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Sept. 27, 2022

The Data of Downturns: How To Survive and Thrive In The Upcoming Recession w/ J Scott

The Data of Downturns: How To Survive and Thrive In The Upcoming Recession w/ J Scott

Today we get into the DATA of Recession. What happened in the past? What's happening now? How can we pivot and proactively prepare? Which asset classes should we invest in?

J Scott (he goes by "J") is an entrepreneur, investor, advisor and the co-host of The BiggerPockets Business Podcast.

He has bought, built, rehabbed, sold, syndicated and held over $70M in residential property and currently owns several hundred units.

J is the author of four best-selling books on real estate investing, with sales of over 300,000 copies.



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Transcript
bri:

All right. Jay Scott and the Jay is for Jerome Powell just raised the interest straight. Other 75 faces points . He did. He did. What's going on brother? How are you?

j:

Everything

bri:

is great. How are you doing? I'm doing good, man. But yeah, it's been a while to ride. I watched his the Fed's speech and I watched to see where they're going, where they're going all in where. Having a bit of nuance and they're being super direct with their messaging and he's essentially saying he's going to keep going 75 basis point chunks until they get inflation back down to 2%. He's Yeah, no matter what. So I'm curious about your perspectives on all of this and what you're seeing with the data.

j:

Yeah, so I, at first I think it's actually interesting anybody that's watched the Fed over the last 10, 20 years, 30 years knows that they typically aren't very direct like this. They generally keep it pretty close to the best, what they're planning to do, and they don't like to signal their moves in advance because they don't necessarily want to move the market anymore than necessary. But over the last several months, last year or two the Fed drum, Powell has taken a much different stance where he's being pretty transparent and basically saying, This is what we're gonna do, this is what you can expect. I think that's part of the reason why people feel like the Fed's kind of all over the place and doesn't necessarily have a great strategy. Mostly because normally the Fed doesn't say what they're gonna do, and so when they do something it's Okay, great. That must have been what they've been planning all along. , now that they're being so transparent, we of got get to see how they're thinking about things and how they're changing direction every month as new data comes out. And so while it may feel like they're not really on top of things, that's more just, we have more insight into them kind of changing their position and pivoting in real time. It, it's interesting and I actually like it because I think it helps us as investors kind of plan for what we're gonna be doing over the next 6, 12, 18, 24 months, because the Feds basically telling us what they plan to do, and so what do they plan? What came out at the last meeting was in addition to that 75 basis points or 0.75% rate increase for the federal funds rate. The other thing that came out is that the Fed thinks that they're gonna have to raise rates higher than they originally thought. Up until. A few weeks ago, what they were saying was, we expect to raise rates to three and a half, three and three quarters, maybe 4% in order to get inflation under control. We expect to be there by the end of 2022 and then maybe let off the gas a little bit. Now what Jerome Powell is saying is that he thinks, and the Fed thinks the consensus of the Fed is that that rates are gonna have to go above four and a half percent. A third of the Fed members, six of the Fed members are saying between four and four and a quarter. A third of 'em are saying four and a quarter to four and a half. A third of 'em are saying four and a half to five or maybe some somewhere in there. And but they're all in that four to 5% range. And the consensus is somewhere around 4.6% by the end of next, by the end of this year, by the end of 2022 and going in 2020. So we can expect if the Fed is accurate about what they're projecting, we can expect another point and a half increase over the next six to 12 months which is higher than anybody was thinking before. But the situation we're in right now is anybody that lived through the 1970s or has studied economics of the 1970s Knows that what happened back then. The last time we saw inflation like this was the Fed would start to raise interest rates. Inflation would start to drop, wouldn't get quite back to that two or 3%, but would start to drop. The Fed would kinda let off the gas and inflation would surge again, and then the Fed would raise rates again. Inflation would come down again and fed would let off the gas, and inflation would surge again. So this repeated four or five times throughout late sixties through early eighties, and it wasn't until 19 81, 19 82 that the Fed basically said, This isn't working. We really need to just step things up and we need to take a hard line against inflation. We need to raise interest rates for as high and as long as necessary to get inflation below 2% to. Crush it. And so the Fed chairman back then, back in early eighties said, Okay, let's do it. And they raised rates to over 20% at one point for a very brief period. But it was in the, it was in the mid to high teens for several months. And that. Solve the problem, inflation went under 2% and we've actually been relatively low in terms of inflation for the last 30, 40 years because of it. So I think what the Fed has learned this time around is instead of playing that game of waiting for inflation to come down a little bit and letting off the gas, they're just jumping right to the, we're gonna do whatever's necessary to get inflation below 2%. And we're not letting off the gas until that happens. Yeah.

bri:

So what are the pros and cons of this? Because there are both sides of it. There are people that are on one side of the media machine that are saying in screaming, this is in directly impacting the affordability of things, ironically. So I see both sides of it. There's three sides to the coin. There's heads, tails, and then the edge. Right in In between. So I see both sides. I see that they need to do whatever they need to do. So before, what was like the kind of the standard basis of raise was what, like 25 basis points and now it's like, Yeah, so now it's 75. It's like kind of the standard unit of measurement. But I can see, What they're trying to accomplish. They have to do something that's damned if they do, damned if they don't, because if they don't do anything then everyone's gonna rag on them for, what are you doing It's going outta control. But then on the consumer end of the spectrum, with the interest rates, especially in the residential real estate market, everyone's kind of running with pitchforks saying that the affordability is down 50%. What are some of the pros and cons of this? If we took out, if we took out p we had chairman Jay Scott in instead, would there be anything that you would do differently or would you attack it the same level of gusto?

