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Don Peebles, The Peebles Corporation CEO and chairman, joins ‘Power Lunch’ to discuss his expectations for the commercial real estate market.

More people are moving out of state as Americans take advantage of remote and hybrid work to move across the country. In 2022 alone, 8.2 million people moved between states, according to the latest U.S. Census data.

The annual American Community Survey by the bureau found that overall, in 2022, state-to-state movers made up a larger share of movers, rising 19.9% compared to 18.8% the prior year. 

These numbers show a trend of rising state-to-state migration, even as overall movement has declined. Between 2021 and 2022, the overall migration rate dropped slightly, from 12.8% to 12.6%. 

In other words, while people are staying still overall, those who do move are increasingly likely to move to another state. So where are they going, where are they leaving, and why?

Where Are People Moving To? 

The number of people moving from one state to another was higher in the South and West compared to other parts of the country. In many cases, the states with the largest migration flows were people moving from one highly populated state to another. For example, many people living in California left for Texas and Arizona, while those in New York left for nearby New Jersey or sunny Florida.

According to one estimation of the Census data, Connecticut had the highest net rate of migration, at 1.58%, gaining 56,582 people between 2021 and 2022. Other areas with the highest net migration included warmer states like South Carolina, Florida, and Arizona.

What States and Areas Are People Leaving? 

Most of the places where people are moving out of state tend to be on the East Coast. New York, Maryland, and New Jersey were among the top places that lost residents in 2022, losing -1.25%, -1.08% and -1% of the total population, respectively.

Texas was among the states with the lowest outmigration rate at 11.7%, meaning those who did move were less likely to move out of state.

What These Trends Tell Us About the Real Estate Market 

Migration patterns have changed since the pandemic, according to William Frey, a senior fellow at the Brookings Institution. While fewer people are moving within their county, data suggests that longer-distance movement across states has risen.

“Longer-distance migration may continue to rise as younger workers become more willing to seek jobs across the country and as employment opportunities respond to the changing nature of work-residence patterns that began during the pandemic,” Frey wrote.

As people’s living habits change, that could also have longer-term consequences on the real estate market. With areas in less demand for housing, prices are more likely to fall.

For example, in Texas, which saw the least amount of people leave the state, the real estate market is in a correction. Prices in areas like Austin, once the poster child for the booming housing market, are dropping faster than the national average.

The opposite is true in markets with strong migration flows. In October, the median listing home price for a home in Raleigh, North Carolina, was 6.7% higher year over year. North Carolina was one of the states that saw a higher-than-average number of people move into the state from another state. 

The U.S. Census data also supports homebuyer migration trends, as many homebuyers are moving to large cities in the South. Home prices in Florida, for example, have steadily increased as more people move in from out of state, although prices have started to flatline. 

The Bottom Line 

It’s important to keep in mind that the U.S. Census data lags, so it’s possible that the numbers from this year will be different. Still, combined with looking at other data on where homeowners are moving to, it seems to hold up that migration trends are having an influence on prices in some real estate markets.

As more people move to seek better-paying jobs or flexible work schedules, those areas are likely to increase in price, while places that are declining in popularity (like Austin, Texas) are likely to see prices drop. 

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With 2023 coming to a close, it’s the best time to get ahead of your taxes. Get with your tax professional, figure out where you stand, and then make some final moves that could save you big bucks when it comes to tax time in a few months. Make sure you know exactly what your options are before you run out of time to do something about it. 

We talked to two expert real estate CPAs and asked them what they are advising clients to do, and importantly not do, in these last few weeks of the year.

Timing is Everything

Amanda Han is a real estate CPA and tax strategist and the author of The Book on Tax Strategies for the Savvy Real Estate Investor for BiggerPockets. She invests all across the U.S.

BiggerPockets: What should investors be looking to do at the end of the year to prep for taxes?

Some of the things investors should look at with respect to year-end is [thinking about] the timing of a transaction. For example, if you are close to closing on a sale that will have a lot of gain, consider deferring that income into Jan. 1 of next year. By delaying the close of that transaction for even just a few days, you can defer the taxes for a whole entire year. 

The opposite applies for expenses. If you need some expenses to offset this year’s income, consider prepaying some of those recurring items before the end of the year to accelerate the write-off into this year.

Even payments charged on a credit card by year-end can be potentially tax deductible. You may not need to have paid off the credit card [for it to count for tax year 2023].

BiggerPockets: What should investors avoid?

One thing investors should avoid is spending money just for purposes of tax deductions. In other words, if it’s not something you need, don’t pay for it just because you may get a tax benefit.

Be Proactive and Communicate With Your Tax Professional

Danielle Rutigliano is a CPA and real estate investor based in Long Island, New York. She is the owner of a boutique CPA firm that specializes in bookkeeping, tax planning, and tax preparation for real estate clients throughout the U.S. As an investor, she’s scaled her portfolio to a little over 40 units in New York, Indiana, and Tennessee in three years. 

BiggerPockets: What should investors be looking to do at the end of the year to prep for taxes?

Investors should be talking to their CPA, who specializes in real estate, before the end of the year to discuss last-minute tax-saving opportunities for 2023. 

They should discuss frequently missed deductions, such as the home office deduction, business use of cell phones, and gifts. They should also discuss if they qualify for the short-term rental loophole or real estate professional status for 2023. If the taxpayer has children, they should discuss with their CPA if it’s beneficial to pay their kids to help them in December for an additional deduction before year-end.  

Investors should keep their books organized and avoid waiting until the last minute to catch up, as this leads to missed deductions. 

Investors who purchased properties in 2023 should talk to their CPA to see if they can benefit from getting a cost segregation study done on their property, which would allow them to utilize bonus depreciation to maximize rental losses. 

Investors should consider prepaying for expenses or services in 2023 to maximize deductions if they are a cash-basis taxpayer. This could be insurance, real estate taxes, or other property-related expenses. 

Investors who have active real estate businesses, such as real estate agents, fix-and-flip investors, and wholesalers, should find out from their CPA if they would benefit from paying themselves a reasonable salary in December to reduce self-employment tax. 

BiggerPockets: What should investors avoid?

• Waiting until the last minute to finalize their 2023 bookkeeping. 
• Working with a tax preparer who does not understand the tax code for real estate clients. 
• Commingling business and personal expenses. 
• Putting rentals in S-Corps 
• Investors should try to avoid selling properties at a gain before year-end: They should try to push the closing to 2024 so they have a full year to plan to minimize the tax impact of that gain. 

BiggerPockets: What are some strategies you wished more people utilized?

• I wish more investors took advantage of real estate professional status because it is a very powerful strategy for tax savings. 
• Proper entity structuring is important and can save taxpayers significant costs. Putting properties in the wrong entity is a very costly mistake, and setting up a rental portfolio structure incorrectly can result in excessive tax preparation costs. 
• Bonus depreciation is also a very powerful tool. I hope that more investors work with their CPA to see if they can benefit from doing a cost segregation study. 

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

David:
Welcome to the BiggerPockets Real Estate podcast. Today is the second of two episodes about deals gone wrong, shows where you hear from real estate pros about mistakes they made so that you don’t have to, especially important in a challenging market like this one, where it’s very hard to make those numbers work.

Rob:
Today, we’re going to be diving right into a deal with our good friend, James Dainard, an expert investor and host of the BiggerPockets On The Market podcast. James calls this deal Humpty Dumpty because the property itself had a great fall, and it’s also a deal where he happened to lose $380,000.

