\n<\/p>\n
The old ways of financial freedom are gone<\/strong>. Before, buying a rental or two and repeating the process for a few years was all you had to do to find <\/strong>financial independence<\/strong><\/a> and retire early<\/strong>, sipping fruity drinks on the beach without a worry in the world. But now, that\u2019s over. The days of easy passive income are gone, but a new path to wealth is beginning to emerge<\/strong>, one that will still lead you to millionaire status<\/strong> if you\u2019re strong enough (and smart enough) to take it.<\/p>\n It\u2019s the 900th episode of the BiggerPockets Real Estate <\/em>podcast<\/strong>, and this is no ordinary show. We brought out the big guns this time. Brian Burke<\/strong>, J Scott<\/strong>, and Scott Trench,<\/strong> all time-tested investors, join us to share the truth about real estate investing in 2024<\/strong> and answer the question we\u2019re all thinking: \u201cIs it still possible to reach financial freedom<\/a> with real estate?\u201d<\/p>\n But that\u2019s not all. We\u2019re getting their takes on whether or not to wait for lower mortgage rates <\/strong>with monthly payments still sky-high, which strategies are working for them in 2024<\/strong>, which investors will get burnt <\/strong>during this investing cycle, and what a new investor can start doing TODAY to become a millionaire in the next decade<\/strong><\/a>. Plus, they share why investors should be fearful now more than ever and why the get-rich-quick influencers are about to get the wake-up call of a lifetime.<\/p>\n David: Dave: David: Brian: David: J: David: Scott: David: Scott: J: Dave: Brian: Dave: Scott: Brian: J: Brian: J: Brian: Dave: David: Dave: Brian: Dave: Brian: David: Scott: David: J: Scott: J: David: J: Scott: Dave: Scott: Dave: David: Dave: Brian: David: Brian: David: Brian: Scott: Brian: J: Dave: Scott: J: Dave: Brian: Dave: David: Scott: J: Scott: Brian: Dave: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast show 900. What\u2019s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast and I\u2019m here today with Dave Meyer joining me to co-host this momentous episode in BiggerPockets history.<\/p>\n
Well, thank you. I\u2019m so excited to be here for this huge milestone. And in order to celebrate, we have something special cooked up we\u2019ve been working on for quite a while here at BiggerPockets. We are bringing on three of our most beloved and seasoned BiggerPockets investors. These are people who have been around the BiggerPockets community for a long time. And we\u2019re going to ask them some of the most burning important questions about the housing market. These are questions like, is now a good time to buy or should you wait for rates to drop, what strategies work in today\u2019s market, and is real estate still a tool to help you reach financial freedom? We\u2019re going to get into this, plus actionable, practical advice that these seasoned vets have for anyone who\u2019s trying to get started today.<\/p>\n
That\u2019s right. We have J Scott, we have Brian Burke, we have Scott Trench, and we have Dave and Dave all in today\u2019s episode. So let\u2019s get into it.
All right, let\u2019s start with a question that is on the forefront of everybody\u2019s mind. Should investors wait for rates to come down before they start to buy? Who would like to take a stab at this one?<\/p>\n
I say give it to J. That way I can disagree with him.<\/p>\n
All right. We\u2019ll go there and then we\u2019ll let Scott fill in afterwards. J, what do you think?<\/p>\n
I see rates being high. And when I say high, rates are relatively high. We\u2019re at what? 6, 6.5% at this point, and that\u2019s historically about where they\u2019re supposed to be, but I think we all know that they\u2019re likely to head down in the near future as opposed to up. And so from my perspective, that gives us upside. That means when interest rates were at 2%, 3%, 4%, all we had was downside. We knew the next move in rates was going to be up. And so if we bought any floating rate debt, if we bought anything that didn\u2019t have long-term fixed rate debt, we were going to be in a position where when we had to refinance or when we had to recapitalize, that things were going to be worse than they are now.
But right now we\u2019re in a situation where we can be fairly certain that the next move over the next couple of years is going to be down. And so if we can find a deal that works today and we can put decent debt in place, then the best case scenario is that in a couple of years, we can refinance that debt, we can bring our cost down, we can continue to cashflow or cashflow more. And our worst case scenario is we\u2019re in the same position we are now a few years from now.<\/p>\n
Scott?<\/p>\n
To reframe the question, I think the right time to buy is when your personal financial position is conducive to it, right? For me, real estate investing is a long-term bet on inflation in US housing stock prices and long-term rent growth. And I buy based on that premise consistently but not aggressively over a long time horizon. That said, just to kind of disagree with J before Brian can, yes, the best scenario is that rates go down. But I think what\u2019s much more likely is the fed\u2019s going to do exactly what they said, lower them two to three times, and then it\u2019s anybody\u2019s guess after that. And if they do nothing, the yield curve will continue to un-invert and the 10 year will continue to rise and that is directly correlated with both mortgage rates and commercial debt financing rates. So I think that I\u2019m planning on, and believe, that there\u2019s a much higher probability that rates stay the same or begin to climb rather than stay flat or go down.<\/p>\n
Can you briefly define what you mean by the yield curve will continue to invert?<\/p>\n
Yeah, so when the Federal Reserve changes rates, they\u2019re increasing kind of overnight borrowing rates, very short-term yields. The US Treasury borrows money both in a short term and long-term basis. And right now, short-term debt for the US Treasury is trading at a 5, 5.25 yield and longer term debt from the US Treasury is trading at a lower yield like 4%, 4.25 for the 10-year treasury. That\u2019s an inverted yield curve. And what I believe is going to happen is either there\u2019s going to be a recession that\u2019s going to force the Fed to drive rates down dramatically very, very quickly, which they are not saying they\u2019re going to do or planning on, or that 10-year treasury is going to be yielding more than the overnight federal funds rate and the short-term treasury rate.<\/p>\n
I think you\u2019re overcomplicating this, Scott. And nothing wrong with that. I think it\u2019s easy to overcomplicate, but I\u2019m a big believer that history is the best predictor of the future. And historically, mortgage rates are somewhere between 1.5 and 2 points above whatever the federal funds rate is. Right now we\u2019re at a smaller delta than that, but that\u2019s historically where we are and I expect we\u2019ll get back to somewhere between 1.5 and 2 points above the federal funds rate.
