\n<\/p>\n
Will 2024 <\/strong>bring about a soft landing or a hard <\/strong>recession<\/strong><\/a>? Tough economic times could be upon us as more and more economists disagree with the \u201csoft landing\u201d narrative of early and mid-2023. Even though the economy hasn\u2019t broken down yet, top-tier investors like Fundrise\u2019s Ben Miller<\/strong> believe that a recessionary \u201clag\u201d<\/strong> is taking place that could give us some severe financial whiplash<\/strong>\u2014and only the best of the best will survive what is to come<\/strong>.<\/p>\n So, what does it take to <\/strong>survive a recession<\/strong><\/a>, and how do you know whether or not you\u2019ve put yourself at risk of losing everything? Ben, David, and Rob all give their takes on what could happen in 2024<\/strong>, how they\u2019re protecting their wealth<\/strong>, and why they\u2019re taking fewer risks to ensure they make it out alive. This may be a HUGE wake-up call<\/strong> if you\u2019re still actively buying real estate deals and leveraging your portfolio<\/strong> as much as possible.<\/p>\n Ben will also talk about his lessons from the last two crashes<\/strong>, how the companies he worked with got crushed, and how he changed his investing perspective to build wealth<\/strong><\/a> far faster <\/strong>than almost anyone around him. Wealth is built during the downtimes<\/strong>, but if you don\u2019t follow the advice of those who have been through past crashes, you could lose everything you\u2019ve built!<\/p>\n David: Rob: David: Ben: David: Ben: David: Rob: David: Rob: David: Ben: David: Rob: Ben: David: Ben: Rob: David: Ben: David: Ben: Rob: Ben: David: Ben: David: Ben: David: Ben: Rob: Ben: Rob: Ben: Rob: Ben: David: Ben: David: Ben: Rob: Ben: Rob: Ben: Rob: Ben: David: Ben: David: Ben: David: Ben: David: Rob: David: Rob: David: Ben: Rob: Ben: Rob: Ben: David: Rob: Ben: David: Ben: David: Rob: 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, 841. What\u2019s going on everyone? It\u2019s David Greene, your host of the BiggerPockets Real Estate Podcast. The biggest, the best, the baddest real estate podcast on the planet. Every week, bringing you the stories, how-tos and the answers that you need to make smart real estate decisions now in the current market. I\u2019m joined today by my co-host, Rob Abasolo, with an incredibly insightful show on the topic of bringing you up-to-date information. We have Ben Miller of Fundrise who is talking about our current economy, what\u2019s going on with it, and how we can position ourselves to survive or maybe even thrive in the face of some pretty serious changes. Rob, what are some of your thoughts after today\u2019s show? What should people keep an eye out to listen for?<\/p>\n
I think that we\u2019re going to get some mindset changes from the people that have been in very aggressively acquiring, that set of investors make change how they think and approach real estate over the next couple of years. Very good, insightful, philosophical talk from Ben. He really brought it man. This guy is, I mean a recession genius, if you will, which is a very weird accolade to have, but he knows his stuff.<\/p>\n
Although this is a bigger new show, it\u2019s more like bigger conversations and Ben brings a lot of insight as someone who has studied actual recessions. You don\u2019t find a lot of people who have dedicated so much of their life to studying something so depressing, but I\u2019m sure glad we got them. Before we bring Ben in to talk about what\u2019s going on in the economy and specifically the world of real estate, today\u2019s quick tip is very simple. Take some time to redefine what success looks like for a decade. We have only defined success by how much real estate you acquired, and it may be time to look at if keeping the real estate that you have or improving your financial position, if cutting down on your debt might be a bigger flex than just adding more. Let\u2019s get into it. Ben has a long career in real estate and finance\/tech. He\u2019s the CEO of Fundrise that currently has over $3 billion in assets under management. A father of three who resides in Washington, DC. As a fun fact, his dog Zappa is the company mascot for Fundrise. Ben, welcome to the show.<\/p>\n
Yeah, thanks for having me.<\/p>\n
What kind of a dog is Zappa?<\/p>\n
Pound puppy.<\/p>\n
I remember pound puppies. Rob, are you old enough to remember those?<\/p>\n
Are they puppies that weigh a pound? Just kidding. Just kidding. No, I don\u2019t know what a pound\u2026 Are you saying like a pound? Do I remember the concept of a pound?<\/p>\n
It was a toy for kids. It was like a type of stuffed animal that were called pound puppies.<\/p>\n
Got it.<\/p>\n
They still have them. I actually saw it in the Target toy section. They\u2019ve made a comeback there again. Have you noticed those, Ben?<\/p>\n
I didn\u2019t even realize when I said that it was like dating me.<\/p>\n
Welcome to my life. Rob always pretends like he doesn\u2019t know anything I\u2019m saying. He\u2019s only five years younger than me, but he acts like he\u2019s 25 years younger than me. What are you referring to? A pencil? What is that? How does that work in a tablet?<\/p>\n
I\u2019m so sorry. A pencil? Ben, you mentioned you\u2019re obsessed with the recession. I don\u2019t think I\u2019ve ever really heard those words in that order when it comes to recession. Why are you obsessed or what are you obsessed about? Just to clear that up for us.<\/p>\n
I guess it\u2019s a little bit like somebody who\u2019s hit by a car or something and they\u2019re afraid to cross the street afterwards. I\u2019ve been through two major ones. I went through 2001 and 2008. I worked for a tech company in \u201999 to \u201901, and that company went out of business and tech basically was destroyed. Destroyed for three to four years after that. Then I was in real estate after that and real estate was destroyed, absolutely destroyed in 2008, \u201909 and \u201910. I came away from those experiences saying 80% of what happens in the world happens during these crises. We just saw it. The last few years has been, it\u2019s just been crazy. The amount that\u2019s happened in a short amount of time. It\u2019s just made me obsessed with these periods.<\/p>\n