j:

I'm not smart enough, so I don't want, First of all, I don't want that. That's

bri:

the second of all. That's the most smart person answer I've ever heard. Everyone that's really smart person says, Oh, I'm not smart. . Yeah.

j:

I one, I don't think anybody in their right mind wants that job. And I'm willing to admit, I don't think I could do any better than what they're doing. Yeah, I probably do pretty much the same thing. Yeah it's a tough situation. So the pros and cons are if you don't do. Then inflation runs wild. Inflation is obviously bad. It's gonna hurt consumers, it's gonna hurt businesses. Eventually it's gonna hurt us as investors. So you can't let inflation run wild. But if you try and attack it too much and too quickly, if you raise rates too fast, if you do what's called quantitative tightening or restrictive policy , on the money supply, then you run the opposite risk. So you. Kill inflation quickly, but you're also gonna kill the. That's basically what raising rates is doing. think of it like chemotherapy for for cancer. When you give somebody chemotherapy the goal of the chemotherapy is to kill the cancer cells. But chemothe is basically poison and it's gonna kill all the cells. And the hope is that you kill all the cancer cells without really killing the rest of the body. But you probably come pretty close. And so same thing with with raising rates and tightening of the money supply. Is that you might be killing inflation, but you're also killing the rest of the economy at the same time, and that's not a good thing, so you can't be too aggress. Because if you're too aggressive, you will accomplish that goal of killing inflation. But you also end up in a recession that's much deeper and much worse and much longer lasting than what is necessary. So really the goal of the Fed is to play that middle ground and to figure out we refer to it sometimes as a soft landing. How do we kill inflation without killing the economy? Historically, they haven't ever been good at that. It's a really tough thing to do. But they have to do their best. And the way they do that is you raise rates and you need to be aggressive raising rates, but you don't wanna be too aggressive and so finding that sweet spot. So far, I think the Federal Reserve has done a pretty good job. This one's a little tougher than most. , simply because we don't just have the normal inflationary pressures. It's not normal inflation. With Covid, we saw a lot of supply. Issues. Basically normally. Inflation is driven by demand. There's lots of money out there. People are buying lots of products. Businesses have to keep up, so they have to hire more workers and buy more inventory and buy equipment and buy warehousing space and buy more retail space, and all those things cost money, and so they raise their prices and everything goes up in price. This time. It's not just the demand that's going. It's the supply is going down. It's harder to get stuff from China or Germany or wherever we're importing stuff from because supply chains are broken. Raw materials are hard to get. And so we have not just the demand side with all this money printing and all its extra money out there and people spending like crazy, but we also have the supply constraints and that's something the Federal Reserve has no control. Exactly so they can't fix that part. That part has to be fixed by itself. On the bright side, it looks like over the last couple months, the supply side's starting to fix itself. There are measures of basically how constrained supply is. And last I saw, we were basically back to kind of February 20, 21 levels. So basically through Covid, supply constraints went up and up and up and up. And now it's coming down and we're. Back where we were in February, 2021, which is the midpoint of like how bad things got. So that's fixing itself hopefully over the next year or two. That'll fix itself. Hopefully a couple more interest rate increases will fix inflation. But I think it's pretty unavoidable at this point that we're gonna have a recession and we're gonna see a downturn and there's gonna be some pain and the stock market's probably gonna fall, and unemployment's probably gonna go up. And we're seeing issues in the bond market and things are gonna get tougher for real estate investors because interest rates are going up. And so it's probably not gonna be fun over the next 6, 12, 18 months. But I think it's necess.

bri:

I agree, and it's been a wild ride, even from the consumer perspective. The data that I recall off the top of my head was like an 8.3% for I believe, July, and then in, or no, a flip flop, and 8.5% for July, 8.3% for August. So September will be at par with, Those are a little bit less, but that's just ridiculous. We're almost having a double digit inflation per month. That's not sustainable whatsoever. . We are in the proactive camp as opposed to the reactive camp. So let's talk about strategies when they come to real estate, and especially how they relate to your new book. That's about to come out with Mr. Dave Meyer, who's also a guest on this podcast, and he's the VP of Data Analytics at Bigger Pockets. So let's talk about how you're pivoting to your strategies when it comes to real estate investing. In particular, maybe about how you're pivoting. Asset allocation in general, and then we will directly talk about how both of these principles apply to the book itself. Yeah, then we ride off in at the Sunset . j: Perfect. Yeah and so yeah, thanks. Thanks for mentioning the book. It's called Real Estate By the Numbers. It's my fifth book for bigger pockets, Dave's first book. We've been working on it for years and it's basically, if I had to rename the book, I'd probably call it Think Like An Investor, because it really is all about how investors think strategically and the concepts that go into investing and all the numbers and math and all the things that go into really. Thinking like a successful investor. And I think it's more important right now than at any point in the past, at least the past 15 years, maybe ever. Because for the last 15 years, since 2008, this business has been pretty easy. You buy real estate, you do something to it, and by the time you go to sell it, no matter how many mistakes you made the value's probably going up and now you're. All these people that, I've flipped a lot of houses, 400 and some houses over the last 10 years, 15 years. And I felt like I was pretty good at it. But here's the thing, even if I hadn't been any good at it, I still would've made a lot of money because the market was just helping me along. Sure. Over the next year or two, or maybe even five. I don't think that's gonna be the case. And the difference between good investors and not so good investors is going to be a lot more apparent. Yeah. We talk about when the water recedes, you see who's naked and I think we're gonna have a lot of naked investors out there that when the waters are receding and they're caught with their pants down. And so this point, more than ever, you really need to understand how. An investor thinks and how to analyze deals and how to analyze markets and how to analyze your business and really understand all the concepts that go into investing as opposed to just going out there, buying houses and waiting for the market to, to help you make a lot of money. What am I doing these days? So I transitioned back in 2018 over to multifamily. Mostly because I thought there was a recession coming a few years ago. . I was obviously off. I'm okay with that. I'd rather be a little bit more conservative than too aggressive. So back in 2018, I saw a recession coming in the next year or two or three. And that kinda led me to start thinking about what asset classes do I want to be in come a recession. And I really like multifamily. And one of the reasons I like multifamily is one, I know residential real estate well. But the problem with single family real estate is the values of single family are based on the values of other single family houses around you. If that, if I'm living in my house right now and the house next door goes up for sale and they sell their house like for 200,000 less than what they should suddenly they've created a comp. In my neighborhood where the next person that goes to sell their house is gonna have trouble selling it for more than that, simply because that's how houses are appraised. People use comps and so if a few people so irritating . Yeah. If a few people get into a bad situation where they have to sell, either they lost their job, they're going through a divorce, they have to move somebody died, whatever. If a few people get desperate to sell for some reason and they sell below, Now they've set the value for all the other houses in the neighborhood. And that's bad for everybody else. Contrast that to multifamily real estate and other commercial real estate. In general, values aren't based on all the other properties around you. Values are based on the income your property is generating. Literally you take the income you're generating, there's a multiplier for your neighborhood hood or your area, and you multiply the income by the multiplier, and that's how much your property is worth. And if you make more income, your property is worth more. If you make less income, your property is worth less. So you have a lot more control over the value of your property because you control the income. And so you have a lot more control over your success or failure as a real estate minister. So that's the reason I love multifamily real. Additionally, while values of houses go up and down over time, if you look at rents over the last hundred years, there has never been a period where rents have gone down. Across basically the entire nation. At once. Obviously, certain locations are gonna see rents decrease if big companies move out or population goes away. But across country it's a stagnant. Yeah, exactly. But across the whole country. Rents typically don't go down. 2008, we actually had about a year and a half where rents stagnated and stayed the same, but they didn't go down. And so the one thing we can really count on, especially when we have inflation, is that rents are gonna go up. And going back to what I was saying about commercial real estate, when rents go up, income goes up. Values go up. And so that was the reason why I moved into multifamily real estate back in 2018. Still really love multifamily. I still really love commercial for that reason. That said, not all commercial real estate is the same. There's all different classes and types of commercial real estate. You have multifamily, you have self storage, you have RV parts, partnership, mobile homes you have office space, you have retail, you have all these different things, and they're not. Created the same. I wouldn't invest in all commercial right now, but in general, I love the idea of investing in commercial real estate right now because with high inflation, we get rents that are going up, values that are staying consistently high and even potentially going up. And the other thing is when all hell breaks loose in the economy and people start losing money in stocks, when people start losing money in crypto, when people start losing money in collectibles or whatever it is, where do they go? Historically they go to real estate. When lots of money start comes, starts coming into real estate stays propped up, and this is the reason why real estate typically does pretty well during a recession, even when other asset classes are getting crushed. Yeah, exactly. Unless you're Robert Kiyosaki screaming about golden silver constantly at all caps on Twitter For the last two decades. Yeah. Eventually

j:

he'll be, eventually he'll be right.

bri:

Yeah. And then they'll make the news articles about him and they'll parade him around on Good Morning America and all the. Publications. But yeah, no, you're absolutely spot on. That's what I'm seeing too. So multifamily and commercial. Just to recap for people listening, it goes from, instead of having a market centric valuation, you're gonna have an NOI centric valuation and you actually control that because nothing in life pisses me off more than depth taxes and having an appraiser tell me value of a single family property, exactly. That's just it. And so I'm curious I wanna pivot a bit more into the book here in a second, but I'm curious maybe for the people that are listening to this right now that are residential investors and they aren't quite familiar with the terms that a bank or that a financial institution is gonna look at for a commercial property as opposed to a residential where they look at your income. Talk a little bit how you apply to get financing and loans on commercial

j:

proper. Yeah. Generally when you're buying a residential property, what the bank's gonna look at, or the lender's gonna look at is they're gonna look at your income, they're gonna look at your credit score. They're gonna look at they wanna see that you've had two years worth of a job. Basically those are the big things they need to make sure that you can continue to. Pay your mortgage every month. And they also want to know that that if you can't pay your mortgage, that they have something to come after. In the commercial world, it's a little bit different. A lot of these loans, generally the loans over a million dollars are typically non-recourse, which means if you default on the loan, the bank's not gonna come after you. They might not be happy, but they're not gonna come after you. You might not be able to get another loan later in, in the future, but you're not gonna be on the hook for whatever you didn't pay back. But the, so that's the good thing. The downside is that the banks are very much gonna be looking at the asset that you're gonna buy because they wanna make a hundred percent certain that if. If all hell breaks loose, that asset's still gonna be generating enough income to pay the mortgage. So the big thing that banks look at is this metric called dscr debt service coverage ratio. . Basically what that means is they're gonna look at how much income is coming into the property. After expenses, how much income's left over, how much cash flow is left over after all expenses are paid. And they want to know that pays at least the mortgage, plus about 25% above the mortgage. So they wanna see this dscr number. They wanna see basically your income at least 1.2 or 1.25. Of whatever your mortgage payment is. So that way basically the property can drop 20, 25% in value, or 2020 5% in income and you'll still be able to make your mortgage payment. So that's the big number that they look for. In terms of borrower, what they're looking for are two things. They want to know that you have a high net worth. And that you have a high liquidity, meaning cash on hand. Typically they're looking for in terms of net worth, one to one of whatever the loan is. So if you wanna take out a 10 million loan, the person's signing for that loan or the people signing for that loan have to have a net worth of at least $10 million. Now, if you are investor, you don't have 10 million, what can you. You go find a partner, plenty of, there are plenty of people out there. They call 'em key principles or kps. And these are people who they're, what they do is they sign on these loans. And so you can give them equity in the deal. You can pay them a fixed fee, and basically they'll sign on. They have a high net worth and they can sign on the loan for you. They become your partner in the deal. The second thing that the banks look for is liquidity cash in the bank. Liquid cash or liquid assets. And typically what they're looking for there is 10% of the loan amount. So if you, again, if you wanna take out a 10 million loan, the bank's gonna be looking to see that you have at least $1 million in liquid assets. Again, if you don't have that, you go find a partner that is the kp a key principle, and you say, Hey, come sign them loan for me. I'll give you 10% or 20% of the deal in return for you signing on the loan for me. And so in the commercial world typically. And that's

bri:

non-recourse. And that's non-recourse. Correct. That is non-recourse, which means that'ss important. Explain the difference between non-recourse and

j:

recourse for people. Yeah, so recourse basically means if you stop paying, the bank can come after you. They can take your house, they can take your business, they can take your car, they can take whatever to basically satisfy the loan amount. Non-recourse means that the bank can't come after you. If you stop paying, they can take the. But they can't come after you for whatever, personally, for whatever the difference is. Now, typically, non-recourse have these things called carve outs. And basically what that means is if you're committing fraud, if you lie to the lender, they can come after you in those situations. So anybody that's signing on the loan for you, they wanna make sure that you're. Like lying to the bank, they wanna make sure that you've been completely truthful about the property because that's the one time when the bank actually can come after you if you've committed fraud or if you've lied on your loan application. But otherwise, non-recourse loans the worst case is if you don't pay it back, whoever signed on the loan may have trouble getting future loans but they're not actually putting their assets at. So non-recourse is a huge benefit to commercial loans. And then the other benefit is simply that you can bring in partners to sign for you if you don't have the net worth and the liquidity requirements to sign for the deal yourself. So I love commercial loans. They're a lot easier in, in many respects than getting residential loans. And again, it's based on the property and the property income. More so than it is based on the borrowers themselves. So

bri:

when you have the triangle of capital allocation for a deal, where you have the three different people. So for people listening to zoom out before we go back in here to, especially in the residential markets, you need three parts of a triangle To get a deal done, you need either , the knowledge, the hustle, or the capital. Yeah, Like those are the three things you need. So does that still, does that concept still apply here? It's just maybe as opposed to having the capital per se, of an individual putting down a down payment and you doing that kind of like you would do in residential, where now instead of using the down payment per se, you're more so using the balance sheet as the collateral.

j:

Yeah. So in the commercial world, the nice thing about commercial is it's a team sport. , in residential, in theory, you can do everything yourself. In, in commercial, very rarely are you gonna be able to do everything yourself. And obviously you do. You shouldn't. You shouldn't. Exactly. You won't be successful if you try and do everything yourself. I'll be honest, like the thing I hated about single family was I ended up doing all these things that I wasn't great at. Acquisitions and finding deals I wasn't great at. Acquisitions and finding deals, but I still did it. Managing contractors. I didn't do it, but I hired people to manage contractors, hated it. Managed the properties. Again, I could hire property managers, but at the end of the day, I needed to be managing the property managers and all these things that I just wasn't good at, but I was doing myself. Because in the single family space, you just do these things yourself in the commercial space and I do again, multi-family. I'm one little cog in, in, in the wheel, and it's my company. I have a partner, but it's our company. But we're still just a cog in the wheel. And so I focus on what I'm good at, which is underwriting and raising capital. And we have other people who find the deals. We have other people who do due diligence. We have other people who take care of finding and working on the debt. We have other people who take care of the contracts and all of the. All of the securities compliance stuff. We have other people who take care of the construction management and the property management and the asset management. And so I get to focus on the one or two things that I'm really good at, and then I get to surround myself by with other people who are really good at all the other things. And What I typically tell people is if you want to do multifamily or commercial in general, you need to be really good at something. And then you just bring in other people to fill that in. And that's something, again, could be finding deals. It could be raising money, it could be managing the deals it could be underwriting, it could really be anything. But mostly you need to be really good at just putting a team together of people that can do all the other stuff. And then,

bri:

I love that point, and I think that may be one of the most important parts that we share in this episode. Like alongside all this financial data, alongside all of these terms and all of these little data points that we throw out at all of you, just that one key concept is worth its weight and gold because instead of going and trying to be a freaking real estate guru, expert, hashtag LinkedIn guy, On everything, go find the one. That you are fantastic at and put your 10,000 hours into one specific thing instead of trying to be good at everything. Be great at one thing. Because a lot of people come in this show and they ask me the questions of how do I attract the partners? How do I attract all these people to come with me? How do I attract these rock stars to partner with me? And the answer to that isn't how you email people isn't how you approach people. It's literally being that fricking good yourself. Yep. And it's like a magnet. Because once you're an expert and , you've got your 10,000 hours of sweat equity into one thing, then the rest just magically appears. I, it's just, it's magnetic.

j:

Yeah. So yeah it's very much it's think of a sports team whatever sport you like. Let's I'll talk baseball. Pitcher doesn't need to be able to, Doesn't need to be able to play the outfield. He doesn't need to be able to steal bases. What he needs to be able to do is pitch, and if you're the best pitcher in, in baseball and you can't do anything else, nobody cares. Because you're fulfilling your goal for the team. Likewise if you're a cleanup hitter or a pinch hitter you need to be able to. And doesn't matter if you can't play the field, doesn't matter if you can't catch, doesn't matter if you can't pitch. Everybody has a position and you need to be the best at your position. And if you get a group of people that are all the best at their position, and they can work well together and they can play well together. You're gonna win championships. And it's the same way in the investing world. You need stars in every position. They need to play well together. They need to work well together. And if you do that, you're gonna, you're gonna crush it in this business. And what I tell people is, worst case, or maybe best case, depending on how you wanna look at it, maybe you're not good at any position, won't be a coach. You, you'd be the one that, that, that brings the team together and manages the team and makes sure that everybody's playing their position and make sure everything's doing things right, and you can make a lot of money being the coach as well. And so figure out what position it is. You are good at playing and you are good at doing, and maybe that position is just CEO or coach and maybe you're the one bringing the team together. My kids and I were watching Oceans 11 the other day, and basically the whole premise of the movie was that George Clooney brought together 11 people to commit the crime of a century. And he was the guy that figured out who were the right people were and what position they needed to play and what they needed to do. And so that's a great way to make money. Also.

bri:

And a prime example of this is I'm practicing what we're preaching, right? So here's like a counter, like a counterintuitive example of this. So I'm a real estate investor, so I invest in real estate as well, but I'm a single family. Yep. So for me, what I do is I come on these podcasts and I could talk with you about commercial terms and multifamily because I'm in the world and I'm surrounded by so many people every single day of the week where I'm talking to all of y'all constantly, so I can speak your language and I know what you're talking about. So there came a pivot time for me a year ago. Where I said I have a certain amount of time and I have a certain amount of acquired skillset and capital that I've already acquired over my 10,000 hours. What do I want my next 10,000 hours to go towards? And this is an important question that applies outside of real estate as well. For me, my 10,000 hours is best spent going towards this podcast and towards the creation of this media company. So for. People listening, Am I going in my free time and am I learning about everything that Jay's talking about? No, I'm not doing it because that would be foolish me because that would be exactly what we're talking about to where I'd be being good at a lot of stuff, but not great at one thing. So if I become great at this and great at the content and great at the capital part, that's my master. And then I can go and say, Hey. I have audience, I have community, I have capital. And then maybe Jay doesn't have that. But what he does have is a decade of analytical knowledge, skills and operational knowhow that I don't have. And I say, Hey, this would be a match made in heaven. And he would say, Absolutely. That's how it works in a practical sense. Yeah. So let's go into some of your favorite parts of the book, this is actually quite cool because it's pre-release. So this is going live on Tuesday, September 27th. So we have about a two week countdown for a pre-order window for this book. So I haven't gotten a chance to read it and I haven't been able to see it. So little salty j It's okay. I'll forgive . It's,

j:

Hey, it hasn't been printed yet. Literally, I haven't.

bri:

A copy. All right. All right. So let's give 'em a sneak peek. What are some of your favorite topics? Cuz I believe I saw your Facebook post that you were alluding to. You spent four years on this, about 400 pages. What are some of your key topics and takeaways that you had most fun writing on this, that you think are gonna be the quotables from the book That people should really pay attention.