And if you look at basically what the market is pricing in for the federal funds rate at the end of 2024, it\u2019s somewhere between 3.75% and 4%. Don\u2019t know that that\u2019s actually going to be the case, but that\u2019s what the market thinks. So assuming we\u2019re actually at 3.75 to 4% in Federal funds rate, at the end of this year, and assuming we expand back to that historic 1.5 to 2 points above that for mortgage rates, we\u2019re probably looking at somewhere in the high 5s by the end of this year, which is a good bit below where we are right now. So I mean that\u2019s my best guess. I know we\u2019re all guessing and I am not saying you\u2019re wrong. I mean you have as much chance of being right as I do, but I just think that we can take a simpler view than what you were putting out there.<\/p>\n
Given that we\u2019re just guessing and we don\u2019t actually know though, I\u2019m curious what you think investors should be doing. Should they be waiting? Scott gave an answer that he thinks the best time is when you\u2019re financially able to do that. Brian, what do you think? Do you think that investors, given the unknowable nature about the future of mortgage rates, should waiting or should they be jumping in right now?<\/p>\n
Well, I\u2019ve often been quoted as saying the phrase that there\u2019s a good time to sell, there\u2019s a good time to buy and there\u2019s a good time to sit on the beach. And as soon as the sun rises and I can open the curtains behind me, you\u2019ll notice that I practice what I preach when you see the ocean behind me, that there\u2019s actually good times to just sit on the beach. Now having said that, I think we\u2019re starting to come to a point where we\u2019re about to maybe crawl out of that hole. And I\u2019ve been a pretty vocal real estate bear for the last couple of years. I think it\u2019s no secret I\u2019ve said on this show and other shows that in \u201921 I started selling most of my portfolio. I sold 3\/4 of all the real estate I owned in 2021 and early \u201922 because I thought the market was going to come down. It did in the sector that I work in.
Now I\u2019m in large multifamily, right? 100 unit and larger apartment complexes, commercial real estate type stuff. And in that market, it suffered a significant hit. Now conversely, single family on the other hand didn\u2019t suffer any ills really at much at all in most markets. In some markets, single family is up over where it was a couple of years ago. So the question of whether it\u2019s a good time to buy now is a difficult question to answer because there\u2019s so many different components to real estate. There\u2019s so many local markets in real estate, there\u2019s so many different strategies in real estate that a case could be made for buying any time at any point during the cycle, no sense in waiting for interest rates to change if your strategy gels well with the current interest rate environment. So if you\u2019re flipping, you don\u2019t really care what interest rates are. You don\u2019t care what pricing movement is, it\u2019s an arbitrage play. So you can certainly still do that. So it\u2019s a really tough question to answer.<\/p>\n
Scott, what do you think about this question?<\/p>\n
This melds perfectly with the way I think about things. In commercial real estate, large multifamily, syndicated funds, those types of things, there\u2019s a time horizon for investments that is finite. You can\u2019t just buy the thing and hold onto it for 30 years in most of these funds. That\u2019s not meeting the expectations of investors. And there are debt and balloon terms and other things that force your hand at a certain point in time. So in that space, you have to do what Brian is doing to maximize returns. There has to be a buy time, a sell time, and a sit on the beach time. And I\u2019m so glad you\u2019re enjoying the sun soon here in Maui and got up early with us.
In the single family and small multifamily space that I play in, I don\u2019t have that constraint because I\u2019m using 30 year fixed rate Fannie Mae insured mortgages and I\u2019m putting down a down payment and can operate myself if I need to and I can hold on for the decades. There is no timing pressure unless I screw something up badly in my personal financial situation. So to me, it\u2019s always the buy time whenever as my capital accumulates, I\u2019m dollar cost averaging into single family or small multifamily that I can hold in perpetuity here in Denver. But if I\u2019m going into one of these other asset classes, I got to be really, really careful about when you go in because that matters so greatly to your returns and there\u2019s a time pressure on it.<\/p>\n
And I would say that just to counter what Scott just said just a little bit, well yes, there\u2019s always a time to get in somehow. If you tell a single family rental real estate investors who bought in 2004 that what their decision was a good decision, they would probably counter that point because there is times when single family can take a significant hit.
