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SHOW NOTES FOR EPISODE 297:RECESSION-PROOF REAL ESTATE INVESTING
It’s one thing, as a real estate investor, to know another recession is coming. It’s quite another to know how to strategically invest at each stage of the economic cycle during a recession to still generate a significant profit and achieve maximum success. In today’s podcast episode, entrepreneur, author and real estate investor who successfully leveraged his real estate business during the 2008 recession, J.Scott, shares insider secrets on how to not only survive but to thrive and grow your real estate business during the next recession.
What You Will Learn
- How to insure your real estate business will not only survive, but will thrive, during the next recession
- What phase of the economic cycle we are in today
- How the economic phases are like seasons
- What are four key things every buy ‘n hold investor should do in advance of a recession
- Eight recession proof strategies that are all but guaranteed to work
- How certain key economic indicators can predict when a recession will occur
About Our Guest
The 2008 Great Recession was a time of economic turmoil and disruption. After the crash, many real estate investors lost everything they’d worked so hard to achieve—but not every investor suffered that fate. Even during the worst parts of the downturn, some real estate professionals were able to grow and scale their businesses. Not only did they come out the other side unscathed, but they also created a better financial situation than ever before. Today’s guest was one of those real estate investors who faired well during and after the recession.
J. Scott
Previously a guest on the Old Dawg’s REI Network (169: Real Estate Investing Success Through Great Timing and Effective Deal Analysis – January 8, 2018), J Scott is a full-time entrepreneur and investor, living in the suburbs of Washington, D.C. In 2008, J and his wife, Carol, decided to leave their 80-hour work weeks in Silicon Valley to move back East, start a family, and try something new: real estate. Since then, they have bought, built, rehabbed, sold, lent-on, and held over 300 deals, encompassing over $40 million in transactions. J also runs the popular website 123Flip.com, is an active contributor on BiggerPockets.com, and is the author of three books on real estate investing. His books have sold more than 100,000 copies in the past five years and have helped investors from around the world get started investing in real estate.
More About J
- Headed into 2018 pretty strong but he was getting pretty burned out
- Wanted to take a break from real estate for a while
- Focused on his writing:
- Wrote revised editions of his first three books
- Went ahead and wrote two new books (his fourth and fifth)
- Wrote for 8 straight months
- Recharged his batteries
- Got a number of ideas he has had out on paper
- Thrilled to get back into real estate
- Moving from DC to Florida
- Putting family first – DC weather is rough
Recession-Proof Real Estate Investing Blueprint
- He’s a student of economics from an intellectual standpoint
- As a real estate investor, he always has looked at the economy in its relationship to various investment strategies
- A year or two ago he realized that we are coming up on another economic downturn
- If you look at economic cycle theory and the history of the United States, it’s been pretty predictable, every 5-8 years, that we experience a full economic cycle
- However, it has been 11 years since the last cycle, making this the longest economic cycle in US history
- This prompted him to ask, “What should I and other investors do to insure that, when the downturn eventually hits, that we can continue to make money and profits and maybe even grow our businesses and do better than we did during the expansion phase of the cycle
- So, a year or two ago, he started to look at historical data on economic cycles, talked to various investors you were active during the last recessions (2001 and 2008) to see what they were doing
- He looked at what investors could and should do to not just make money during the recession but also modify their investment strategies at every point of the economic cycle
Four Phases
- He broke the cycle into four phases
- Expansion phase
- What we’ve seen recently during 2014
- Market going up
- Wage growth
- Unemployment dropping
- People have confidence in the stock market
- Everything going well
- Overall optimism
- Peak phase
- Things start leveling off and trending down
- There’s a lot of uncertainty as to what that really looks like
- November 2007, everything looked great
- By November-December of 2008, once we hit the peak, it started to decline in a couple of months
- February 2008, the stock market dropped 3,000 points
- Housing was down
- Many people today think that’s the way things are supposed to look
- But if you look at 2001 and late 80s recessions, it’s not always like that it was a long drawn-out plateau
- Market bounces around
- Unemployment goes up and down
- GDP ( the total output of the US economy) going up and down over many months or even a year
- Economy isn’t growing or shrinking at the top
- The Recession or Downtrend Phase
- Things start moving in the other direction
- Market turn
- Unemployment goes up
- GDP drops
- People default on consumer debt
- Defaults on corporate debt
- Real estate
- Short sales
- Pessimism
- A lot of fear and concern in the markets
- Recovering Phase
- We’ve hit the bottom of the market
- Start to go back up the other side
- 2010-2014
- Things slowly start to recover
- Finding the Strategies That Work for Each Phase
- The goal of his new book is for investors to know how to invest at each phase of the economic cycle for maximum return and safety
- He equates the different phases of the economy as “seasons:
- Expansion Phase – Summer
- Peak Phase – Spring
- Some cities are doing well
- Economic growth
- Housing prices are going up
- Lots of buyers
- Today – Seattle, San Francisco, parts of Florida
- People will be experiencing different things
- Good for some
- In another city, things are bad
- Recession or Downtrend Phase – Winter
- Housing prices drop
- Buyers fleeing the area
- Economic softening
- Recovering Phase – Fall
- Expansion phase
What Phase Are We at Today and What Should We do?