It\u2019s the fear of it happening again and being exposed when the music stops and you got no chair to sit in.<\/p>\n
It\u2019s a combination of fear or I would say appreciation of the full power of the ocean, like if you swim, if the ocean is so vast. Also, opportunity. Because I watched a lot of companies survive and flourish out of recessions, a lot of people. It\u2019s like most of the time you spend your day-to-day doing the same thing, it\u2019s pretty stable days. Today is like tomorrow, yesterday was like today, and then sometimes it\u2019s not. It\u2019s really like those times of not that\u2019s the greatest risk and opportunities.<\/p>\n
David, you mentioned you\u2019ve been a skeptic for a while. The past couple of weeks you\u2019ve changed your mind. Specifically, is that because of anything that you\u2019re experiencing in your market or anything like that?<\/p>\n
I don\u2019t know if I\u2019d say I\u2019d changed my mind yet. I hold these things with an open hand. As I\u2019m looking at it, I see like, it looks like we\u2019re heading in this direction, but I\u2019m not going to be making these videos that we are heading to dooms day and it\u2019s going to be the worst ever. Because you go back five years and there\u2019s people that have been calling for these crashes the whole time and they don\u2019t happen. Then some news comes out that changes things like what if tomorrow all of a sudden, they drop rates from seven and a half to three? Probably would have an impact on our economy. I can\u2019t guarantee that it wouldn\u2019t stop a recession, but it very well might. It\u2019s hard when you\u2019re trying to predict what\u2019s going to come in the future with all of the moving pieces that we have. My take on a lot of this, or I guess to answer your question Rob, of why do I see this happening? I\u2019m noticing a lot of companies are laying people off.
In my 40 years of wisdom in life that I\u2019ve developed, what I\u2019ve noticed is that a lot of the economy is a momentum thing, and it depends on psychology. When you feel wealthy, you spend money. When you spend money, you make other people wealthy, they feel wealthy, they spend money. Your real estate goes up in value, you feel like you\u2019re wealthy. Your stock portfolio goes up. You go out to eat more often. You buy a more expensive car. The restaurant owner and all the waiters, they get more money. The person who sold the car, they get more money. Now they take a vacation. The hospitality industry does well. They start hiring more people. Those people start to get more money. They can pay higher rent on their houses or they go buy a house. Everyone does better when money is changing hands faster.
When we raise rates, we slow the velocity of money. Money starts changing hands slower. People feel less wealthy, they spend less money. Now the momentum is going in the opposite direction. It\u2019s often psychological. It\u2019s very difficult for us to pin and say what we could do to stop it. It\u2019s often what you could do to make people feel like it\u2019s okay to spend money or how you get money changing hands. Frankly, I\u2019ve just noticed a lot of companies have been looking at their PNLs and saying, we don\u2019t need this many employees, and they\u2019re laying people off. People at one point were complaining about having a W2 like it was the worst thing ever. They were a victim because they couldn\u2019t get financial freedom by 25 and they had to have a job. I think a lot of these people are now saying, \u201cOh, man. I wish I had my job. Can I get another job?\u201d It could get a lot worse. How does that sound, Rob?<\/p>\n
That\u2019s good. I think you\u2019re getting at this point that I call it magnitude, but you described it a similar way, which is essentially there\u2019s a feedback loop. What happens I think, is that when things go well and things get hot, they get hotter than anything could possibly make sense. We saw that with meme stocks and crypto and things just got crazy in 2021. The exact reverse can happen too. When things go bad, they can just get totally illogically bad. I think that when people are looking at the odds of recession, they\u2019re not adjusting for the magnitude of how bad it could get. It\u2019s just not logical. It would get as bad as it does in 2008 or 2001. We got beyond logical. It\u2019s because it\u2019s not logical. You said it\u2019s psychological, it\u2019s emotional. People are forced sellers by events outside their hands. That magnitude, I think it\u2019s really hard for people to appreciate without going through one or two yourself. Every time I think of my odds, I always try to adjust them to the scale of the risk, the scale of the problem, not just the odds of it happening.<\/p>\n
You\u2019ve studied data from the past nine recessions. Based on that, you\u2019ve come to some conclusions. What are some of those things that you\u2019ve realized after looking at other recessions, patterns that you\u2019ve picked up for what to expect?<\/p>\n
Well, so one of the things I\u2019ve learned is that if you want to understand the future, you should look at the past. I was convinced there was going to be a recession. I\u2019ve been convinced since basically when Russia invaded Ukraine. I was perplexed by why there hasn\u2019t been one yet. I just went back and looked at the last, I guess I went back to how far fed data goes. Fed data goes to mid-1950s and there\u2019s been six, maybe if you think March 2027 recessions in that period since 1969. They actually all follow a pattern and the pattern is really clear. This was the thing that surprised me because I didn\u2019t know. The Fed starts raising rates because they\u2019re trying to cool the economy down.