Now ultimately it recovered. It took years to do so and that was certainly an impact on the time value of money. But what you got to think about is the holistic world of real estate investing and where do you think the risks are. And in \u201904 and \u201905, home prices were so high. I mean they really only had one way to go. There were plenty of risks in the Fannie financing that was going on at that time and all that stuff. Now we don\u2019t have those risks. So a sharp residential downside is probably not part of the cards. So you still have to factor in the overall market conditions and thoughts of where something\u2019s hiding around a corner to kill you, but right now it\u2019s not there in my opinion, especially in the single family space.<\/p>\n
And it\u2019s also worth noting that, I mean no matter how smart we are, we are all dumb to some extent. I mean if I said to you, Brian, you sold everything in 2021, if I said to you in January of 2020 that we\u2019re about to have a global pandemic, we\u2019re going to be shut down for a year and a half, basically supply chains are going to be frozen, but you have the opportunity to sell your entire portfolio before March 13th, would you have done it?<\/p>\n
Yeah, I probably would have. And that would\u2019ve been a huge mistake.<\/p>\n
Exactly. You\u2019re the smartest multifamily investor I know, but even you couldn\u2019t predict these weird macroeconomic situations. And so, this is why it\u2019s often said that time in the market is more important than timing of the market. I\u2019m not going to disagree that we can do this portfolio play where we say, \u201cHey, we\u2019re not going to buy a whole lot when things are really frothy.\u201d But to say we\u2019re just going to sit on the sidelines\u2026 And I\u2019m not talking about you. I mean, if you buy right all the time and sell right all the time, then you\u2019re always going to have an opportunity to sit on the beach. You did that. Most of us, we don\u2019t have that crystal ball. And so yeah, we can kind of slow down a little bit when we think things are frothy, we can speed up when we think there\u2019s good opportunities. But to Scott\u2019s point, I think it\u2019s always a good time to be buying when your financial situation allows it and when your time horizon allows it as well.
And I\u2019ll just say, I mean Scott pointed out that we can\u2019t do that in the multifamily world. I agree. To some extent, it\u2019s a lot harder because we do have investors. And our investors don\u2019t want to sit on an investment necessarily for 10 or 15 or 20 years. And loan terms typically are not 30 years. They\u2019re typically seven or 10 or 12 years. But that still gives us seven or 10 or 12 years. And if you look at historical trends again, what you\u2019ll see is over any 10 year period in the history of this country, real estate has gone up peak to peak. And so yeah, maybe we\u2019re not going to make a ton of money for our investors if we hold for 10 years, but we\u2019re probably not going to lose money either.
And so if you make a good investment, and when I say a good investment, investment that\u2019s not going to be forced to sell based on macroeconomic conditions, something that you\u2019re going to be able to hold through a downturn, if you can hold that for five or 10 years, you\u2019re probably going to come out unscathed and at least make a little bit of money.<\/p>\n
And you have to have the loan maturity to match.<\/p>\n
Am I the only one who doesn\u2019t mind interest rates where they are? I feel like it\u2019s actually a pretty good opportunity to buy right now. And I do think it sort of helps cool down the housing market and creates a little bit less competition. So for me, I\u2019ve actually personally gotten a little bit more active in the last couple of months than I have in the previous few years.<\/p>\n
All right. We\u2019re going to take a quick break but stick around because we\u2019re about to answer the questions everyone is asking lately, is cashflow still possible and what strategies actually do work in this market right after this break.
And welcome back to the BiggerPockets Real Estate Podcast. We are here with some of the smartest real estate investors in the game right now, debating the most pressing questions on investors\u2019 minds.<\/p>\n
Let\u2019s transition our conversation here a little bit to what strategies actually are working in today\u2019s market given rates. Let\u2019s just assume they stay where they are because we don\u2019t know what\u2019s going to happen. Brian, I know you have a couple that you don\u2019t think will work, but are there any that you do think are going to work in the coming months?<\/p>\n
I think you can flip houses in any economic climate. In fact, the best my flipping business ever did was during the \u201908 to 2013 real estate down cycle. And you can do really, really well with an arbitrage strategy. You can also do really well with single family rentals. I mean, single family rentals aren\u2019t really like\u2026 They\u2019re not the cashflow play people want to think they are and that many people promote that they are. I mean, if you really looked at somebody\u2019s five-year total cashflow including capital improvements and everything else, they\u2019re not a huge money maker, but they\u2019re a wealth builder.