David:
And I’ll say it again, being a strong real estate investor isn’t about never losing money, because that’s going to happen. It’s about being prepared so that when you do lose money, you bounce back, have strong fundamentals, know how to react, and have a plan to get yourself back in the game. Let’s get into it.

Rob:
So James, when did this deal happen and how experienced were you at the time?

James:
I would say I was very experienced. This deal happened in the last 24 months. I’ve been investing since 2005. One thing I can tell you is if you invest for a long period of time, you’re going to run into these deals more regularly than you want, but lots of practice before I got to this major loss. Mine was a $380,000 on my bank account loss. So it was not on paper. It was a real, real hit. And it was just a deal that we bought in 2019, and we finished it up in the worst time you could ever finish a deal in the last 10 years, in 2022, and it took a clip.

David:
All right, James, what kind of property was this?

James:
So it was just a single family, our bread and butter, single family fix-and-flip. It was a 2,000-square-foot house, major fixer, view property, great area, Seattle. But it’s what we do on the regular, buy a house, renovate it, and sell it for some money. It just went the wrong way this time.

Rob:
How’d you find it?

James:
We found it off-market. So this was actually a property that was listed on market for a couple different years, never sold. Sent out a mailing campaign, and the seller engaged with us, and we skirted it off-market, and we thought we got ourselves a home-run deal.

David:
All right. And how much did you pay for this house?

James:
So we paid $550,000 for it. And this is in a class A neighborhood of Seattle, and at the time, after the renovation, we felt very comfortable that we’d be able to sell it for 1.1 million, so a huge, huge spread on this deal.

Rob:
Okay. And what was the plan for this flip? BRRRR? Live-in flip?

James:
So it was a very, very heavy value add fix-and-flip property. It was a two bedroom, one bath, 1,500-square-foot house that we were going to add another 700 square feet into the basement. We were taking it all the way down to stud, rebuilding the whole house. Everything was getting done. We had a renovation cost of about $250,000 allocated for it, which is about 125 bucks a foot, and that’s pretty typical for us on that size renovation in Seattle.

David:
All right. And how far into this deal did you get before things went wrong?

James:
You know what? It took me about nine months before I realized how bad this deal was going to get, and the reason it took so long to know was in Seattle, part of these deals that can go really bad, it comes down to debt costs and it comes down to timing. Time kills all deals, whether you don’t make a decision or you do. And so we had bought this property, and in Seattle, when you’re doing a substantial renovation like that, you have to apply for permits, and these permits can take a long time before they get issued, which we had planned for, but we didn’t even start working on this property until seven months after we had purchased it.

Rob:
Wow. So was it just sitting like vacant that entire time?

James:
It was sitting vacant. We went through, we did our asbestos removal, our abatement, and our demo, and so we pulled a demo permit and did a couple other little permit items that we could pull over the counter as we were waiting for plan review from the city. So yeah, it’s a waiting game on these massive projects. You just kind of push it through, you can do what you can, and then you have to wait for that permit, which is not the fastest thing in a lot of metro markets.

Rob:
Right. And so it took about nine months to get that permit. That’s when your deal started going wrong. And that’s why the deal went wrong?

James:
Well, no. Then it started getting real wrong. So we got issued full building permits, engineered, we had it designed all by an architect, and we started getting into the framing on this house. So we had demoed it, and when we demoed it, we saw that there was some cracks and kind of sinking in the foundation that was a lot worse than we had thought. But I’ve done countless amounts of projects where we are repairing structural walls, foundations, and so for us, we brought out our foundation contractor, our structural engineer, and as we started demoing and framing the house, the house started shifting dramatically and it literally fell over like the Leaning… Or maybe another nickname for this is Leaning Tower of Leschi, because that was the neighborhood that that was in. The house, all of a sudden, went sideways on top of the hill, and we had to rush in with our foundation specialists. We jacked the house back up, re-poured a foundation wall, and got it stable.
So it was kind of like we dodged a bullet. But what had happened is we had full building permits, but we did not have a permit to jack the house up and re-pour a foundation wall. Now, we could have added that in if we knew we needed to do that in the original, but that’s a new permit at that point. So the neighbor was really concerned we were going to block the view when we jacked the house up. I met him there. I said, “Hey, just relax. It’s going back down. We have full building permits.” We went over the permits. He said, “Everything’s fine.” But then 24 hours kicked in and he freaked out again, called the city, city came out. They said, “This is outside your scope of work for your permit. You need to go back in for plan review,” which would’ve took another 9 to 10 months to reissue this permit. So then we would’ve been stuck on this house for 18 months, paying 12% interest in points to do the renovation.

Rob:
Dude, that’s wild. Genuinely, I’m not even kidding, my forehead hurts right now. Honestly, it’s coincidental, because it’s been hurting the last couple of days, but when you started telling me that, I was like, “Ow, it hurts.”

James:
Yeah. The pain just began to start at that point, Rob.

Rob:
Oh, really, there’s more?

James:
There’s always more.

Rob:
Yeah, just get us through this quick. Rip the bandaid off.

James:
So then we decided, “Hey, we got to rip the bandaid for real,” right? And we’re looking at our pro forma, because anytime you’re having a change in your plan, you need to reevaluate what you’re doing. And so at this point, we looked at what we’re doing. We knew we had to wait another nine months, we knew that the house value wasn’t going to shoot up dramatically, and that nine months of cost is going to be right around $100,000 for that house. It’s going to be about 80 grand. That was going to destroy our pro forma at that time, in addition to, we had an additional foundation cost. So we said, “Okay, our plan doesn’t look like it’s going to work well. We want to get through this deal, but we want to go to highest and best use. That’s what we’re always tracking.”
And so re-comp the property. We saw that new construction we’re selling for the high-2 millions to $3 million range, and we were on a prime street with a view, and that’s what sells, novelty sells. And so we decided, “Hey, if we got to wait nine months, then let’s just re-permit a new house instead of the house.” But we had already spent a hundred thousand dollars in jacking up this house, reframing it, siding it, windowing it, and roofing it, and so that was just dead cost. So our basis now went up by a hundred grand. We had nine months to sit there to get our first permit, and we had to wait another nine months. So this 550 purchase price just turned into about a 750 purchase price very, very quickly with debt costs and the money that we already spent on this property.
We get our permit, it gets issued, it takes us about 15 months to build this property, which is about three to four months longer than normal because we’re on a nasty slope with bad dirt, and we had to spend a substantial amount of money putting in our foundation, which we had accounted for, and we built one of the most beautiful homes that you can see, this really cool northwest modern, rooftop deck, concrete finishes. It was beautiful. But when you build a beautiful product, sometimes it doesn’t matter. And when we finally got to sell, we hit the worst possible market timing.
And the reason we missed the market timing is actually, let me take a step back. When we got the building permit issued after waiting 18 months, it was right in the rain season. You can’t put foundations in a rainy hillside that’s unstable during rain season, so we had to wait another four months before we could start the work. And because we had to wait that four months, it kicked the can down the road, and we listed right as interest rates started doubling rapidly, and our $3.1 million value got compressed by 15% very, very quickly because the market went into this quick free fall in Seattle, and we ended up selling it for 2.5 million. That’s $600,000 less than the comps were nine months prior for when we evaluated it.
Once you racked out all the purchase price, the bill costs, the debt costs, it ended up being a $380,000 hit. And not only that, what makes my skin boil on this deal even more is we had like $350,000 just sitting there for three years, not only not making money, but losing money that time, and the velocity of money and time value of money was just shot at that point. So it’s a $380,000 loss, but typically we make 20 to 30% on our money minimum for fix-and-flip on that point, so it’s really like we lost 6 to $700,000 with the time value of money, the loss of opportunity, and the nasty hit we took in getting in the red out the door.