They raise rates slowly and it usually takes them about a year to 18 months to fully raise rates. Then once they finish raising rates at a peak, there\u2019s a lag. There\u2019s a lag that lasts on average 10 months from the peak of when they raise rates. They peaked raising rates in July and the average lag is 10 months. 10 months from July is when the recession would on average hit. That\u2019s like May 2024. That\u2019s a long time from now. That\u2019s what happens. It happened in 2006, it happened 2000, in \u201989 in 1980. I was like, \u201cOh, wow. I didn\u2019t appreciate, that\u2019s such a long lag.<\/p>\n
Why is that, Ben? Why does it take 10 months or however long you\u2019re talking about? What\u2019s the reason for that?<\/p>\n
I mean there\u2019s general reasons and specifically what\u2019s happening today. The general reason is that monetary policy is a very indirect way to affect the economy if you get into it a little technically, like basically nobody borrows from the Fed. No, people do. Banks are the one who borrow from the Fed. You have to slow banks down and then the banks have to then slow down consumers and companies. That credit channel they call it, it\u2019s really slow. We\u2019ve seen it. We\u2019ve seen from 2008 to 2020 interest rates were relatively zero. That\u2019s like almost, what is that? 12 years. Took a super long time for all that monetary, it\u2019s like printing trillions of dollars. It took a long time for that to feed into the economy. It\u2019s actually funny, I\u2019ve been reading this paper. Milton Friedman, famous economist, he\u2019s a conservative economist, some would say monetarist. He has this famous quote. I just found it reading this paper, \u201cThe central empirical finding in my conclusions that monetary actions have a long and variable lag on economics and economic conditions.\u201d
He wrote that in 1961. Generally, that\u2019s how it works. Then specifically, we just have $5 trillion of stimulus, fiscal stimulus that went into the economy. That has to work its way through the economy. Then it\u2019s like, we juiced the economy. That\u2019s working against the monetary policy that\u2019s trying to slow everything down. Those two things will eventually, that fiscal stimulus will and has, it\u2019s going away. Student loan payments are resuming. I don\u2019t know if you saw this, but child poverty rates, we\u2019re at 5.5 I think a year ago and they\u2019ve jumped to 12.2. They\u2019ve doubled in the last 12 months because a lot of the program supporting SNAP and welfare and stuff have basically diminished. There\u2019s a lot coming out of the economy. The essence of it is that just 350 million people, hundreds of millions of different actors, companies, it\u2019s slow. It\u2019s so slow.<\/p>\n
Is this something like where somebody eats a pot brownie and they\u2019re like, there was nothing there. I don\u2019t feel anything. Let eat three more of them and there\u2019s a lag and then it all hits you, all that stimulus hits you at one time. Is that what you\u2019re describing?<\/p>\n
That is not the analogy I was imagining, but that\u2019s a decent one. Then the problem is you can\u2019t really unwind it. You just have to work your way out of it slowly too. Because by the time it\u2019s hitting you, hitting the economy, to unwind it has the same long and variable lag. The Fed, just to look at what\u2019s happened recently, inflation hit the economy May 2021. If you\u2019re in real estate, you saw it in your rents, just everything. The economy woke up May 2021 with the vaccine and all this stuff and it just roared. We had inflation, I don\u2019t know what it was, I feel like rents were up 20, 30% for us. That\u2019s May 2021.
If Fed doesn\u2019t start raising rates till a year later, a year. There was zero all through that period. You look back and you\u2019re like, \u201cWell, that was crazy.\u201d Now just flip that. Inverse it is what Warren Buffett always says, invert it. You flip that and say, now all of a sudden, everything\u2019s going bad and they keep rates high despite all that. There\u2019s a great quote, I know if you know this quote, the Fed talks like a traitor, but acts like an accountant. They talk a good game, but they always look in the rearview mirror when they make their decisions.<\/p>\n
If we\u2019re understanding the lag well, it\u2019s because when you make the decision, the effect isn\u2019t instant. Again, an oversimplified analogy here. We took some caffeine and it took a minute to kick in and we just kept right to zero and then we feel great and we realized we\u2019re feel a bit too great. This kid needs to go to bed at some point, let\u2019s give them some NyQuil. Then there\u2019s a period of time after you take the NyQuil before the NyQuil kicks in and these economic decisions that they\u2019re making are always, well, we have a problem. How do we fix the problem? It takes a minute before that kicks in. As we\u2019re sitting here making financial decisions, trying to decide what we should buy, what we should invest in, where we should put our money, we\u2019re trying to make those decisions in real time. Your argument is that there\u2019s going to be a lag after the Fed makes big jumps and so you\u2019re not going to feel it right away. Is that pretty accurate?<\/p>\n
Yeah. That\u2019s 100% accurate. The debate I thought we were going to have, David, was like there should be a soft landing because unemployment is so low and job growth has been so strong and households are so healthy. Even though that\u2019s always how it has worked, this time is different because it\u2019s just like a special moment.<\/p>\n
Well, let me give you the fight you were looking for because that is going to be more fun. I don\u2019t want this to be clipped and someone puts it on TikTok and say, \u201cDavid is saying there\u2019s no recession.\u201d That\u2019s always the fear you\u2019re going to have. Let me play that hypothetical role. I do think there is a chance that some other president gets elected and says, \u201cI need to make the economy look good. I\u2019m going to come in and I\u2019m going to lower rates again and we\u2019re going to create some new form of QE.\u201d Maybe they don\u2019t do the exact same thing because that would look reckless, but they come up with a fancy name and they do it a different way. It effectively is a new form of stimulus. Then just when we were supposed to crash, we go and then the plane flies even higher than ever, which theoretically could cause an even bigger crash later. What do you think about that?<\/p>\n
A different way to say is like, during these lags, new things can happen. We have peace in Ukraine. That\u2019s another thing. I think that\u2019s actually could be the most positive dis-inflationary effect. In your specific scenario, it would still be lag. You\u2019re talking about 2025. This is why it\u2019s so hard because you have to take in the psychology of the institutions we\u2019re talking about, is the Fed likely to want to drop rates again? We know about the Fed, if you\u2019ve read about their history, because there\u2019s a lot of history. I understand the Fed, there\u2019s great, great books about the history of the Fed. Thing institutional character of it is that they are slow, super slow and they have biases or preferences, if you want to call it preferences.