I mean, the thing about real estate is there\u2019s two things required to build wealth in real estate, money and time. And the money doesn\u2019t have to be yours, it could be somebody else\u2019s. But the time, you can\u2019t do anything about. You have to give it time. And that time is going to create appreciation in two ways, rental growth and price growth. And it\u2019s from that rental growth is where you\u2019re going to start to make cashflow in time. And if you\u2019re patient enough, and as J alluded to, if you can hold long enough, and I think even just as importantly, you have the financing structure that allows you to hold long enough, i.e. you don\u2019t have a loan maturity looming and you can actually hold, you can do well. And I think I agree with you, Dave. I hate to say that. Gosh, that pains me.<\/p>\n
Do you want to agree with everyone or do you just come on here trying to disagree with as many people as possible?<\/p>\n
My role is to disagree. I\u2019m brought on this show to be the bear or to disagree. But no, I agree that the strategy play I think right now in the single family side is, you can buy at today\u2019s rates that are a little bit higher. And if you can find a deal that works, the numbers work at today\u2019s rates. Then later when rates do fall, you can refinance and improve your returns and improve your cashflow. And this is a really good time to do that play. You couldn\u2019t have done that play three years ago. That play was off the table. So when you talk about, and I talk about, \u201cThere\u2019s times to do this, there\u2019s times to do that, there\u2019s time to do nothing,\u201d there\u2019s also times to just change up your strategy. And I think that\u2019s the strategy play right now, Dave.<\/p>\n
Brian is like the enforcer that is brought in on a hockey team who ends up hugging everybody and being their friend when he\u2019s supposed to be laying down the law.
Scott, what do you think about strategies that are working in today\u2019s market? Is this a question that people are asking that they shouldn\u2019t be or is this a relevant question that we should be putting focus on?<\/p>\n
I agree with the single family rental. And again, I\u2019ll throw in the small multifamily property area. I did some research a few months ago and posted a webinar to the BiggerPockets YouTube channel, and I think released on the Real Estate feed here, around where to find the cashflow, right? And there\u2019s markets around the country. I like upstate New York, there\u2019s a couple of examples there. Cleveland, I love the south, especially in the build-to-rent space. A lot of people built a ton of properties. They\u2019re brand new inventory, they\u2019re designed to be rentals. And the institutions that were supposed to buy them aren\u2019t there anymore. And so that\u2019s a really good opportunity for investors to do that.
Are you going to get a ton of cashflow there with those deals? Nope. But you can cashflow with a traditional down payment and today\u2019s rates on those. And I agree completely with Brian\u2019s thesis here around, hey, if you\u2019re going to be buying these types of properties, that\u2019s a long-term wealth play. You\u2019re letting the loan amortization go, you\u2019re getting a solid but not incredible cash on cash return. You\u2019re going to benefit from long-term rent and pricing appreciation on those.
If you want cashflow in a big way, the obvious answer in a higher interest rate environment is to turn to debt. For example, I purchased a couple of hard money notes last year and I\u2019ve been re-rolling those, right? Flipping is still a great way to make money. And I feel like if my worst case scenario as a real estate investor doing this for 10 years is foreclosing on a property and finishing a project, I\u2019m comfortable with that. And that\u2019s given me a 12 to I think about 13% blended rate on the several loans that I\u2019ve owned over the last year. So I think that\u2019s an obvious solution here as well to be backed by real estate if you\u2019re really looking for that cashflow. There\u2019s no tax advantages to that. I paid a tax, man, on my interest by the way, unless I were to move it into my retirement accounts, but it is significant.<\/p>\n
Okay. So for years, we\u2019ve been able to get almost every single benefit that real estate offers out of the same deal because real estate was in its heyday. You could get appreciation, tax benefits, cashflow, loan pay down, easy financing, the ability to partner with people, almost a free education from doing a deal and \u201cHey, if it didn\u2019t work out, you could just sell it and make money.\u201d There was almost no downside in general to real estate and you could get all the upside in the same deal.
It sounds like what we\u2019re saying is that it\u2019s not quite as easy as it was. It\u2019s still possible, but you\u2019re maybe not going to get everything out of the same deal. Do we think investors should be looking at building a portfolio that has some properties that are a long-term appreciation play, some opportunities like Scot just said that are going to be cashflow heavy but they\u2019re not going to shelter your taxes, other properties that might be a good tax savings for money that you\u2019re making in business? What\u2019s your guys thoughts on if we need to maybe lower our expectations and become a little more strategic on the type of real estate we\u2019re putting in our portfolio?<\/p>\n
Yeah, I think it\u2019s important that we\u2019re all a bit more introspective. I mean, I think the biggest lesson here is throughout again the history of this country, we\u2019ve become accustomed to recessions every four or five, six years. That\u2019s just the way it works. And basically what that means is every four or five six years, we as business owners and investors get our asses kicked and we learn we\u2019re not the smartest people in the room, we\u2019re not the smartest people on the planet and many of us have no idea what we\u2019re doing.<\/p>\n
Except Brian.<\/p>\n
Except Brian.<\/p>\n
Nobody beats up the enforcer.<\/p>\n
And it forces us to really come to terms with the fact that we may not be as smart as we thought we were and it makes us get better at investing and do things the right way or get the hell out of the business. Well, the problem is, since 2008, we haven\u2019t had that kick ourselves in the ass moment for people to recognize that they may not be as smart as they think they are, they may not be as good at an investor as they think they are. They may have been thinking for the last 15 years they\u2019ve been doing everything right because you buy a bad flip, you take too long to flip it, you get the wrong financing, you spend too much on renovation, you don\u2019t sell it for as quickly as you thought and you still make money because the market just kept going up.
And so I think we\u2019re going to have a big revelation in this industry that a lot of people who have built big brands and big names, and hopefully I\u2019m not one of them, but a lot of people that have built big brands and big names aren\u2019t necessarily as smart and successful as they thought they were. So I just want to start with that.