j:

Yeah, so we wrote, Dave and I wrote this book basically with the idea that part of the problem with investing is too many people throw out formulas. They say, Here's here's a formula. Stick the numbers in and get your response. And the problem is that a lot of us as real estate investors, we, that's like step.

bri:

There's nuance. Yeah.

j:

Yeah. We need to know which formula to use. Like when do we use this formula? When do we use that formula? What are the right questions that we should be asking when we look at an investment to determine is it a good investment or is it a bad investment? And a lot of us don't even know where to start. And so the goal of this book was to give people an idea of the questions they should be asking. Each phase of the investment process, each phase of the business process, in order to get the answers you want, you can't get an answer. Doesn't make sense unless you know the right question to ask. If you ask the wrong question, the answer's not gonna make any sense. Yes. And so basically we every chapter of the book starts with, here are all the questions you might want to ask to learn. X, Y, and Z and then we spend the chapter basically answering that question, saying, This is when you want to ask this question. And this is how you answered this question. And I know that didn't make a lot of sense when you read the book. It'll make more sense. Makes a lot of

bri:

sense. Okay, great. To me at least, maybe, because what it is it's give a man a fish, eats for a day, teach man to fish, eats for life. So what you're doing is you're providing. Framework of a questioning sequence that people can go and apply to different situations to where your brain is trained to be looking for patterns and recognition. I love it.

j:

Yeah, exactly. Awesome. Then I guess we've accomplished at least part of what we were trying

bri:

to accomplish. Scrap the book. Scrap the book. It's not gonna work anymore.

j:

Yeah. But we structured the book in five parts. The first part is all about your business, managing your business, financial statements, the high level stuff like ensuring that you're successful from the beginning by structuring your business correctly, and being able to look at your business and say, Is my business operating effectively? And not just your business, but the specific investments within your business. My favorite part of part two is time value of money. This concept that money today is worth more than money tomorrow. And I know that's, it's, that's a that's a broad. Idea, but it really it's important in every aspect of investing. So I give an example of the book where I'm selling a property. And this was a real life example. A long time ago I was selling a property. I got two offers. First offer was full price, cash close in two weeks. Like exactly what I wanted for the property. Second offer was an investor who really wanted this property but he didn't have the cash. He was like I'm selling another deal. It's probably gonna finance. Yeah. He wanted me to sell financing. He said, I have another deal. I'm gonna be selling in about seven months. Name your price. What do I have to pay you to get this property? I just can't pay you for seven months. And so I had to figure out, did I want to take X dollars today? For why dollars in seven months, How much would I need to be making? Or how much would I, how much more would he have to be paying in seven months for me to be getting a better deal to wait seven months for my cash? And so they're actually mathematical formulas that you can use to figure out how much is, how much. If I'm getting a hundred dollars, a hundred thousand dollars today, How much would I need to be getting in seven months to be equivalent to a hundred thousand dollars today based on the fact that I'd probably be investing that money for the next seven months. And these types of questions are pervasive throughout every facet of real estate investing. Because we're always thinking about when we're getting our money, what we're gonna do with it, when we get it, and what we're losing out on when we don't. And that's you don't realize it until you start thinking about specific examples. So that was one example, but we give dozens examples of examples in the book of how. When you get your money and how much you get at different points impacts your total returns on the investment. Another example I like from the book is we've all seen these Facebook posts where somebody will throw out, Would you rather get a million dollars today? ? That's what I was just thinking. Or $10,000 a month for the rest of your life. Yeah. And you have a hundred people arguing over. This is clearly better because of this. This is clear. The cool thing is there's actually a mathematical formula that you can figure. Which one is better based on how you're gonna invest that money, how much you're gonna return, how long you're gonna live, so you know how many, how long you're gonna get money for every month, and you can actually figure out which one of those scenarios is better. And so instead of arguing over I think this, or I think that you can actually use math to figure out which one is gonna give you a better return. And so part two of the book is all about high level concepts. So things like expected value and time value and money. And how interest works and how compounding works and all these concepts that, that we know, but we don't really know because we've never sat down to really think about 'em in a fashion that, that like really allows us to understand it. My goal of the book from the very beginning was to take all these concepts that, that we talk about and explain it in the simplest terms so that people can walk away and. I've heard compound about compounding for 20 years, but I never really got it and how it works and why it's so important. I've heard about time, value of money for 50 years, but I never really got how it works. And so that's part two. Part three is really all the return metrics that we hear about in this business. So ROI and cash on return and aar, average annual return and irr internal rate of return. And all of these different all of these different return metrics that we use and people think do I want to use this one or do I want use that one? And how's this one work? And what does this one mean? I hear this term IRR all the time, and I know bigger IRR is better than smaller ir, but what the hell is IRR mean? And so basically you have a whole part of the book where we start at the very beginning. We explain what every one of these metrics means. why we use 'em, in what situations we use them and what the limitations are and what the benefits are for each of these metrics. And then the next section of the book, part four, we talk about capital stacks. We talk about debt and equity. And then the final part of the book, part five is basically putting all the concepts together and talking about specifically how to analyze deals. And we run through a whole different. Set of deals and how you would analyze those deals from beginning to end using all the information that we introduced earlier in the book. So it took us four years to write this book because I really I wanted this to, this was, I knew this was gonna be the most important book I ever wrote, and it's probably, hopefully gonna impact more investors than anything I've ever written. So I just, I really wanted to get.