For example, they idealize Paul Volcker who was a fed chair in \u201979 to \u201988, I think. He\u2019s a fed chair that battled inflation and won and goes down in history. Everybody wants to be like Paul Volcker. Then there\u2019s this other guy, Arthur Burns, who was fed chair before Volcker. He goes down in history as being a disaster. What he did, there was rampant inflation in the 70s, like 20%. There was a recession in \u201974 and inflation came down and they then dropped rates. In \u201975, he drops rates again because inflation had come down and inflation came back. That goes down to one of the fed\u2019s biggest mistakes in history. All institutions always fight the last battle. They don\u2019t fight. That\u2019s just the bias towards fighting the most recent. I just think there\u2019s a huge institutional bias or preference away from dropping rates and QE, even if there\u2019s political pressure. Anyways, let me go back to the magnitude point. If anybody knows Nassim Taleb, who wrote Black Swan and Antifragile and tons of really good books, I recommend all of them.
He has this point he makes, which is that when you look at the risk of drinking a glass of water, I said there\u2019s a 1% chance, it\u2019s a really small chance, 0.1% chance that it\u2019s poison and you\u2019re going to die. What\u2019s the chance you\u2019re going to drink that water? The magnitude matters more than the chance. Whether you have a business or your career, we\u2019re talking about real risks here. We\u2019re not talking about if it\u2019s going to be really good or kind of good, we were talking in 2020 or in 2019 or \u201918. We\u2019re talking about real risks. The downside risk is not worth what you\u2019re getting paid to taking it. That\u2019s why I\u2019m obsessed with the magnitude. Then I always adjust my chance by saying, I say 80% chance of recession. I don\u2019t mean probabilistically, I just mean on a weighted adjusted basis. Because you look at all of the countervailing factors in the world, China, Russia, inflation, deficits, and I say, well, this is a time for caution. That\u2019s just my bottom line.<\/p>\n
I\u2019d like to follow up on that. The interesting thing in the real estate side of things, it seems like a lot of people are scared of selling their property because then they can\u2019t get into a new property and they\u2019re going to have a higher interest rate. Going into the recession, do you feel like real estate itself will be impacted pretty adversely or do you think the housing stalemate will continue?<\/p>\n
Real estate is typically highly impacted because it\u2019s very sensitive. Interest rates and things that are sensitive to capital flows are more impacted. Things that are not impacted, just an example, like food. Food is typically not very, or liquor not very impacted by this type of change in the economic environment. Typically, real estate, which has a lot of debt and that\u2019s why it\u2019s so interest rate sensitive, is heavily impacted by it. Then some real estate is worse than others. You asked about housing. Housing is actually usually less impacted, but it depends on what kind of housing. It\u2019s already, real estate, at least in the commercial world or institutional world, is definitely in a recession. The institutional real estate is in a recession. That\u2019s a fact.<\/p>\n
Can you define what institutional real estate is for everyone at home?<\/p>\n
I would say it\u2019s when it\u2019s being bought, owned or sold by a company, by a certain scale, I would say. Like when you\u2019re talking about in the tens of millions or hundreds of millions or billions. Not individual who\u2019s buying a house or two houses.<\/p>\n
You mentioned that typically things that are so interest rate sensitive are going to be hit. We\u2019re talking about real estate in this capacity. Can you help us understand, because it tends to sound a little doom and gloom, which it\u2019s a recession, it\u2019s a very serious thing, but how can investors take ownership during a time like this? Do you have any tips for people that are looking to get in the real estate space or looking to just maintain what they have?<\/p>\n
My theme here is caution and I\u2019ll just go to the greats, the GOAT here. Warren Buffett and Charlie Munger, they always talk about being patient. They say sit on my hand, sit on my butt. I have this quote from Charlie Munger. He says, \u201cIt takes character to sit with all that cash and do nothing.\u201d I believe that it\u2019s going to get worse before it gets better. Stanley Druckenmiller who\u2019s a famous investor also, he says he\u2019s waiting for the fat pitch. I think that being patient is very much underestimated. It\u2019s undervalued by people because they feel like the activity is what drives value. Then the older you get, the more you realize that it\u2019s activity during certain periods that really matter. It\u2019s like if you think back, look on your career, list the top five decisions you made that were most impactful to your life. You can know it\u2019s super concentrated. It\u2019s a magnitude thing again. I think it\u2019s not what generally you get from social media, that\u2019s all this activity that\u2019s going to matter. It\u2019s actually inactivity. In 2021, most people should\u2019ve been more inactive. All those day traders.<\/p>\n
It\u2019s a contrarian stance. It\u2019s saying, if you follow what everybody else does, you join the party and then there\u2019s a lag that you may be jumping in during the lag and then once you planted your flag there, the consequences hit and you\u2019re caught off guard, in a sense.<\/p>\n
There\u2019s another quote for you by Andy Grove who\u2019s one of the founders of Intel. He says, \u201cMake reversible decisions quickly and irreversible decision slowly.\u201d<\/p>\n
You know what? I\u2019ve heard of that described by Jeff Bezos in Amazon. He has a policy, because Amazon is growing incredibly fast, they almost cannot keep up with the speed of their growth. With his leadership team, he talks about one-way doors and two-way doors. A one-way door is the decision that once you go in that way, you cannot come back out. It cannot be reversed. A two-way door is a decision that you make that if you realize this isn\u2019t where I wanted to go, you can come right back out. What he says is, if this is a two-way door, if you could make the wrong call and then reverse it, just make it.