In terms of what we should be doing now though, I agree with what everybody said, buy and hold. Like Scott and Brian both said, I mean there are lots of benefits. There\u2019s cashflow, there\u2019s principal pay down, there\u2019s tax benefits, there\u2019s appreciation. But the one thing we\u2019re not going to see a lot of in a higher interest rate environment is cashflow. And so for all those people that for 10 years were saying, \u201cI\u2019m going to buy a couple rental properties and retire from my W2,\u201d I still think it\u2019s a great idea to buy a couple rental properties. Buy a property a year, but you\u2019re not going to be retiring from your W2 thanks to the cashflow like you were doing a few years ago.
And so I think people have to kind of reset their expectations on the cashflow piece. But again, those other pieces are so valuable that if you\u2019re buying now, in 10 or 15 years, you\u2019re going to find that your net worth has increased significantly and you\u2019re going to have an opportunity again at some point to recapture that cash flow. So buy and hold always good. Transactional type flipping stuff, I\u2019d say be cautious, but it can still work.<\/p>\n
I think that the two kind of words that bubble to the surface in my mind in this conversation are fear and enough. And I think that over the last 10 years, there wasn\u2019t enough fear in the real estate market, right? You talk about these commercial real estate deals, for example, like office and some multifamily in certain areas, you can be the smartest guy in the room. You can be doing this for a decade or two and there\u2019s nothing you can do when Austin, Texas is adding 10% to its existing multifamily stock in year 2024. Rents are going down, property taxes are going up, insurance rates are going up. There\u2019s nothing you can do and you\u2019re helpless. And you\u2019ve got to have fear in this business in addition to the long-term belief that I voiced earlier around depreciation and rent growth.
I have both of those at all times. I\u2019m scared every time I buy a property to this day. I was terrified the first time in 2014. Prices have gone up for six years and we\u2019re right around the corner from the recession that happens every five to six years that J just talked about, and in 2017, in \u201918 and \u201919. And there\u2019s always a bubble. You\u2019ve always got to have that fear I think in addition to the belief in the long-term thesis. And that comes back to me from the thing I\u2019ve been harping on this whole time around personal finances and the ability to hold the asset for a very, very long period of time. That\u2019s how you compound growth and don\u2019t lose your principle.
And the other side of this is enough, the penny can\u2019t double forever. It\u2019s completely tied into the fear concept here. What is enough for you and do you need to keep leveraging that whole time and do you need to get there overnight? Can you accept the fact that a good real estate investor might get mid-teens returns over a 5, 10, 15 year period? A small spread to what you can get for example, against an index fund and a stock market, but a worthwhile one to chase. Not in the 20s, right? Not in the 25%. Not these huge doubling of your investment in three, four years that we experienced over the last 10 years. What is enough for you and are you structuring your portfolio to get there? And I think that those are the two things that got lost in the last 10 years by a lot of folks and some of the loudest folks in the real estate community.<\/p>\n
Scott, I love that so much. I completely agree with you. I think it\u2019s so important that people have a healthy understanding of risk and reward. And everyone talks a lot about reward and how they\u2019re getting these outsized returns, but they don\u2019t talk about how much risk they\u2019re taking on. And it\u2019s okay to take on risk, but you sort of have to be thinking about that and cognizant that with reward and upside comes risk. And I think knowing when you have enough is also just probably the most important lesson I\u2019ve ever learned as a real estate investor. You can use that to work backwards and figure out how much risk is appropriate for you and how much reward is appropriate to you to get to your long-term goals.<\/p>\n
It\u2019s just super hard when these 22 year olds are racing past you from a wealth creation perspective because they\u2019ve bought a hundred deals in the last two months with other people\u2019s money. So I get it, but you have to have that fear and enough.<\/p>\n
But it\u2019s a tortoise in the hare thing, right? You have to just be slow and steady if that\u2019s your approach. If you want to go fast, you can, but there is more risk there.
All right. I like it. This is starting to heat up. When we come back, we\u2019ll name the elephant in the room and ask the question, is real estate a viable path to financial freedom? Stick around.<\/p>\n
Welcome back, everyone. Dave Meyer and I are here with Scott Trench, J Scott, and Brian Burke and we\u2019re talking about the biggest questions this market is asking. Let\u2019s get back into it.<\/p>\n
Now, Brian, I want to turn it over to you, but I just first want to point out that you are perfectly blending into your background right now. Anyone watching this on YouTube, he just opened the door and he\u2019s got this beautiful Hawaiian backdrop, but he\u2019s wearing a Hawaiian shirt. And you can\u2019t even see him. He just fits perfectly into this setting. But enough about that, Brian. How do you view this risk reward situation and discussion we\u2019re talking about?<\/p>\n
Well, I think one of the biggest things I\u2019ve seen in real estate in my 34 years of doing this in multiple cycles, I kind of see the same thing repeat itself time after time. People tend to fail to treat real estate investing like the loaded gun that it is, because this business can save your life and it can also kill you in a figurative sense. The risk is real and people tend to forget about it. And when you find the greatest amount of euphoria is usually the biggest signal to me that we\u2019re nearing the end of an upcycle, and that\u2019s what was happening in \u201920 and \u201921 when I decided to start selling everything, is because there was just so much euphoria, you couldn\u2019t make a mistake, you could do nothing wrong, everyone was making money, everyone had to buy. And when everybody wants something, it\u2019s a good to allow them to have it. So if you have it, it\u2019s a good time to turn it over when everybody wants it. Because when nobody wants it, it\u2019s a really bad time to sell it.