Rob:
Okay, so let me ask a clarifying question here. Were you all in on this deal at 2.9, and so you sold that 2.6, and that’s how you lost your 380?

James:
Yes, yes. Because our debt costs, we had to hold cost this property for over 30 months. It’s basically 30 months, start to finish, right?

Rob:
You said an 8 to 10% interest rate?

James:
Yeah, it ended up being… So for the first 15 months or 14 months, we had flip debt, which was 12%, two points. When we went to issue a new building permit, we actually got our debt cost down to 6 1/2% with a new construction loan because we get really good friendly terms, but that’s a floating rate when you’re getting that kind of rate on a new construction.
So then in our pro forma, we had performed it all the way out at 6 1/2%, but by the time we were building it, we were up to 10% because the rates had jumped so dramatically. And so it was like an average cost of blend on there, but yeah, we had at least 250 to $300,000 in debt costs. We had a build cost of around, it cost us on average, usually we build a house for about 300 to 300 bucks a foot start to finish in Seattle, but when you’re on hillside, it costs a lot more, so we were about 400 bucks a foot for that build, which cost us about 1.25 on the build. So with all the debt costs, the build costs, and the cost of dirt and the waste of the renovation, we are into it for about, yeah, 2.6, 2.7 because we have about a 10% selling cost in Seattle.

Rob:
Wow. Okay. And so what did you learn, man? Because it seems like you learned a lot of things the hard way. Give us a couple of lessons from this deal.

James:
Well, you know, looking back, I don’t know if we did anything wrong. We were using stats and facts to make our decisions, and sometimes it’s just bad, bad market timing. What I would’ve definitely done wrong, and this is what we’re offering, especially on today’s market, we have a flatter market, it’s a little bit riskier, there’s not as much upside in them, it’s all about structuring your terms upfront right. So we knew going into this house that it was a nine-month permit with this owner. We should have offered to close on permits when our building permits were issued. We could have gave them large earnest money, we could have released it to them. That would’ve saved us about 100 to $110,000 in debt cost during that time, in addition to I wouldn’t have spent $100,000 on the renovation during that time as well.
And so it would’ve saved at least $100,000 right there, in addition to, if we wouldn’t have been in that deal and we got red-tagged and we had to put the foundation in, the $100,000 wouldn’t affect the performance so much. We could have stayed with our original plan and we could have tooken that plan all the way through. It would’ve probably still made us, even with the rates shooting up, $100,000 because that price point didn’t shift as much as the higher end. Around a million to a million-three in Seattle, it only came down 5 to 8% rapidly when the rate started jumping. The higher end dropped a lot quicker. And so if we would’ve stayed with our original plan, the loss of value would’ve been a lot less, we would’ve been in and out a lot quicker, and if we would’ve closed on permits, we could have done that all, but we just couldn’t absorb that debt cost.

David:
All right. So James, how has this deal helped you on future deals?

James:
Right now, what that told us was it was kind of the shift of… You know, every market’s different. Every market shift is going to teach you a different lesson. And what this was was the indicator for us that we need to switch our whole business model up for the next 24 to 36 months because we were officially in a shift of a market, right? We went from a razor-hot, high-appreciating market to an instantly declining flat market really quickly. In a flat market, it’s what it was in 2010 to 2014, you have to nail your construction plans and you have to stay inside that plan for you to make any money. There was no appreciation to save us. 2010 to 2014, it was execute the plan, make some money. If you don’t, you’re not going to make any.
And that was the sign that, hey, this is back to this market that we really got to get over, as we’re writing our offers, really think about the plan, structure your offer around the plan, not just the pro forma and what price you’re getting. And so it’s a shift in how we do business. We are not closing any properties on long permits as of right now. Now, we would’ve done it 36 months ago because the market was so red-hot and inventory was hard to find. You could factor in a little appreciation there and you knew it was going to rebound well. When you’re going in a flat, you got to execute well. And so everything that we’re closing on are long permits. Even this duplex I just bought recently, I closed with a long permit. They allowed me access beforehand. It allowed me to get cheaper financing. The cheaper debt and financing is making the deal a home run rather than a loser. So it’s really about structure for the next 12 to 24 months.

Rob:
And you’re not doing any long-term permitting stuff, you’re saying, because, yeah, the market, you just can’t really predict how crazy the market’s going to get in the next year, and so it’s just an overall risky play to have such a long timeline for some of these properties?

James:
We’re still doing it. Right now, we probably have like $6 million in land that we’re contracted on with long permit closes, but we’re contracted and not close, so the risk is, A, we only have to put up a little bit of earnest money, give it to the seller. That’s better than a down payment on a property. We get to keep our cash on hand right now as you’re kind of weathering through storms through your business and growing different departments. In addition to, we don’t have to rack that debt cost. Debt is expensive. There is no more 6, 7% hard money cost or lending costs. It’s 9 to 10%. So we can avoid that interest rate spread. And so we’re still doing them, but we’re not closing until the permits are issued or we can start our work today. We don’t want to start our work in nine months.

David:
That’s good stuff. So James, to recap yours, it sounds like time was the killer. The period that you don’t have any control over, when you’re waiting on the city to come back or you’re waiting on the weather to change, it was always something outside of your control that forced you to wait, where you just had to keep making those debt payments. And so what you learned about your deals was do as much as possible before the deal closes or structure this in a way that you limit your risk and your exposure to time that’s going to cost you money. James, anything you want to add?

James:
Yeah. Like a $380,000 loss, that can be detrimental. That’s a huge number on anybody. But the reason we could absorb that loss is because we had such a red-hot two years of flipping, where if we look at our three-year average of flipping properties, we absolutely crushed it. This was just how it ended, right? You can’t time the market perfectly every time. But the reason we could take that $380,000 loss is because we take 10% of our profits and we stick them over in a bucket because we know that there’s something coming at some point. Because even if you’re a really good investor, I always say you’re going to lose 1 out of 10. It’s just going to go wrong. And so you want to have that cash aside. We had just done really well on flipping. We had cash over here. We could absorb it.
And then we also didn’t let the fear of the loss trap us. Sometimes, like we could have refinanced this property and took a nasty loss every month trying to do a midterm rental, short-term rental, try to break even, but we wanted to get our cash back. Not only did we take the loss, we did get $200,000 of our own cash back to us, or 2 to 300,000. We put that money to work since taking that loss, and we have been making 30% returns on that money. We’ve turned that deal now twice, so we’ve already made back half of our loss in the last nine months by reinvesting it.
So don’t get locked up, don’t get afraid. You got to figure out how to rebound back out of it. If we would’ve just been like, “Hey, this isn’t for us right now,” it would’ve ended with a loss. Right now, we’ve already made traction on it. I bet you by the end of the 2024 or by the first quarter of 2024, I will have that loss redeemed. And so you’re going to take these as investors, but you’ve got to reposition, you got to reinvest, and you got to regrow. Things go up and down. Make sure you get it back up again.

David:
All right.
Thank you to all of the bigger losers on the panel today. It takes some guts to get up here and share your Ls, but we all benefit when it happens, so thank you a lot. If you’d like to get in touch with any of today’s panelists, including Rob or I, head over to the show notes and you can get our contact information as well as our social media. You can also find Mindy on the BiggerPockets Money show or James On The Markets BiggerPockets podcast, so check those out as well.
Any last words before we let you guys get out of here?