Don\u2019t sit here in six months analyze what to do. This is a one-way door, you need to stop and actually put the time in to making sure you made the right decision before you invest a significant amount of resources, capital, energy, whatever the case may be. I thought that was really good. When it comes to our own point of making decisions, if it\u2019s a two-way door, it\u2019s okay to go a little bit quicker. What I\u2019ve told people before is when it comes to house hacking, for instance, here\u2019s a practical example. I don\u2019t know, do I want to buy in that part of town or this part of town and what if I end up not liking my neighbor and I don\u2019t know about the color of that?
They just sit there, and for five years they\u2019re analyzing what they should do. When I look at it, that\u2019s obviously a two-way door. You buy that house, you rent out the rooms to other people or it\u2019s several units. If you don\u2019t like it, you just make it a rental and you move out and get another one. As long as you make sure it would cash-flow if you didn\u2019t live there, that does not require an intense amount of decision making. Or you start a business very low actual money that you had to put into it, it\u2019s just going to be elbow grease. You don\u2019t like it, throw it out the door, go somewhere else. Versus some investments, significant down payment, going to be very difficult to sell to somebody else. That\u2019s when you really want to take some time to think about. Ben, on that note, what are some areas where you see could be two-way doors and some that you see could be one-way doors moving into a potential recession?<\/p>\n
I love all the things you just said. A lot of times that first step, you don\u2019t realize it, but actually what you\u2019re buying is learning. You\u2019re trying to get up the learning curve to mastery. I\u2019ve learned this entrepreneuring in the beginning of Fundrise. I was obsessed with trying to plan things out and then I learned that you can\u2019t plan anything out and that you have to learn by doing. Taking many low risks is really smart because you actually end up learning more than you think. Being inactive doesn\u2019t mean you\u2019re not putting yourself out there. A lot of people I find what they\u2019re worried about is actually looking dumb. They\u2019re worried about making a mistake, they\u2019re going to be embarrassed by. That\u2019s a huge barrier. That doesn\u2019t matter. The sooner you can get to that place, the sooner you\u2019re going to actually get to mastery and excellence. If you\u2019re trying to basically get started, I would just say go and then just size the opportunity to the amount you can afford. Don\u2019t get over your skis.<\/p>\n
What about in terms of if you are deploying money during this economic climate, where would you recommend people deploy money outside of real estate? Are there other ways that people can be diversifying outside of the real estate side of things?<\/p>\n
Well, we are a real estate investment platform. We have $7 billion real estate and I think we have 37,000 doors or something. We have a lot of real estate scale and I can talk really specifically about what we\u2019re seeing in real estate, which you asked. I got to the philosophy. We launched a venture platform, so we\u2019re investing in late-stage tech. Because I think tech is actually going to do pretty well even if we have a recession because AI is a generational breakthrough, like the personal computer. Goldman Sachs, it says it basically has a chance of being 500 times more productive than the personal computer. I\u2019ve been actively investing for our investors in high-tech. I can name companies, Databricks and DBT, and that\u2019s been I think really, really productive and I think it\u2019s been awesome. Then on the real estate side, probably going to have confirmation bias for you guys, but I\u2019m going to bear on downtown cities. I\u2019m old enough to remember when DC and San Francisco and New York and LA were just absolute horrible. Downtowns were just like, you didn\u2019t go there.<\/p>\n
LA, for sure.<\/p>\n
That cycle is happening again. It\u2019s not going to be the same. Something like that is happening because the work from home is not going away. It\u2019s going to get worse. Better, worse, whatever your perspective is. Because soon we\u2019ll have immersive VR and we\u2019ll have AI and you\u2019re not going to go to the office. I think that if I were buying and we are buying, I\u2019d be buying in housing for families and riding the demographic trend, trying to build being in the suburbs. I\u2019d be focused on rental housing, not for sale housing, not flipping. Flipping, I think has got a lot of risk right now because I think the music could stop. Absolutely stop. That\u2019s what happens usually in a recession. Music stops and you don\u2019t want to be in a position where you have an expensive loan and you can\u2019t sell the house.<\/p>\n
I\u2019m feeling that a little bit. I feel like I\u2019ve seen so much changes in the flipping thing. What I like about the rental side of things is at the very least, we\u2019re trying to break even here. If it does go south and you aren\u2019t exactly hitting your numbers, it\u2019ll take a very long time to really feel that impact. Whereas if you go into a flip, it\u2019s possible to lose a big sum of money, 30, 40, 50, 60,000. I know people that are going through that right now and that\u2019s a very difficult thing to absorb in one gut punch.<\/p>\n
Actually, one of my big learnings about real estate, I\u2019ve now done it for 20 years, is that you really want to get in a position where time works for you in real estate. Time is at your back. It\u2019s a tailwind. There\u2019s a lot of real estate deals where time is working against you, speed. I think that\u2019s always a mistake. It may work out occasionally, but really, the power of real estate is this compounding growth over time. It\u2019s sneaky how much that can really work for you. I always try to look for deals that are like, well, if it doesn\u2019t go well and I have a year, the next year will be better. Time is the most valuable asset. The bottom line is time is most valuable thing in the universe. Seeing it at that, it\u2019s so powerful. Once you see the power of time, whether it\u2019s I\u2019ll wait the person out or I\u2019ll wait. That\u2019s why rental housing I think is ultimately the much better risk-adjusted return. I don\u2019t think you make that much more money on flipping, considering how much more risky it is.<\/p>\n
How much more taxes that you pay, how much more closing costs you have. It\u2019s a very inefficient way. I like to look at money like water in a bucket, just because to understand how much money is worth is so tricky when the value of the dollar moves around so much. Instead of trying to figure out exactly how much money this would be, I think about how much energy it would be. In a flip, I buy a property below market value where I added some energy to a bucket and then I improve the condition of the property, which hopefully, improves the value, which adds more water in the bucket. Then when I sell it, I pour all of that water into a different bucket, which would be my bank account. During that process of selling, you\u2019ve got all of these hidden costs that you weren\u2019t expecting. You\u2019ve got the closing costs of the realtor, you\u2019ve got capital gains taxes, all that water spills.