Scott nailed it. You really have to focus on the fundamentals now because no more is the market going to necessarily bail you out. Now you might get a gift in a year or two where you can refinance and get a lower interest rate and increase your cashflow, but you have to buy right. And there\u2019s really a couple things I think that are failure points for most real estate investors. They either have the wrong strategy at the wrong time or they have the wrong capital stack. Those are the two things that kill people. They\u2019re buying to hold when they should flip, or they\u2019re flipping when they should buy to hold, or they\u2019re buying and holding with three year maturities on their loan and in three years they\u2019re going to have to refinance or sell or do something. You\u2019ve got investors that have a short call window. You\u2019ve got preferred equity, which means that somebody is going to knock on your door soon and say, \u201cI want my money back.\u201d
If there\u2019s anybody that\u2019s going to want their money back in a short period of time that\u2019s involved in your real estate deal, you\u2019re dramatically increasing your risk profile. If you have long-term capital, a long-term horizon and the right strategy, even if you bought wrong, you\u2019re probably going to come out okay. I mean, you don\u2019t hear a lot of real estate investors saying, \u201cI failed because I bought this property wrong.\u201d It\u2019s like, \u201cNo, you failed because you got short-term financing, you had the wrong strategy.\u201d That\u2019s where people get tripped up.<\/p>\n
So we all agree that real estate is a great option, but it\u2019s foolish to not consider the risk that you\u2019re taking on when you buy it. Brian, you made some great points there of what people can do to reduce their risk.
In Pillars of Wealth I talk about, \u201cHey, if you want to scale up big and you want to go big, that\u2019s great. You have to temper that with more savings, more reserves and more offense. You have to be able to make more money in your business if you want to scale up the real estate.\u201d If it\u2019s proportional, you\u2019re fine, but to Scott\u2019s point, it\u2019s a big problem when you\u2019re 22 years old, you have no money in the bank, you borrowed a bunch of money from other people, you don\u2019t understand the debt instruments you\u2019re using and you\u2019re just throwing it all on black and trusted that Roulette\u2019s going to work out every single time because it has before. So I thought that was some very sound advice.
Since I\u2019ve been involved in real estate, the carrot that we\u2019ve used to get people into this game is to buy some real estate, get some cashflow, quit your job. It\u2019s always been the same strategy that\u2019s been marketed over and over and over. \u201cDo you hate your job? Do you hate your life? Does your cat sit on somebody else\u2019s lap instead of yours? Are you having a hard time getting a girlfriend? Well, if you had some cashflow, all of that would go away, so come buy some cashflow and you can fix all your problems.\u201d And now that the cashflow has somewhat evaporated from rates going up, nobody knows what to do and they\u2019re all losing their minds. Is it still possible to reach financial freedom and quit your job in a couple years with real estate today? Or do we think that people should be acquiring real estate before a different purpose?<\/p>\n
Was it ever possible?<\/p>\n
It was presented that way, right? I mean, I think a lot of people listening to this, that\u2019s how they got here, is that\u2019s what they got sold, is they had a bad day at work and someone said, \u201cWell, if you had cashflow, you wouldn\u2019t have to listen to your boss or wake up on time or be sitting in traffic.\u201d And so that\u2019s why they got into the game and I see a lot of bitterness in the real estate investing communities when they\u2019re like, \u201cWell, I thought I was going to be able to quit and I can\u2019t make it happen.\u201d What do you think, Brian?<\/p>\n
I think that if your expectation ever was that you\u2019re going to get all this cashflow in two years by buying any kind of real estate, you\u2019re probably fooling yourself. Single family rentals don\u2019t throw off enough cashflow unless you\u2019re paying all cash, so that means you already have money and you\u2019re already financially free. If you\u2019re getting the money from somebody else, you\u2019re paying them a lot of what you\u2019re getting in cashflow. If you\u2019re buying large apartment complexes like I do, there\u2019s a concept called preferred return, which means that investors get 100% of the cashflow until they reach a specific return threshold. That means you as the sponsor who raised all this money is getting nothing in cashflow during that period of time. You really make your money when you sell.