James:
Always be buying. Just buy your way out of it if you get yourself in trouble.

David:
Thanks a lot, everybody. We’ll see you on the next show.

Dave:
Hey everyone, welcome to On The Market. I’m your host, Dave Meyer, and today we’re going to be talking about, God, the thing that we just keep talking about for the last three years straight. Is there going to be recession in 2024? Well, we’re just going to take the question out of it and pretend that there is going to be, and we’re going to give you some advice on how to recession proof your business in the case that there is a recession in 2024.
To help me with this, I have Henry Washington, Kathy Fettke and James Dainard joining me. Thank you three for joining us. I appreciate your time.

Kathy:
Thank you.

James:
I’m ready to talk about 2024. I’m done with 2023.

Dave:
You look tired, man. You look like 23 has worked a number on you.

James:
Yeah, the only good 23 is Michael Jordan. That’s about it.

Dave:
All right. Time to move on to 24.

Henry:
Kobe year.

Dave:
Yeah. Wait, was Kobe 24 first or was he eight first?

Henry:
He was eight first. Whoa. 2008 was the recession, so maybe Kobe 24 is the next recession. Boom!

Dave:
Oh, no. Well, I was just about to say that a bunch of economists have been saying that the chance of a recession in 2024 was less than 50%, but you know how there’s always those octopi that predict the Olympics better? So I think Henry’s random prediction about Kobe’s numbers is probably right. So anyway, the real predictions are something about 20% to 25% of a recession next year. That’s at least according to Treasury Secretary, Lawrence H. Summers, or former Treasury Secretary, or Yardeni Research, which is a real estate research company. They produce some really interesting data. They’re saying that there’s a 30% chance of a global recession, and so these people at least are not saying it’s the most probable outcome, but that is definitely more comfortable than most of us want to be.
And just for everyone to know, we talk about this a lot, but a recession doesn’t have any official meaning. I know a lot of people use the two consecutive quarters of GDP loss as the meaning, but it really is up to a bunch of academics and bureaucrats to decide whether or not a recession happens or not. So we don’t really know what’s going to happen and if it’s going to happen, but I think the important thing is that there’s risk in the market. There is a chance that there’s going to be a downturn in economic activity, and therefore we are going to discuss best practices for your business so that you can hopefully just be conservative and prepare in case something bad does happen. And if everything goes great, then you’re just in a better position anyway. So everyone has one piece of advice. James, Henry, Kathy, and I are each going to offer a piece of advice on how to recession proof your business. And Kathy, you have drawn the short straw and have to go first. So what do you got?

Kathy:
Well, I just first want to say that the economy is really pumping right now. It’s going to be a big GDP this quarter, so I’m not too worried about it happening right away, but there are some economists who think maybe mid next year, maybe in the fall. Either way, I look at my investments as if there’s going to be one. Why not? Be prepared for that, be prepared for if there’s not going to be one. And the way that I do that is either way, if there’s going to be a recession or not, I like to make sure I have plenty of cash reserves in place. Remember, I’m a buy and hold investor, which means that you buy it and then you have to hold it. There’s two pieces to the puzzle here. Right? And the way that people lose money in buy and hold, there’s several ways of course, but the big way, and certainly in 2008 is they couldn’t hold it. When those loans came due, they weren’t able to afford that payment.
That’s really not what people are facing today in buy and hold for the most part, at least in one to four, they’re mostly fixed rate loans. So just making sure you have plenty of cash reserves in case your tenant loses their job. Now, that can happen at any time because we’ve been living through a recession in certain industries. If you’re in real estate, if you’re a real estate agent or mortgage broker, you’ve been in a recession and there’s lots of them out there and they’re not making the money they used to make, generally.
So there’s always a risk that your tenant could lose their job, that they could get sick, that something could happen. And having that six months reserves, and what I mean by that is six months rent overhead. You just want to have that in a bank somewhere, so that that gives you plenty of time if your tenant loses their job and you need to cover the expenses. So that’s what I do anyway, and that makes me feel like I can walk into any economy and feel safe.

Dave:
Kathy, when you’re creating a cash reserve, do you basically just hold back cashflow until you have six months? Or what about people who might not have six months of cash reserves currently? Do you recommend they inject capital into an operating account, or how do they do that tactically?

Kathy:
Personally, what I advise people is have it at the outset. You know you’ve got it. Now, if you are just starting out and you don’t have that capital, then you would just keep all the cashflow, everything that comes in, it just goes into an account and you don’t touch it. And that’s your reserve account because remember, it’s buy an old real estate, people live in your property. If there’re going to be repairs, you need that reserve anyway. So just have it, six months reserves for rents and overhead, general overhead, but also a cushion for repairs. You should know your property well enough to know how old certain items are, have they been replaced? When will they need to be replaced? What’s the CapEx that you’re looking at? And have that set aside too.
Maybe you could put them in a two or three month CD or something, make a little money on it while it’s sitting there. It doesn’t have to sit in a non-interest bearing account, but just it needs to be somewhat accessible, especially if you’re in California or in a state where it’s harder to evict. Where we invest, if somebody loses their job and we have to evict, then it can be just a matter of weeks for that to happen. But in certain non-landlord friendly places like California, it could be six months, it could be a year. So anyway, yeah, if you’re in California, then maybe you want 12 months reserves.

Dave:
That’s a great point. I think it really does depend on the individual property and your individual circumstances. Six months is a rule of thumb, but if you know that your hot water heater’s rusting out and about to pop at any point, you might want that well, or if your tenants have a history of making late payments, you might want to consider that as well.

James:
Yeah, and it depends on what kind of assets that you’re in. I love what Kathy said because that’s that old mindset of that historical kind of metrics of keeping six months aside, and I love that. I think after 2008, I really learned that lesson and really started keeping. I call it my oh, curse word money. It’s got to be sitting over there. The thing is, with how things have moved over the last couple of years and how people have gotten into growth, it’s not just the traditional six months aside. You really got to get into the forecasting of what your businesses are and what they’re doing, and then make adjustments for what’s essential in today’s market. If you’re only looking at performers and P&Ls, it doesn’t tell you where your capital’s getting eroded.
And so you’ve got to spend a lot of time forecasting that cashflow out, putting it aside, making sure you have your reserves and then making your adjustments. Because as we go through transitions, you have to adjust those models.

Henry:
Yeah, I agree. James. One of the things we like to do is to have a set amount per number of doors. So meaning if you’ve got five doors, then maybe we’d like to have somewhere between 10 and 30 grand in an account. The most expensive thing typically from a maintenance perspective or CapEx perspective that we’d have to put on a house is probably a new roof. And so just making sure that if something happens, we’ve got to put a new roof on a property that the money’s there to be able to do that. And then as the portfolio grows, then that amount of savings needs to increase with it. And then as we spend that money, we’ve got to reduce cashflow spending and make sure that cashflow goes back into that account to make sure we just keep those amounts to make it just a little easier to manage. But first and foremost, Dave, if you’ve got a hot water heater that’s about to pop, just go ahead and replace that.

Dave:
Yeah, just replace it.

Henry:
Speaking from experience because I’m buying a house right now that the seller didn’t do that. The whole house flooded and now he’s stuck and then they found asbestos and now his house is down to the studs. So just go ahead and replace [inaudible 00:08:52].

Kathy:
Just get it done.

Dave:
Just go ahead and do it. That’s not cash reserve, that’s just repairs.

Kathy:
I like to buy stuff that is either new as you guys know or is repaired on the outset because then you can gauge your capital expense a little bit better. You know what you’re in for if everything’s fairly new.