Even if you did a great job of putting the water in the bucket originally, which is the part you control. In the best-case scenario, your win is still a lot less than what it should have been, versus what you\u2019re describing buying rental property and waiting for a long time. The energy stays in the bucket. When your property goes up in value, you\u2019re not taxed on that. You have options of getting the energy out of the bucket like a cash-out refinance that you\u2019re in control of. You do that when you want to. When rates benefit you. You don\u2019t have to because you have to sell this property. Where the market is, is where it\u2019s at. It really gives you the control to monitor the stuff you\u2019re talking about, Ben, the condition of the economy and make the decisions to extract your water and reinvest it somewhere else when it benefits you. Is that what you\u2019re getting at when you\u2019re talking about playing the long game with real estate?<\/p>\n
Totally. Also, think about it, if you sold in 2021 versus if you\u2019re selling in late 2023, you\u2019re selling in 2021, there\u2019s a hundred buyers and it\u2019s really a good time to sell. I\u2019m closer to the commercial real estate, but I\u2019ve sold stuff in 2021 where I had 30, a hundred bidders. It went for millions above the price we thought we\u2019d get. If you sell now, there\u2019s like maybe two and they\u2019re going to low ball you. Having the ability to basically, sell on your timing. You can be filling that bucket up, but if the tsunami comes and knocks you down, like my experience in 2008, I learned that the macro will swamp the micro. You can spend so much energy doing that flip and having the perfect design and 2008 hits or the pandemic hits. It\u2019s so much more powerful than you are.<\/p>\n
That\u2019s one of the things frankly that\u2019s frustrating about being a real estate investor. Because we listen to podcasts like this, we take courses, we read books. We like the feeling as a human of control. If I just learn how to do this. That\u2019s why I think a lot of us, like spreadsheets, is they give you a feeling of control. You can create order out of chaos and it makes you feel safe. The reality is, like you said, it\u2019s maybe 10 to 20% how good of an operator you are, and 80 to 90%, what the conditions are that you\u2019re operating in. We just don\u2019t like it. It\u2019s uncomfortable. I was thinking when you were talking about the nature of commercial lending. It\u2019s got balloon payments and it\u2019s based on the NOI of a property. You can have a property that has a really solid cashflow, you\u2019re crushing it. Your balloon payment comes due and you got in at a 3% rate.
Now rates are 8% and it\u2019s not going to cashflow at that time. Or it happens to come at a time like right now where office space is not as desirable as other spaces. We\u2019re in this flux period, there\u2019s a bit of a lag there. Is office valuable? Is it going to be valuable? Where are we going? Are people going to work from home? No one knows. No one really wants to jump into that game until we get some stability there. You could have a property with office space that you\u2019ve increased the NOI on, maybe you\u2019ve doubled your NOI. You\u2019ve done everything an operator is supposed to do. You\u2019re a stud. Like you said, the macroeconomic conditions work against you. The tidal wave wipes you out no matter how much you\u2019re working out your legs and how strong you got. It\u2019s a bummer. I don\u2019t know another way to say it when somebody has committed themselves to mastering their craft and then some of the decisions that happen from the overall economy just wipe it out. Is that what you\u2019re getting at?<\/p>\n
Definitely. They lemonade out of the lemons thing is like, that\u2019s definitely going to happen to you anyways in your life. It happened to me. Essentially, the learning you get out of it and the reputation you get from how you behave during that period and you see a lot about other people. You see how this person behaved in that situation. I mean you get a lot out of those periods. It doesn\u2019t feel like it at the time. You\u2019re probably in your 30s. You have decades left to make it up. That\u2019s why I\u2019m obsessed with the recessions. Lots of people worked a decade to get here and they can get wiped out just because of the tidal wave. I don\u2019t think there\u2019s going to be a tidal wave. I\u2019m not saying it\u2019s going to be as bad as \u201908, but it is for office. It\u2019s worse. The lack of control is something people, emotionally, it\u2019s a cognitive bias, you don\u2019t want to believe how little control you have over your life.<\/p>\n
It\u2019s a solid point that you\u2019re getting at there. I think we judge people that fail a lot of the time as don\u2019t look at this person, they failed. Based on what you\u2019re saying, you\u2019re making a good point. Sometimes the best person to trust is the person that has already failed. They learn the lessons who you can trust when something happens. How to maybe see it come in the next time a little bit better than the person that\u2019s never failed that has this. I guess maybe an analogy could be you have a fighter that\u2019s undefeated because they\u2019ve only fought bad opponents. Gives this impression that they\u2019re the best. The person who\u2019s fought the best in the world may have much more losses on their record, but they\u2019re going to be the better fighter. I think when it comes to finances and real estate investing, there\u2019s an argument to be made for that.