So getting rich in real estate in two years, the problem with it is it\u2019s just a misnomer. It\u2019s a misguided expectation. Real estate has always been a long game. It\u2019s always been a way to build wealth over time. You can buy all kinds of real estate right now and build up this huge portfolio with just a tiny, tiny, tiny bit of cashflow, and what\u2019s going to happen is over time you\u2019re going to be able to refinance into a lower interest rates, rents will eventually go up, those increased rents coupled with a lower mortgage payment are going to produce cashflow eventually. At some point the loan will be paid off and you\u2019ll have massive cashflow. And if you do that enough and you can buy enough property, you\u2019ll accumulate massive wealth. And I promise you, you will get a girlfriend and the cat will sit on your lap. All those problems will go away, but it\u2019s not going to go away in two years. This problem takes time to solve like any complex problem.<\/p>\n
I completely agree with that. This has never been a two-year journey to wealth, and it never should be considered that. But I believe that if people are buying this year, next year, the year after, every other year, whatever, if you buy three to five properties over the next 10 years starting today, you have a great shot at accumulating more than a million dollars in net worth from a standing start, especially if you\u2019re willing to house hack or do any of those strategies where you\u2019re going to add a little bit of value or work on the portfolio yourself. And you will start seeing material cashflow by the end of that first decade in this business that has a really good boost to your life. You will see that continue to expand if we see anything like the historical appreciation rates and price growth in rents, which I expect and fundamentally believe in. But no, you won\u2019t get there overnight. And it\u2019s a consistent grind of continuing to accumulate, building up your cash position and steadily continuing to expand your portfolio at least in the single family space. Go ahead, Brian.<\/p>\n
I just want to add something to that, Scott, because what you said is absolutely true. And I just want to relate a story to people because I think it\u2019s important. 25 years ago I made a pledge to myself that I was going to buy one house a year. That was going to be my big break. I was working, I was getting a W2, I was in law enforcement like David. I just wanted to buy a house a year and I thought that was going to make me rich. I started out on that and here I am 25 years later, I\u2019ve bought over $800 million worth of real estate during that time.
Some of my very early single family homes that I bought, I did a 1031 exchange, which means I could sell these two properties and buy a larger property. I bought a 16 unit apartment complex. I held that 16 unit apartment complex for 15 years and then I sold that in a 1031 exchange and bought this very spot that I\u2019m sitting in right now with this ocean view behind me in Hawaii. And that is how the road to wealth works. You start small with a goal, you take active steps to get there, you accumulate probably\u2026 It doesn\u2019t matter if you get 100 houses in two years, like the 22-year-old you\u2019re competing with whoever mentioned that. Where\u2019s that guy in five years? Probably in bankruptcy court. What you got to do is just make a goal that fits for you, chip away at it one piece at a time, and eventually you\u2019ll have what you\u2019re seeking. It just will take time. It took me what? 20 years to get into here. And it will take you time. Just be patient.<\/p>\n
If only there was a game that taught us that if we buy houses today, in the future we could turn those into something else like hotels or something, that\u2019d be really cool. We should create that game. The key here is that\u2026 And I think Monopoly is actually a good analogy for this because what do we do in Monopoly? We don\u2019t spend the game trying to buy fancy cars and expensive dinners and traveling around the world. What we\u2019re doing is we\u2019re buying assets and we\u2019re letting those assets grow. And most of us in Monopoly, we find every time around the board, we\u2019re looking forward to collecting that $200 because we\u2019re running out of money because we keep buying assets. And that\u2019s the way to do it because by the end of the game, if you\u2019ve done it well, you\u2019ve got a whole lot of assets and that\u2019s worth a whole lot of cash.
I think we kind of use the terms rich and wealthy interchangeably, but from my perspective, there\u2019s a big difference. Rich people, they have a lot of cash. They can go out and buy a nice car, they can go out and go on fancy vacations and they can do all those things that you think about when you think about rich and flashy. But wealthy is where you want to be. Wealthy is your net worth. Wealthy is that equity. Maybe it\u2019s tied up for now. Maybe it\u2019s tied up for the next five years or 10 years, but at some point in the future you\u2019re going to wake up and you\u2019re going to realize that \u201cI\u2019m worth a lot of money and I can take that equity and I can convert it into cashflow or I can convert it into another type of equity and I can quit my job.\u201d
And yeah, it\u2019s not going to happen in two years, but again, if you do things the right way like Brian did and like Scott\u2019s doing, like David did and Dave and me, I mean in five or 10 or 15 years, you\u2019re going to wake up\u2026 You\u2019re going to wake up in 15 years either way, at least wake up rich. Excuse me, wealthy.<\/p>\n
Great advice, J. If only there was a book that talked about return on equity that perhaps you and I wrote that people could check out, that might work out for people.