Dave:
Henry, I was going to ask you, if you own a bunch of properties, do you have cash reserve on every property level or do you ever just do it as a portfolio level, sort of like the insurance model, the likelihood that you’re going to have an event in every property is low, so you can leave less total reserve as long as you’re thinking about the total portfolio?

Henry:
Yeah, we do it in buckets. So every five properties, we want to have X amount of X money in reserves. So if I have 10 properties and I know that’s X amount of dollars. If I have 11, we still keep it at that number, but once we get to 15, then we increase it again.

Dave:
Is that how you do it too, James?

James:
Yeah. Well, it depends on the business. Typically, with our portfolio, cashflow is pretty heavy right now. And so we don’t take a dollar from our cashflow throughout the year, and then at the end we then reallocate it out. So our portfolio really does pay for itself 3X over, but we had to get there. And so yes, right now we would put money aside and then it’s to cover, if we weren’t at our cash flows, we would have at minimum six months of payments. Plus, we like to have a maintenance account that’s typically going to be about 1% of our net cash flows.

Dave:
Well, Kathy, thank you. Very, very good advice just as reminders to build a cash reserve and really safeguard that cashflow. Henry, what’s your advice for recession proofing your business next year?

Henry:
So this is what helps people start to build that cash reserve, but I think we need to pay attention to what’s it costing us to operate our business? And this one is the hidden killer because these costs sometimes feel like they’re coming out of nowhere because you’re getting so many little onesie, twosie things that happen in your business that in the moment don’t seem like it’s a big deal. And then you look back at the end of the year or at the end of the month when you’re doing your bookkeeping and you’re like, “Holy crap, how much did I spend on X, Y, Z maintenance?” For me right now, I was getting eaten up by all of these little pieces of software that we need in different parts of our business.

Dave:
It’s like subscriptions.

Henry:
Yeah, subscriptions. But it’s like I’ve got a tool for this social media thing and I got a tool for this part of my business where we’re looking at offers and there’s all these little tools and subscriptions and you forget sometimes that you sign up for them and it’s just like people with their cable bills and all that. You’re looking at them, but you need to do that in your business too because as we’ve been growing, we find these tools, we use these tools and some of them are great, but now we’ve been spending a lot… I’ve been spending a lot of time looking at them, scaling them back and then consolidating them into one singular tool that does everything. And I’ve probably saved myself five grand a month just in the cost of some of these tools that we’re using elsewhere in our business.
So it’s about tracking your expenses and being more diligent about tracking expenses and understanding where you’re spending the money and do you need to continue spending that money? Can you consolidate some of these services? Can you hire someone to eliminate some of these things? A lot of the times it’s just… I guess the goal is you want to take a look at what are your expenses in your business? What are you truly spending money on every month? And making sure A, that you truly need to be spending that money or B, can you make a decision to bring somebody on or bring on a tool that eliminates you having to spend that money? Sometimes you can find a lot of your savings to help you save up for that cash reserve Kathy was talking about right now in what you’re currently spending in your business.

Kathy:
Oh my gosh, I agree so much. When times are good and when times are great like they have been the past 10 years, people are going hard, they’re going fast, they’re making a lot of money, they’re not really paying attention to expenses. A lot of times they’re just going and at times like this, you get to slow down and look at operations and really cut back because I think a lot of excess happens during the good years and it’s fun.
Anyway, so I know that with our team, it’s like everybody goes through, looks at the extra expenses that we maybe took on but don’t actually need. And sometimes, unfortunately, that can be personnel as well. If you had to hire extra people during the good times, they maybe have to go during the slower times, but this is the time to really just slow down and look at overall expenses and what’s truly needed and what could be cut.

James:
Yeah, it was funny. I was just talking to my wife the other day. I’m like, “Hey, we’re going to do a credit card, debit card purge. We’re going to cancel every debit card and credit card and then we’ll see what bills come in and go, ‘Hey, you need to renew or update your payment.’ If we don’t want it, we’re just going to cancel it right then because once it pings for the auto-renewal…” But yeah, these little costs can really erode your business and something else to think about that we’ve been really looking at is operational costs. For us as investors, I look at money as inventory for us. It’s inventory that we use to grow our business and our portfolio and buy new things and we have money sitting there, we want to deploy it and we want to get into the next deal.
But then sometimes as deal junkies and investors, you’re not thinking about, “Okay, well now I got to really secure this property. I got the dead time. I got insurance costs. I got these little creeping bills that don’t seem like much when you’re just racking deals,” but if you’ve got to pay four more insurance premiums, why it’s sitting and being turned, or you got to pay four more superintendents to manage your properties, why it’s being turned, those are the costs that are really eroding.
And so you have to work that all into that and go, “How do I reduce that and change that up in times when cash flows are lower?” Like for us, we got rid of some of our project managers because that’s a dead salary of a hundred grand a year. And it was not a dead salary, it’s to operate, but we have to pay for that. And we started structuring deals differently and bringing in partners and slicing in the deal to erode our monthly payment on that, and we’re still getting the projects done.
So it’s about looking at the business and go, “How do I reduce my costs?” And whether it’s through partnerships, cutting the cost, cutting waste, but we all have to do that right now. Cut the cost one way, shape or form and restructure it.

Dave:
Do you have Henry, any advice on how to go about doing this? Should you perhaps buy some new software subscription that will help you figure out what software subscriptions you don’t need?

Henry:
Yes, absolutely. In order to figure out how not to pay for stuff, you should go pay for something.

Dave:
You know there is actually a tool that you pay for that stops your subscription? It’s a subscription to stop your subscription.

Henry:
Yes.

Kathy:
It works. You sign up for things you forgot.

Dave:
That’s a good idea actually.

Henry:
First of all, within your business, you should be doing bookkeeping. And if you’re doing bookkeeping, you should already have an accounting of what you’re spending every month and on what those things are for. So really, it’s just diving into your monthly bookkeeping and seeing where your money is going and then get to that kind of micro level and then make decisions on, “Do I need to be spending this money on this thing right now or is this something that I can do either on my own?” Maybe it’s that you take a set of services that you’re paying for and then you hire a VA to take care of doing those tasks. And sometimes that VA cost will be a lot cheaper and more efficient than you paying for multiple different pieces of software that take care of those things.
So there’s tons of ways you can look at it, but I’d start with your bookkeeping. If you don’t have a bookkeeper, then A, you probably either need to go hire one or B, get one of these free tools that will categorize your expenses for you like I think Mint, but I think they just might’ve gone out of business, but there’s a few free tools that you can use.

Dave:
Yeah, yeah, there totally are. I think a lot of banks actually do it. I know Chase does it, and even if you do your bookkeeping yourself, like QuickBooks Online for example, they have some auto categorization features that you can use that are actually really helpful. It’s not perfect. It’s not the same as having a bookkeeper, but even just for most rental properties, I don’t know about you guys, but for an individual rental properties, there aren’t that many expenses. It doesn’t take that long to go through, especially the recurring ones, unless you’re doing a rehab or anything. The recurring ones, go see what’s on there. It’s not that hard to just even eyeball it.

Kathy:
You got to know your numbers, you got to know your numbers, especially at times like this and be looking at expenses every week at least, at least. What am I spending money on? Where is it coming from? Where is it going? And if you aren’t completely dialed in, then you’re either leaving money on the table, you’re just spending too much. It’s like that is the job of a business owner is to know your numbers inside and out.

Dave:
Well said. All right, James, for our third piece of advice for recession proofing your business, as a reminder, Kathy said to build cash reserve, safeguard your cashflow. Henry said to reduce and evaluate operating costs. James, what’s your advice?