bri:

That was gonna be one of my questions is when it comes to a serial authorship, we talk about serial entrepreneurship, but we don't talk about serial authorship. I'm always curious if the next book, and the next book and the next book, , what are the differentiators between that feeling like a drag and feeling like that, being like chasing the high of the previous one, and what's the difference between that and what's the difference between saying, hey, last book was good. This one's gonna be even better and I'm even more excited about this one. What do you think are the differentiators between

j:

that? So I hate calling myself an. Because authors are people that write books. You're an artist.

bri:

Not kidding.

j:

No.

bri:

It's just the, it's just the opposite.

j:

It's just the opposite. I don't enjoy writing books. I, it's not something I do because I say I, This is my calling in life and I really want to be an author and I really wanna write. . Every time I finish a book, I say I'm never writing another. That was just way too hard and way too draining. And I'm just done. Yeah. And then some topic will come along and I'll think, Oh shit, I gotta write a book. And so my criteria basically for writing is either I will only write something if I think I can do it better than any person alive that's ever written a book on the topic. Or it's a book that I believe has never been written and needs to be. And so when I wrote the flipping book, for example I really thought I could do that better. All the flipping books out there that I read were they were motivational and they were like, rah, how to get excited about flipping houses, but they weren't really nuts and bolts. And I'm an engineer and so I felt like I could write a step by step guide to flipping houses. And so I thought I could do it better than anybody. And I wrote that book. Ended up being the best selling flipping houses book ever. And so I'd like to think I accomplished that. When I wrote my estimating rehab book, there were no books out there on estimating renovation. So I wrote that simply because I needed this myself, and I figured if I needed, lots of other people need it. So I wrote that one for the negotiating book. I wrote that because there was no books I could find that were really specific to negotiating real estate. And there were plenty of negotiating books out there, but they just they were generic. Real estate or generic negotiating books. And so I didn't feel like that book existed. And then the recession proof book, that was another one that I felt like there's just no good economics book for real estate investors. There were a couple that I didn't really like. I thought I could do it a lot better, so that's why I wrote the recession Proof Real Estate book. This one. There are one or two books out there that I feel like this is gonna compete directly with, but I really felt like I could write this book better than anybody has written this book before. And so that was part of why it took so long to write because I just, I wasn't gonna release something just to release another book if I'm gonna write it. It's, again, it's either gonna be something that's brand new, doesn't exist, or it's gonna be better than anything out there. And so it took years to make sure that I felt like it was better. But I, I really feel like we accomplished that.

bri:

Yeah. And I know it's a lot coming from you, man, because every single thing that you do is to a certain degree of, perfection where it's just that's just how you're wired. That's how all of us are wired. It's like how you do one thing is how you do everything. And it's funny whenever you mention all the terms and everything, like those don't go away in different industries because right now I'm in the media industry and that's, that's what I'm building. Like I'm building an entire media company. So like I see bigger pockets, I see Josh Dork and I'm messaging back and forth with him. I'm like, Okay, like how'd you make this decision? Why'd you do this way and all this stuff. And I have to learn terms like cpa, Ccpm, ltv, a arr, annual recurring revenue, stuff like that. And I'm just like, Okay, I know the real estate terms. Now there's more terms. Somebody else. I'm like, Oh my God, they never end.

j:

But there's so much. There's so much. And this is actually the reason I wrote part one of the book, which was all about like financial statements. Because Yeah, the cool thing is what people don't realize is I, in one chapter of the book, I talk about profit and loss statements, financial statements. Nobody, a, nobody cares about profit and law statements. It's a boring topic. They should, but let me but here, yeah, they should, number one. But here's the cool thing. If you know how to do a profit and loss statement for your business, a profit and loss statement is the same exact thing that you do when you analyze a rental deal. , it's the same thing. You start with income, you subtract expenses, and you get a net income number. And so a p and l, if you can do that for your business, You can apply that to analyzing a rental property. Likewise, if you know how to analyze a rental property, you know how to use the same methodology to analyze your business, and people don't realize that like these concepts aren't specific to real estate. These concepts kind of span entrepreneurship and when you learn how to do these, a few really basic things you're good at not just real estate, but you become a good entrepreneur, a good business owner. , you become good at other types of investments. And so basically taking these, these concepts that feel really real estate specific and generalizing them in ways that people say, Ah, I'm a better investor now. I'm a better business person now. Not just a better. Multi single family rental owner.

bri:

Yeah. And you're leveling up. And that goes to the whole identity concept, right? To where now it's you're not just, to your point, you're not just a better single family operator, You're not just a better multi-family guy. You're a better investor and you're a better entrepreneur and you're a better business person. Yep. So that's the key. And we're gonna need more of those people than ever as we're going into this next phase. To end the show, let's maybe share two to three pieces of advice that you would give right now as we're going into the, this next six to 12 months. Because I think this next year especially is gonna be a wild ride. And I think we'll start singing the effects in real estate probably mid next year, because there's always a lag. Yeah. Maybe share two to three pieces of advice you would give for people right now. Short little pieces that we could take as we exit this. Yep.