You see things coming that other people wouldn\u2019t. What I\u2019ve been thinking about lately is just how do I start playing more defense? The last 10 years, the metrics of success we measured. How many doors did you get? How much real estate did you buy? How much cashflow could you acquire? That\u2019s what everybody at every meetup or every event or on social media, everyone\u2019s posting the same stuff. Like, this is how much I acquired. As we\u2019re slipping into what could be a recession, and by the way, we didn\u2019t get into it, but I do think we could go into an economic recession and residential real estate could still stay strong. That might\u2019ve been the fight.<\/p>\n
I agree with that.<\/p>\n
We can\u2019t fight over that either, unfortunately.<\/p>\n
Dang it.<\/p>\n
As we\u2019re heading into recession, victory to me looks like surviving. A lot of the competition is going to get wiped out. How many of our assets, our businesses, our net worth, how much can we hold onto? You just have to assume you\u2019re going to lose some. Rob, what are some steps that you\u2019ve been thinking about taking when it comes to a recession? The fact that you and I are both heavily exposed with short-term rentals. That\u2019s probably going to be a factor that\u2019s more sensitive to people feeling like they\u2019re less wealthy. They\u2019re less likely to go take a vacation to a nice property if they feel like they\u2019re poor. Now\u2019s the time to start thinking defensively. Let\u2019s get some ideas from you about how you\u2019ve positioned things.<\/p>\n
Sure. Well, first and foremost, most of where I invest are national park markets. The Smoky Mountains and stuff like that. I think that those markets tend to be a little bit more resilient, simply because people are always going to go to the Smoky Mountains. Maybe they can\u2019t buy plane tickets for eight people in their family and go to Disney World, but they can go to what I always call, Mother Nature\u2019s Disney World, like national parks. I think for people that are looking to maybe get into the game, those for me always seem to be markets that perform relatively well. I\u2019m not acquiring quite as viciously as I was, but for a multitude of reasons. It\u2019s not necessarily because I\u2019m scared or I\u2019m like, I don\u2019t want to buy things during a recession. I actually am such a big believer. I\u2019ve just had this realization over the past few months, which is a very simple realization, by the way.
What I\u2019m about to say isn\u2019t really the newest idea. I think the best defensive tactic anyone who\u2019s already heavily invested in short-term rentals or really anything is just portfolio optimization. I think that this is a huge, huge thing for me right now. When you put into perspective of a short-term rental, let\u2019s say you\u2019re buying a $400,000 house, well, you\u2019re going to need 20 to 25% down. You\u2019re looking at $100,000 to close on that loan, plus another 20 or $30,000 to actually set it up and get it ready. 130,000 bucks, that\u2019s not a small amount. Then on that 130,000, you\u2019re trying to make a 10 to 20% return. That\u2019s what we\u2019re fighting for in any deal these days on the short-term rental side. What I\u2019ve come to the conclusion that instead of doing that and spending a ton of money trying to get a great return on a new house, what could I do to actually raise the revenue of my current portfolio? How can I make more money with my portfolio?
I\u2019ve talked about this a bunch of different ways. I\u2019m adding amenities to my properties that cost way less than buying a house but will have a really big impact on my revenue. I built this really crazy tree house deck. An outstanding amenity at my house at the Smoky Mountains. I think that it will increase my revenue by 15 to 20,000 because we added a hot tub. If that is true, I\u2019ll have a 50% return on that specific investment. When I start calculating my portfolio, I\u2019m like, what are these five to $20,000 investments I can make to make that much more every single year in gross yearly revenue? My defense is just really solidifying every single property and maximizing revenue to the highest extent. I think a lot of people do get into this mindset of, I need to get another short-term rental. I need to get another door. It is a very, very popular methodology and mindset. Not enough people focus on just making the most amount of money from the actual properties that they already have. That\u2019s what I\u2019m doing right now. What about you?<\/p>\n
I think I\u2019m operating under the pressure that inflation is probably going to keep happening even as we raise rates that it\u2019s odd that we\u2019ve raised rates this much and residential real estate values haven\u2019t dropped, and food is still more expensive and gas is still more expensive and cars are still more expensive. It\u2019s odd that raising rates hasn\u2019t actually dropped the price of a lot of things. It\u2019s just caused money to change hands less frequently, which has caused people to feel less wealthy. I feel like you have to still put your money in smart places. Now, that doesn\u2019t necessarily mean buy more real estate. That could mean putting it in reserves. That could mean doing exactly what you\u2019re describing, Rob, if I spend X amount of dollars here, I can increase my ROI in this place.
I\u2019m thinking about the type of asset I\u2019m putting it in, much more than just how do I maximize ROI? I think that when your economy\u2019s doing very well, your thoughts are, how do I get the most return on the money I possibly can? As we head into a recession, I operate under the understanding that I want to keep as much of this as I can and be positioned when we come out the other side to be able to go run after the stuff you\u2019re getting and get into the acquisition and play offense again. Ben, what\u2019s your thoughts on victory in a recession is winning at defense? Do you think am I off on that? You\u2019ve studied this a lot more than I have.<\/p>\n
I think you\u2019re right on the money. You just said this, Rob, your goal is make 10 to 20% on your investments. You can go get that in the market today. There\u2019s good mortgage REITs that have yields of 13%, current. If interest rates fall, which I think they will, that will appreciate and they\u2019re liquid, you can then sell that and get into a property. Same with treasuries at 5%. It just seems like the Fed wants you on the sidelines and there\u2019s the saying, don\u2019t fight the Fed. Go on the sidelines because they\u2019re going to punish you for not being on the sidelines.