James:
It’s all about having access to capital. As we’ve gone into a transitionary market, what’s happened is a lot of investors, including ourselves, you perform at a deal, the debt has changed and you’ve had to service that debt cost. And some of these projects that can take six, 12 months, 18 months, when your rate jumps from 9% to 11% or even 8% to 11%, it erodes your capital back. And so what we’ve had to do is we’ve had to really get comfortable with securing other types of backup slush fund credit, and that’s by working with banks and getting access to capital and working with banks to help you with these cashflow issues. Every deal that we’re looking at right now, we are talking to our lenders and going, “Hey, how do we get a 12 to 18 month interest reserve put in this deal?” And an interest reserve is where they finance in all of your carry costs so you can really function off the now and not worry about the debt cost creeping up on you on a 12 to 18 month period.
And so what we found is we wanted to build better relationships with banks so we can structure deals a little bit better. By us moving over deposits to a bank, they’re paying us a 4.5% return, which is great. It’s not what we make us as investors, but we’re moving our money over, which then by moving the money over, we’re making a 4.5% return. We’re borrowing the money then on a deal at 9%, 10%, but then they’ll factor in all of our cashflow needs, which is going to be those interest reserves that carry costs and stuff that you need to push through a flatter market.
And so by really working with banks and getting these lines together, it gives you these levers that you need to push you through a hump. Every time an investor buys a deal, it takes up capital. You got to put your down payment down, you got to service the debt, you got to service the people to facilitate the transaction, and that’s where you can get in trouble. And as investors, the thing with us, as soon as money comes back in our bank account, what do we want to do? We want to go do the next deal.
And so you get these wins, you race into the next deal, but then you’re not forecasting that hard six to 12 month cashflow. So by having your banks and your slush sum reserves, that’s what’s really going to push you through the humps. And that’s about getting personal line of credits. Having access to credit card debt, even though I don’t really believe in it, it’s way too expensive. I don’t think you should be doing deals if you’re going on credit cards right now, personally, but that’s just for me.
And then also moving your money to smaller portfolio banks that will look at you as far as a business, not just a client in the bank. When you meet with these portfolio banks, they look at your forecasting in your businesses and they’re going to structure your debt around that. They look at our performance, they look at our assets, they look how we’re going to stabilize things. If I go to one of the big banks, all it is, “How many deposits do you have? What’s your monthly expenses? We’re going to give you that leverage on that.” So by moving around to small business banks, it’s really helped give us access to debt, but they also understand the business for better terms.

Henry:
Yeah, I think this is fantastic because this is something I wholeheartedly agree with. I think what you want is access to capital in the event that you need it, right? Yes, recessions are difficult times, but recessions also create opportunities for investors and opportunities to buy, and access to money is just harder right now. And so you don’t want to miss out on an amazing opportunity because you haven’t prepared yourself on the front side to have access to capital to be able to jump on it. And so we’re not saying go rack up a bunch of debt for no reason. We’re saying prepare yourself, have access to capital and then use it strategically. And so being able to do something like… Everybody has a bank account. And so if you’ve got a bank account, even if it’s not at a small local bank, you can probably call your bank and see if they’ll just give you access to an unsecured line of credit. That’s kind of a cheat code nobody knows about.
So an unsecured line of credit is essentially a line of credit. So the bank will extend you a line of credit just based on they like you. It’s not secured by any asset. So secured lines of credit are things we’re all used to, like a home equity line of credit, that’s a line of credit that’s secured by a piece of property. You can secure loans with all types of collateral depending on how cool that bank wants to be with what they want to consider collateral. But mostly, you’re going to get a line of credit secured by a piece of property or you’re going to get a line of credit secured by your credit worthiness. And that’s all an unsecured line of credit is. It’s them saying, “We like you, we like your credit score. Here’s some money that we’ll allow you to use.”

Dave:
And if you’re unfamiliar with a line of credit in general, it’s basically just money that you can use but you don’t have to use. It’s similar to a credit card basically. It’s available to you. The bank issues you a credit limit and you can take out part of it, all of it. So if you had $100,000 as your line of credit, you could take out $10,000 and just pay on the $10,000. You’re not paying on the full amount of your credit limit.

Henry:
They already bank with you that you already got money in there in deposits. They have a relationship with you. You can call down there and say, “What would you give me an unsecured line of credit for?” And they may just turn around and give you access to some money that you can use for a down payment for the next good deal that comes your way. Now, you don’t want to over-leverage yourself and spend that on a bad deal, but just having that as a backup plan to be able to know, “Hey, if a good deal comes my way, I just got 20 grand on an unsecured line of credit with this bank.” And you don’t have to use the money. And if you don’t use the money, then you’re not paying any interest on it. So there’s lots of good little things you can do like that to be better prepared, better capitalized for opportunities coming your way through a recession.

Kathy:
Yeah, it’s a conundrum, right? At times like this, as the Federal Reserve is trying to pull money out of the system, they flooded the system with money over COVID. And the many years prior to that, it was easy to get access to money. And the process over the last 18 months is to pull that money back out. And during times like that, it’s harder to get money, but at the same time, that’s when the deals are there. So you’ve got to get good at finding money in any kind of market, but definitely in the coming market because it is harder to get, which means there’ll be less competition, which means there’ll be more deals and you’re the one who gets those deals if you can find the money. And there’s so many ways to do it. It doesn’t have to be just through a bank.

Dave:
Yeah, this makes so much sense right now. It always makes sense, but we’re in this weird scenario where prices might fall a little bit. We are seeing some downward pressure, but it’s also still very competitive to buy, which is just this confounding dynamic that doesn’t actually make any sense, but it’s reality. And so like Henry said, and like everyone said, you have to just be ready to jump on these opportunities because there are going to be ones, but they’re going to go really quickly. It’s not going to be the kind of recession, at least in my mind, where deals are sitting on the market for 180 days and you’re going to have your time. Things will come up and opportunities will arise, but people are going to be waiting and you should be one of them.

James:
And I think that’s why it’s so important to have your cashflow forecasted out in a six to 12 month period because you can get blinded by the good deal and just go get it, but then all of a sudden you’re in quicksand because you have to keep up with that debt. And so really forecast that cashflow out and know even if you have a good deal, sometimes the best deal you ever do is passing on that deal. And so forecast and make sure that you can keep up with it and have your slush fund because that’s where the quicksand starts.

