time today, brother. Awesome. Thanks

jason:

Brian. Appreciate you having me.

brian:

Appreciate you, buddy. This is Brian and Jay Scott signing off.