Last question here before we get out of here. I want to hear from each of you quickly what practical actionable advice would you give new investors. So we\u2019ve talked a lot about what people who have been in the game for a while should be doing, but what advice would you give new investors who want to get started here in 2024? Scott, let\u2019s start with you.<\/p>\n
It\u2019s the age old stuff. There\u2019s nothing new here. It\u2019s strong personal financial position. Build up your cash reserves. Develop the mental models that you need to. That\u2019s a pompous way of saying start learning the way that what J just said there. And look, consider a house hack or a live-in flip, right? Those are the most powerful tools you have the huge advantages when you\u2019re just getting started that completely multiply your leverage and multiply your opportunity and upside while diminishing risk if you can live in the property, operate it yourself and maybe add a little bit of value. It\u2019s all tax-free if you do the live-in flip correctly and live in there for two years and sell it within five years of doing that. I would strongly encourage people to be looking there for those opportunities because they\u2019re so high upside and so low risk in any year, but at any point where you\u2019re getting started.<\/p>\n
I meet two types of people in this business all the time. Number one, I meet people that have never done a deal. And most of the people I meet have never done a deal. 95, 96, 98% of the people I meet have never done a deal. And then the other type of people I meet are people that have done 5, 10, 50, 100 deals. There\u2019s one type of person I never meet in this business, and that\u2019s somebody that\u2019s done one deal. So anybody out there that\u2019s listening, don\u2019t do a bad deal, but don\u2019t give up until you get to that first deal because after you get that first one, it gets so much easier and you get your head around the process. And I promise you, if you do one deal, you\u2019re going to do 10 or 20 or 50 or 100 deals.<\/p>\n
Right. Brian, what\u2019s your advice for new investors?<\/p>\n
The first thing you need to be doing right now is getting your plan together. What strategy do you want to employ? What markets do you want to invest in? Where are you going to get your capital? And that includes both equity capital and debt capital. Get everything lined out. If you\u2019re going to use investors, build your investor list. If you don\u2019t know what you\u2019re doing, build your partner list. If you don\u2019t know how to turn a wrench, build your contractor list. Get everything ready, get it lined up because the opportunities are presenting themselves and they will in more quantity as time goes on. And if you\u2019re ready for it, you\u2019ll be ready to pounce when you see opportunity.
The people that get caught flatfooted are the ones that they have no plan, they have no money, and they just say, \u201cOh, I found this great deal,\u201d and it\u2019s like, \u201cOkay, what do you know about great deals? Where are you getting the money? Where are you getting the debt? What are you going to do with it?\u201d
\u201cOh, I haven\u2019t thought about any of that.\u201d
\u201cWell, then it\u2019s too late. The great deal is already gone.\u201d So you have to have all that other stuff ready so that when the great deal comes along, you\u2019re absolutely ready to do it and do it right.
The second thing I think people need to think about is don\u2019t get in too far over your skis. One of the things that really killed investors back in the last downturn in \u201905 was they took on way too much debt over what the property or they could support. The problem with this business is, if your career gets really shortened because you really screwed up, it\u2019s even harder to get the second deal. J\u2019s right. It\u2019s easier to get the second deal, but it\u2019s harder to get the second deal if your first one was a total disaster.<\/p>\n
Well, Brian, I totally agree with you. I think if I had to give my advice concisely, it would be to start with the end in mind, to really think about where you want to go, Scott alluded to that earlier, and what you\u2019re trying to accomplish through real estate. And then work backwards to identify the strategies, the markets, the financing structures that work for you and are appropriate given your personal situation and your personal goals. I see a lot of people just jump right into that first deal. And J\u2019s right, you should get into that first deal, but make sure that it\u2019s one that\u2019s appropriate for you and that is well aligned with your long-term goals.<\/p>\n
Nice. The thing I would tell a newbie is to think about the long-term. When you guys were talking, I was thinking about my experience that I\u2019ve had in real estate since I got into it. And it seems like real estate tends to move in these really big waves. If you think about the market as the ocean tides, it goes up very quickly when we print a bunch of money and it goes down very violently when we get into a recession. And there\u2019s occasionally times where it just slowly increases at that 2 to 3%, but we can never predict when that\u2019s going to happen. So the idea is how do you get as many buoys in the water in the best markets that you can, and then you ask yourself the question, \u201cHow do I keep them there? How do I not lose the properties that I bought?\u201d Obviously, cashflow is a really strong way to do that, but that\u2019s the profit and loss of a property.
Think about the profit and loss of your life. Are you saving money? Did you get a little bit of cash and immediately go buy yourself a Mercedes-Benz and jeopardize the health of your investment portfolio because you can\u2019t stop spending money? If you could be disciplined with your own finances and always be bringing more value to your employer, more value to the marketplace, more value to your customers, increasing your income while keeping your expenses low, you\u2019ve now earned the right to take the risk that is involved with real estate investing that will pay off if you can wait long enough. So just stop trying to outsmart the market and out time the market and ask yourself, \u201cHow do I get the best buoys in the water, in the best markets and keep them there for as long as possible?\u201d
And then what happens is 10 years, 15 years, 20 years later, you got a butt load, that\u2019s a technical term everybody, of equity, and you can ask these cool questions like, \u201cHow do I move this into a different asset class?\u201d
All right, gentlemen, thank you all for joining me here on this stellar 900th episode of the BiggerPockets Podcast. I was first featured as a guest on episode 169. And I can\u2019t believe how quickly we are flying towards 1,000.<\/p>\n
I just want to throw something out there. You first appeared on Show 169. J, what was your first episode? Do you remember that one?<\/p>\n
Episode 10.<\/p>\n
Whoa! 10. That\u2019s pretty good. Brian, what was your first episode?<\/p>\n
Episode 3.<\/p>\n
Talk about OG on this. J and Brian. Wow. Thank you guys for being around from the very beginning and coming back all the way here for 900.
If you are one of those people who have listened to all 900 episodes, please find me on BiggerPockets and shoot me a message. We want to hear from you and your experience. We would love to know if you have listened to all 900.<\/p>\n
And let us know in the comments on YouTube what your favorite BiggerPockets show was. All right, I\u2019ve got to record episode 901, so I\u2019m going to get us out of here. Thanks everyone.<\/p>\n