- J feels we are at the “Peak Phase” and, in some markets, the “Recession Downturn Phase” today
- People are still pretty greedy
- A lot of cities are seeing economic expansion, rent and price growth in the housing market
- J’s recommendations
- Don’t stop buying
- Be more cautious
- Think of how and where you are buying
- If you’re flipping houses
- It still can work
- Keep projects very short
- You don’t know if a project will take 3, 6 or 9 months
- Only take on projects that will take 3-4 months to complete
- Make sure your margins are sufficient enough to cover your “worse case scenarios”
- Example:
- J is in DC market
- Looking at the last 3 recessions in the DC market
- 12-15% decline is about the worse this market has experienced in prices in the last 3 recessions
- If he decides to do a flip, he should go into it will assurance that he will achieve at least a 12-15% profit margin
- That way, if, in the middle of the flip, the crash hits, the worse he will do is break-even
- Don’t loosen up your criteria too much – make sure it can withstand the worse case scenario
- If you are a buy ‘n hold investor
- There’s never a bad time to buy
- The key is to just make sure your numbers work
- Project your current income and work projections allowing for a 10% decrease in income
- Likewise, calculate your vacancy numbers allowing for an additional 10% increase in vacancies
- If the property numbers are still good with a 10% decrease in income and a 10% increase in vacancies, then you should be alright because, in most buy ‘n hold cases, there is seldom a more that 10% decrease in income and increase in vacancies
What J Did During the Recession and What he Recommends
- He missed the worst part of the recession but did still see price declines from 2008-2012
- He regrets that he was mostly doing flips and wished he bought more rental properties while the market was low
- His flipping business did well but he wished he bought more rentals
- Many people are usually too afraid to buy rentals during a recession
- He recommends people buy rentals even if they are scared
- If you have cash, it’s a good idea to use it to buy rentals
- Also, as you approach a recession, you need to…
- Make sure your credit rating is very good because lending will tighten up and if you want to buy real estate on credit, you need to be prepared
- Apply and get pre-approved now for HELOCs (Home Equity Lines of Credit) so when you want to draw on your home equity to buy rentals, all you have to do is write a HELOC check when you need the funds
- Get credit card limits increased for the same purpose
- At the time in the cycle when you can see 1-3 years of downturn, look at your existing rental properties and determine which properties are you comfortable holding on to for at least the next 5 years, you can probably weather he upcoming economic storm. If not, and/or you are considering selling in the next 1-3 years, you should sell now to get the cash and the best ROI because, in a year or two, the buyers aren’t out there, the values have dropped, and it’s difficult to refinance (it would be better to refinance now!) Don’t just sell to sell
How is J Investing Differently Today?
- With the flips, he’s trying to keep the projects very quick
- Staying away from 9-12 month flips
- Sticking with “bread and butter,” “paint and carpet” rehabs that he can get done in 3-4 months
- He’s not doing any ground-up development
- On rentals
- He’s always looking for rentals
- Modeling more conservatively
- Assuming modest decrease in rents
- Increase in vacancies
- He’s doing a lot of lending right now to buy ‘n hold investors – it’s relatively safe
- At the very worse, if they can’t make payments, they are likely still receiving rental income and, the loan can always be restructured and/or extended. He will still see the regular income coming in
- He’s focusing more on multifamily purchasing and syndications
- In certain markets it’s relatively attractive
- Looking at best recession-proof type markets
- Wouldn’t invest in Las Vegas or Orlando because they are heavily reliant on tourism – not good during recessions
- Best are smaller markets, heavy in blue collar industries that will be around even in a downturn. Also good are:
- Military towns – government pays rents
- Kentucky – good because backbone of the economy is agriculture, horses and alcohol (recession-proof industries). Have more blue collars workers that are working on people’s “needs” more than people’s “wants”
- He’s doing more multifamily investing but is being very picky.
- Investing in “C Class” properties is one of the best recession-proof strategies for buy ‘n hold investors
- Mobile home parks and self storage investing are also recession-proof
- Commercial real estate retail strip centers anchored with grocery stores are also recession-proof, as are medical centers
Economic Shifts
- The typical economic or “business cycle” in the U.S. is generally 6 1/2 years
- It has been 11 years and now economists are saying it’s like to happen soon
- Economists look at a number of key economic indicators that help determine where we are now in economic cycle
- One is called the Yield Curve. It measures how interest rates on government treasury bonds move with the economy
- See: 249: Multifamily Acquisition Strategies for Today’s Economy
- Single best indicator of a coming recession
- It’s current movement indicates a recession is near (6 to 18 months away)
- Unemployment – When it’s at 4% or lower it indicates that we’re at the top of the bubble or “Peak Phase”
- When unemployment is so low, it’s hard for companies to find the people they need and they have to pay more for the good employees, have to pull people out of retirement and they have to pass the increased cost of wages on to the consumer, causes inflation, government’s reaction to inflation is to raise interest rates and thus causes everything to slow down
- GDP (gross domestic product – total output of the economy) – As economy slows, this number drops. We’ve seen this over the last few quarters. Last summer we saw growth of about 4.2%. Winter – 3.3%. Q-4 – 2.3%
- Interest rates – As they go up, that’s also a good indicator
- Auto Sales – Traditionally a great predictor of recessions. When consumers get concerned about economy, they push off big purchases like automobiles
- Although the indicators do show that a recession is near, it doesn’t help predict an accurate time WHEN it will occur
- One is called the Yield Curve. It measures how interest rates on government treasury bonds move with the economy
What Can an Investor do During the Downturn?
- Stop flipping – change strategies
- Buy ‘n Hold – Good opportunities with foreclosures, short sales, seller financing, “subject to” deals (protects seller credit when buyer takes over existing financing)
- Multifamily – Investors with big balloon payments due and as financing tightens up will sell apartments at a discount to avoid foreclosure
- A great time to be opportunistic
- Have lots of cash available for quick sales
- Approach sellers days before a foreclosure with cash quickly
How to Reach J
- Facebook: JScottInvestor
- Website: 123Flip.com
- BiggerPockets: https://www.biggerpockets.com/users/JasonScott
- Email: j@123flip.com
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