j:

If you're a new investor and you haven't done a deal or you've only done a couple deals and you're terrified to invest right now, nothing wrong with that. I know some very seasoned investors who are terrified to invest right now because nobody really knows where things are headed. And so what I would say is, Even if you're not doing any investments right now is the absolute perfect time to get out there and start learning. Figure out in three years I really want to be doing x I don't know what X is. Maybe you want to do mobile home parks. Maybe you want to do you want to own warehouses, maybe you want to own single family rentals. Whatever it is you're gonna want to do in a year or two or three, and take the next year or two or three, however long you're uncomfortable investing and use that time to really. Use that time to study. Use that time to build relationships, Start going to real estate investor association meetings, r meetings, hop on bigger pockets, go to conferences, meet other people that are doing that so you can build up your knowledge, you can build up your network, and you can build up your access to capital because I guarantee you the time when the market gets better and everybody's optimistic again, is gonna come a lot faster than you think it will. So use this time right now to learn Number two. Be super conservative, get back to the fundamentals. And so I, I say that and people are like I always follow the fundamentals. And I think what people again, don't realize is over the last 10 years, most of us haven't been following the fundamentals. We've been following our gut and assuming even if we make mistakes the market's gonna correct those mistakes. Now is really the time that when you run your numbers, You gotta know your numbers and you can't just back of the napkin thing. You really need to ensure that every assumption you make is backed up with as much data as you can possibly get. And you have to have a plan B and a plan C and a plan D if any of your assumptions end up being wrong. So what I tell people now is spend a lot more time upfront underwriting the deals, saying no to the deals that don't work. If your gut tells you this isn't a good deal. Get the hell outta there and make sure you have. Contingency plans and mitigation plans, plan B, C, and D if things don't go as well as you expected them to go. And then lastly, I would say now is a great time to start building relationships because there are a lot of people out there that are in the same boat you are, where they're not really sure what to do. The market's changing, they're thinking about different asset classes that might be good. And for the first time in many years, a lot of people are. Coming out of their bubble where they've been heads down flipping houses or buying rentals or whatever it is they're doing, and they're looking around saying, Okay I'm like, finally have a chance to get my head above water and breathe. As people do that, it's a great time to build relationships and to build your network and to find partners and people you can potentially work with when the market improves and when you're ready to actually jump in and do whatever it is you're ready to do. So really and now's a great time, and I'm doing this myself. I'm focused a lot more on networking and building relationships now than I have been for any time in the past 10 or 15 years. Absolutely.

bri:

And two that I would add to that would be one to what we talked about before, when it comes to that deal, triangle of being the money, the knowledge, or the hustle go all in. If you don't know what part of that role that you serve, which corner of the triangle you are, now is the time. To figure that out and to figure out which part you want to be, and then gravitate towards that. And number two the reality I see over and over again is there are gonna be two schools of people that come unearthed during this next phase here. You're gonna have the pessimist, you're gonna have the optimist. The pessimist are gonna be the ones where it's the, their first dance, their first rodeo, where they got punched in the mouth, and now they're gonna go down and they're gonna try to drag you the hell down. Yep. That's not the person you wanna hit your wagon to. There are other people that are gonna be optimist that have been there, done that, got the t-shirt, been through 2008, lost it all, and then built life changing generational wealth on the backbone of that. So now they're going into this next recession and they're saying, Okay, cool. What can I do to be proactive as opposed to react? So stay proactive people, not reactive. Jay Scott. Dave Meyer Real Estate by the number. A complete reference guide to deal analysis is live in two weeks. Jay, where can they get the book?

j:

Yeah, so it's available for pre-order now. If you want to order it from bigger pockets, it comes with a whole bunch of bonus materials and you actually get entered into a bunch of drawings to get like free coaching calls with me and Dave and lots of other bonuses. If you pre-order now. You can go to numbers book.com and that'll link you out there. Numbers book.com or if you want to get it on Amazon, it's available in pre-order on Amazon also, but I think it ships a few weeks later on Amazon because bigger pockets wants to incentivize people to buy it on the site. So yeah, I appreciate you letting me talk about that. I'm really excited about that book and I hope it helps. Literally No problem. Tens of thousands of.

bri:

Oh I know it will. And guys, so you know what to do, go by the book. This is not a better time in the market, in the economy to go by the book than right now. And also, you have two different ways to get a coaching call with Jay. Probably three. They could throw a number at you, maybe that you would be like, Okay, I can't say no to that. So you can either go by the book right now and you can. Drawing to be coached by him. Or you can spend a couple thousand hours developing a personal brand, building a podcast, doing hundreds of hours of interviews, and send Jay a Facebook message to come on your show So pick which one. pick which one works best for you, my friends. And with that you guys know where to find Jay. He's gonna be in the show description. And with that, we will leave it there. This is Ben Brian Lupin and Jay Scott with the Action Academy Podcast signing.