Dave:
All right. So far, we have three excellent pieces of advice, which is to build your cash reserve, reduce and evaluate operating costs and secure financing before you need it. The last one I’ll bring, which I can feel you guys rolling your eyes already, which is to diversify your investments. I know none of the three of you diversify outside of real estates, but I do. I like to keep at least some of my net worth in stocks and bonds and bonds and money market accounts are doing pretty well right now. You can earn about 5%, 5.5%. And I think the real thing that I focus on in these types of markets is actually just trying to balance liquidity. It’s not even necessarily trying to get into multiple different types of assets, but it’s making sure that if I need a big amount of money that I can get it.
And real estate has many benefits. Liquidity is not necessarily one of them. If you’re unfamiliar with this term, liquidity is basically how quickly you can turn an asset, which is anything that has value, into cash, and it’s relative what you mean. I generally think it’s can you turn something to cash into a week, in two weeks, in three weeks? And so there’s this big spectrum. Cash is obviously the most valuable because you can use it and it’s the most liquid. On the far end of the spectrum, it’s like fine wines and art. And real estate is on the further end of that spectrum where it’s relatively illiquid, which is fine because most of us buy and hold for long periods of time. But during periods where there is a lot of volatility, particularly if your job or your income is volatile, I think it’s really important to balance your portfolio and your investments to make sure that you always have access to… You could sell something, you could sell your stocks, you can sell your bonds in case you needed to cover something in your real estate portfolio.
So generally, that’s just how I think about things. It’s just basically trying to make sure that I always have options to liquidate some part of my investment portfolio if an emergency occurs. Now, I choose to do that across different asset classes. I know you all don’t, but you can also diversify within real estate as well. So in addition to owning rental properties, for example, which typically have a very long hold period, you could also flip houses or you can wholesale or you can hotel because that you just have your money into those investments for less time. And so you have more frequent opportunities to reallocate your capital in these changing market conditions. What happens three or six months from now might be very different from what’s happening today. And so if you do a flip and you get your money out in six months, you have that chance to take advantage of whatever’s doing best then, whereas some of the longer term holds aren’t necessarily as good for that.
So that’s generally my advice is to try and make sure that you have liquidity across your entire portfolio. Now Kathy, I know you have almost all your money in real estate and you’re mostly a buy and hold investor. So how do you think about this? Do you have any more liquid assets in your portfolio?

Kathy:
Yeah, we invest in gold. Rich does play a little bit in the stock market mostly for fun and to learn it and cash. So yes, I’ll call that diversification.

Dave:
So mostly cash. Cash is the most liquid thing there is. It doesn’t take any time to turn cash to cash.

Kathy:
Yeah.

Dave:
Okay. So I like it. Okay. So Henry, I know you mostly invest in real estate and that’s totally fine. So within real estate, how do you think about how you allocate your money? Do you think that, “Oh, I’m going to do some long-term investments, some short-term investments,” or how do you manage your equity and your capital in a way to mitigate risk?

Henry:
Yeah, no, that’s a great question. So for me, obviously my main strategy is buy and hold. And so that is where obviously the bulk of the net worth comes in. But I like doing flips as a way to generate capital. And I will also look at my portfolio as a whole, as my rental portfolio as a whole and determine which of these rental properties can I monetize sooner than later when it’s financially beneficial to do so? Because markets are cyclical. So I may have properties that I bought as a buy and hold, but maybe that property is way more capital intensive because of the… Maybe it’s way more maintenance intensive than I was expecting or that I underwrote that deal for. And if the market is up, I can probably get paid a hefty premium for selling that property, eliminating the maintenance expense, which was eating away at the cashflow, and then make so much profit that it would’ve taken me a decade or two decades to generate that kind of cash from just the cashflow month over month, especially because the maintenance was eating away at it.
So I try to look at, A, evaluate my portfolio as a whole and see how I can monetize things differently in order to increase cash in my business. But yeah, I’m always looking at how can I generate capital on a short-term and then how can I offset those gains when you’re flipping through holding the real estate.

Dave:
Thank you. Yeah, that makes a ton of sense. Just trying to mix the different types of investments and the different kinds of wins. James, you talked a little bit about forecasting your cash flow. Is this something that you do as well, doing as many flips? How do you make sure that you’re scheduling your deals so that you get regular injections of capital back and you’re not having too much of your capital invested into long-term things?

James:
Yeah, and I love this topic. It’s funny, a lot of times people will talk to me and they say, “Hey, you’re not diversified, you’re only in real estate.” But I look at my portfolio as being a pie chart with diversification that we’re moving around at all given times. In today’s market, we know access to capital is essential. And so I have really allocated probably 50% of my cash into private lending where they’re on three to six nine month notes that pay me a much higher yield than when I have to pay for my bank financing all my other deals for. So I know that the cashflow for my private money lending is going to pay for any debt that I’m securing on any kind of short-term investment engine or rental property that’s on a negative to offset that. So I look at every market that I expand the pie charts.
Two years ago when rates were really low, I would say I had 50% of my capital in short-term high yield investments, which was fix and flip and development. And so as the market gets riskier and things get flatter, we just move things around. Like right now, I don’t want to trap any money in a deal that’s going to pay me an average return, even if it’s a great rental property. If I can structure it right with leverage to where I don’t have to leave much in, then I’ll look at that deal. But I don’t want to go leave 20% in to get a growth factor over a five to 10 year period because what we’ve referenced on the show is there is some amazing deals that pop up right now.
And so I like to have my cash in a high yield investment that I have access to liquidity for. I can make a move, buy that deal if I need to, but I’m going to be heavier on that passive income streams with access to capital. And I think that’s just important to move things around as you grow, but it also depends on where you’re at in your investing career. When I was newer in 2008, 2009 and 2010, we did not do that. It was about pushing through and growing. And so depending on where you want to be, you want to look at where’s the portfolio, what are my goals? And then set your pie chart.
It’s no different than those financial planners. I have a pie chart for my liquidity and my investments, where’s it going to allocate? And based on my goals, it’s going to tell me what to do in my pie chart. So I’m not in as high growth factors as I used to be, so I’m going to be a little bit lower returns with more cash accessible. If I’m making 12% of my money with private money, that’s making about one third of what I would make flipping a house on a return basis, but it gives me access to capital, it pays for other debts and it allows things to move things around. So we’re constantly, every year I’m reshaping my pie chart, but this year I moved a lot into private. I wanted high yield cash accessible investments.

Dave:
That makes a lot of sense. And yeah, I just think this whole concept of what James is talking about, like reallocating capital within your portfolio is something not talked about enough in real estate. I think there’s some mantras where it’s like just buy and hold on forever, but even if you’re a buy and hold investor, you should still be thinking about selling properties and buying new buy and hold properties just and optimizing, as you said James, your pie chart based on current market conditions and what else you can get out there. So in addition to diversification, just thinking about reallocating your capital to maybe safer investments is another… Maybe that’s the bonus tip for recession proofing your business right now is consider reallocating some capital into something safer.
All right, well, thank you guys so much. This was great help. I also want to recommend that if anyone wants additional advice on top of what James, Henry, Kathy, and I said today, BiggerPockets has a great book. It is called Recession-Proof Real Estate Investing. It’s written by J. Scott, my co-author of one of the books I wrote, and just a great real estate investor in general. It is full of really helpful practical tips on how to navigate any type of recession or economic downturn as a real estate investor. It’s really actually quite easy to read. I’ve read it like three, four different times and you can get through it in like two or three hours. Highly recommend.
All right, well, that’s it. Well, Kathy, James, Henry, thank you for joining us and thank you all for listening. We’ll see you for the next episode of On The Market. On The Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

You may not be familiar with modern portfolio theory, but you probably know its core tenet: Investors should diversify among uncorrelated assets to maximize returns while minimizing risk. 

Soren Godbersen at EquityMultiple makes a strong case that if you subscribe to modern portfolio theory, private equity real estate belongs in your portfolio. In fact, he points to data that shows it actually boosts your risk-adjusted returns. 

I couldn’t agree more—which is why I invest in private real estate through many channels and along many timelines. 

These investments serve different purposes in my portfolio. Some generate instant and ongoing income, others offer liquidity, and still others offer high long-term growth. The equity investments also provide me with tax deductions and depreciation. 

Short-Term Real Estate Investments

Contrary to popular belief, you do have options for short-term real estate investments beyond public REITs. These investment choices don’t come with the same volatility or correlation to stock markets. 

The following real estate investments typically let you access your money within a year. Use them for immediate income, liquidity (in some cases), and diversification.

Real estate notes

Some real estate-related notes repay in a year or sooner. EquityMultiple offers some, as do 7e Investments, Norada Capital, and others. They may or may not allow non-accredited investors or be backed by real estate deeds or liens, but you have plenty of options. 

Earlier this year, in fact, our Co-Investing Club invested in a nine-month note with Norada at 15% interest. So far, it’s paid us monthly interest like clockwork (not that I’m endorsing any specific investment; just sharing our experience). 

But you don’t have to go through a company. If you know any real estate investors personally, you can always offer to lend them private notes as well. 

Groundfloor notes

Groundfloor deserves its own subsection, given how accessible it is. It allows non-accredited investors to participate, and many of their notes allow a relatively low minimum of $1,000. Note terms range from one month to two years. 

I’ve personally invested in Groundfloor notes, and they’ve always repaid my interest and principal on time. 

Concreit fund

Concreit follows a similar model, letting you invest in a pooled fund of secured property notes. 

The difference? You can invest as little as $1, and you can withdraw your money at any time. 

Those advantages come with an equal and opposite downside: Concreit pays lower interest than the other options outlined here, currently 6.5%. If you withdraw funds in under a year, they also ding your earned interest by 20% but don’t penalize your principal. 

I like using Concreit as a high-yield holding account for funds slated for longer-term real estate investments. For example, if I know I want to invest $5,000 in a real estate syndication through our investment club but don’t know when I’ll need it, I might stash it in Concreit and earn interest on it in the meantime. 

Concreit also adds another layer to my emergency fund. I can’t access it as quickly as a savings account, but it still offers fast access in a pinch. 

Ark7 property shares

While smaller than its competitors, Ark7 offers something those bigger competitors don’t: a secondary market for selling fractional property shares at any time. 

Well, almost any time. They do impose a one-year hold period. But that still qualifies as a short-term investment. You can buy shares in a single-family rental property without the long-term commitment, enjoy the rental cash flow, and sell any time after the first year. 

Medium-Term Real Estate Investments

Investors have fewer options for medium-term investments between one and three years, but they let you plan for the not-too-distant future without locking your money up indefinitely. 

All the short-term investments mentioned here can, of course, be held longer than a year. That goes for Ark7 property shares and Concreit fund shares, and of course, some real estate notes offer terms in the one-to-three-year range. 

Consider these options if you don’t want to lock up your money into the mists of time but don’t mind committing to a couple of years. With these medium-term investments, you can start taking advantage of equity tax benefits, infinite returns, faster velocity of money, and, of course, cash flow. 

Shorter real estate syndications

Most real estate syndications make it very clear that you should expect to leave your money locked up for five years or longer. That’s most—but not all. 

Some sponsors plan on faster turnaround times, perhaps because their business plan doesn’t require as much value add, or they have teams that can move fast. In some cases, they might be stepping into a deal midway through unit renovations and simply need to complete an existing business plan.

We invested in such a deal not long ago in our Co-Investing Club. The seller was in their 90s and had been renovating units and successfully turning them for high markups. But their health gave way before they could finish executing the plan. 

The new sponsor stepped in to finish the job and plans to sell the property within 18 months. In the meantime, the property cash flows well and will pay distributions. 

Another sponsor our club just invested with told me candidly: “We underwrote this deal conservatively, telling everyone we plan to refinance and return capital in three years. But we actually expect that to happen between 18 and 24 months from now. We know we can finish the value-add before then because we’ve already done it at two similar properties down the street. We just haven’t marketed the deal that way because no one would believe us.”

Groundfloor LROs

Groundfloor made its name letting retail investors put money toward individual hard money loans. They call these LROs, short for limited recourse obligations.

These loans sit in first lien position, and if the borrower defaults, Groundfloor forecloses to recover your money. While many of these repay in four to 12 months, you don’t control when you get your money back—it’s based on when the borrower repays the debt. So you have to accept that some of these may not repay you for a year or two. 

Over the course of Groundfloor’s history, these have performed with remarkable consistency, averaging 9.5% to 10% per year. I invest $10 to $30 apiece in these, spreading my money among thousands of loans. Some repay on time. Some repay in full but late, and others default and repay later with some loss of principal. Averaged together, I still come out in that 9% to 10% range of returns. 

I’ve now invested in so many that every week, some of these repay for consistent passive income. I consider these an income and diversification play. 

Long-Term Real Estate Investments

Real estate is a notoriously illiquid investment, which makes most real estate investments long-term. 

I used to buy rental properties directly, and they certainly qualify as long-term investments. It costs thousands of dollars to buy and tens of thousands to sell even a modest property, and it takes years of appreciation to break even. 

Today, I only invest passively in real estate. I don’t have the free time or patience to put up with landlord headaches. 

Real estate syndications

Instead of rental properties, I primarily invest in real estate syndications. I buy a fractional interest in a large property rather than the entire ownership of a small one. 

That leaves someone else to hassle with lenders, contractors, tenants, property managers, city inspectors, and the like. I just sit back and collect the cash flow, appreciation, and tax benefits. 

In our Co-Investing Club, we typically review deals targeting 15% to 30% annual returns. Some are more income-oriented, paying high distributions almost immediately. Others are more growth-oriented, with big payouts slated at the sale or refinance. 

By investing as a group, we can each invest small amounts, and sometimes we can negotiate higher return splits than solo investors get. I might only invest $5,000 personally, but I get the preferential returns of a $500,000 minimum investment. 

Today, it’s the bread and butter of how I invest in real estate, which is my core strategy for reaching financial independence within the next few years. 

Fundrise

The last year has not been kind to Fundrise investments, but then again, it hasn’t been kind to many real estate investments. 

I have some money invested in Fundrise for diversification. But I no longer invest new money with them, as I feel more confident in the other real estate investments outlined here. I also don’t like that they penalize you if you withdraw money in under five years, although it’s a lower penalty than most of their competitors. 

Arrived property shares

I’ve bought shares in a handful of properties on Arrived, mostly as an experiment. I like the low minimum investment per property ($100), but I don’t like the lack of liquidity and long time horizon (five to seven years). 

To be fair, Arrived just launched a fund with the same minimum investment and a redemption option to sell shares. It comes with a minimum six-month holding period, a 2% penalty for selling between six and 12 months of buying, and a 1% penalty for selling between one and five years of buying. 

Again, I no longer actively buy property shares on Arrived, but that’s simply because I’d rather invest in syndications for my long-term investments. 

A Portfolio for Financial Independence

I invest in stocks for long-term growth, liquidity, and ease of diversification. Plus, stocks offer easy investing in tax-advantaged accounts such as IRAs without needing to hassle or pay for a self-directed IRA custodian. 

I invest in real estate for both income and longer-term growth. Real estate also comes with enormous tax advantages baked in without needing help from tax-sheltered accounts. Best of all, it achieves all this while reducing risk in my portfolio, as real estate has less volatility than stocks and adds the diversification of a low-correlation asset class. 

If you wanted to, you could invest only in short- and/or medium-term real estate investments. And if you’re new to real estate investing and cautious about it, start small with short-term investments. 

I don’t worry about the lack of liquidity in my medium- and long-term investments because I can access my short-term investments in a pinch. Each of these investments I’ve discussed plays a role, whether it’s the liquidity of Concreit, or the income of my note investments, or the growth and tax benefits of my private equity real estate investments. 

As a small business owner, my active income fluctuates wildly. The passive income and growth of my investments help stabilize my finances and provide peace of mind. I can sleep at night knowing that every month brings me closer to financial independence, regardless of the monthly income from my business. 

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