Any good sports team, they\u2019re good at defense and offense. The team that only can play offense, you watch them, you\u2019re like, and they just get beat time and time again. I think that\u2019s right. I wanted to say one more thing, David, you said about two-way doors. The funny thing about two-way doors is that a lot of times people, they get invested in the decision they made. It\u2019s called the endowment effect. It means basically, once they made a decision, they feel like to unmake it, they made a mistake. If you own, I don\u2019t remember, Rob, maybe you own 10 short-term rentals and you need to sell one at a loss, so now you have cash to hold the other nine. That\u2019s okay. That\u2019s the long game.<\/p>\n
Interesting.<\/p>\n
You said portfolio thinking, it doesn\u2019t matter what you paid for something. You look at this exact moment, what\u2019s the best decision? Are you a buyer? Are you a seller? Because interest rates are so high, it pushes you into the liquid market.<\/p>\n
It\u2019s mega interesting that you say that. Because as real estate investors, I think over the last few years, we have been in this mindset of deploy, deploy, deploy. If you have cash in your bank account, you\u2019re a dummy. You need to be moving that cash and making money. That\u2019s this mindset that I\u2019ve always had that I\u2019ve been deploying a lot and recently, I\u2019ve been holding onto a lot. I\u2019ve been saving a lot. I\u2019ve got multiple companies, I pay a lot of people now. I have a lot of real estate. I just like to make sure that I have reserves. I was talking to Codie Sanchez a couple of weeks ago and I told her, I was like, \u201cI feel weird being a real estate investor that has any amount of liquidity because I\u2019ve always been trained to just deploy it.\u201d
She was like, \u201cYeah. Real estate investors are kind of weird like that. Rule number one, don\u2019t go bankrupt.\u201d I was like, \u201cWow, that\u2019s a good rule.\u201d She\u2019s like, \u201cKeep money. Hold onto it. Don\u2019t go bankrupt. That is rule number one above all the other real estate principles or investing principles. It\u2019s never going to be a bad thing to have some cash in your savings.\u201d I think I am starting to move into this mindset a little bit more of saving. It\u2019s interesting that you say, maybe I sell a property at a slight loss or I take an equity hit so that I have reserves for the other 40 properties. I think that\u2019s honestly, something I hadn\u2019t really considered.<\/p>\n
The CEO of Zoom, if you ask his advice, you\u2019ve seen him on a podcast where he said, \u201cSurvive. Survive, survive, survive, survive.\u201d He repeats it like 12 times. Look at Zoom, I mean just like, he was in the right place at the right time. He had to get there and that fat pitch came and worth whatever, tens of billions.<\/p>\n
Such a good point. You know what, Ben? It comes back to your perspective that the macroeconomy is so much more impactful than the micro. In an environment of plenty of prosperity and peace, winning is about acquiring more wealth or more friends or better relationships. Whatever you\u2019re measuring, it\u2019s by getting more. If you\u2019re in a war, winning is about surviving. Nobody\u2019s in a war worrying about, I want to be driving a Ferrari instead of a Civic. They just want to live. I think the environment dictates what the rules of success are. What the question that we\u2019ll get a lot here is, David, how do I make money in this market? Well, that\u2019s a good question.
It also presupposes that the goal is if we\u2019re going into a recession, you should be trying to make as much money as you can. I would tend to think the goal is how do you keep as much of the wealth as you\u2019ve been able to create? How do you survive this and position yourself so that when we come into a time of peace, you\u2019re ready to go forward? Now, none of us are going to turn down an opportunity to make money in a recession. I think my expectations just drop that I don\u2019t feel bad if I\u2019m not increasing my net worth by as much or I\u2019m not adding more doors as it would be if we were in a time where it was easy to do that. Right now, holding onto the real estate you have, not losing as much money, seeing your revenue not drop as much is a win. Have those thoughts crushed your mind yet, Rob?<\/p>\n
Definitely. That\u2019s the big one now. It\u2019s like, you grow at such a fast rate when things are going well, I guess it is just a weird feeling to say, it\u2019s still a victory to just have what you got. If you\u2019re keeping your net worth where it\u2019s at, that\u2019s much better than losing it. I think it\u2019s just a lot of people are having to kind of, they\u2019re being forced to settle a little bit. I think that makes people feel like they\u2019re failing, but it\u2019s the opposite. I think it\u2019s the very opposite of failing to hold onto what you have. It\u2019s a new thing that I\u2019m going through myself.<\/p>\n
Like a race car driver. If you never hit the brakes, you would definitely crash. An all-around player plays the highs and the lows.<\/p>\n
That\u2019s a great point. Nobody in a race car is smashing on the gas when they\u2019re in the middle of a hard turn. It\u2019s when you hit the straightaway. I love that analogy right there. Some economies are a straightaway and it\u2019s all about how fast can you go. There\u2019s other economies that are dangerous with a lot of twists and turns, and it\u2019s all about how safe can you go. You make wealth in the straightaway as you maintain wealth when you\u2019re in these turns and studying the track lets you know what you should be doing. I really appreciate being here, Ben, to explain why this is important to study. If people want to reach out to you and learn more, where can they go?<\/p>\n
I\u2019m on Twitter, BenMillerise and fundrise.com. Hit me up.<\/p>\n
Awesome. Rob, what about you?<\/p>\n
You can find me over on YouTube at Robuilt, R-O-B-U-I-L-T, on Instagram, too. Depends on what you want. You want short form, funny reels, or do you want long-form videos that teach you how to do real estate? You can pick your poison. What about you, David?<\/p>\n
Find me at DavidGreene24, the most boring, yet stable screen name in the world. Going into recession, you definitely want stability. Go give me a follow on social media at DavidGreene24, or visit davidgreen24.com and see what I got going on. We here at BiggerPockets are dedicated to giving you the real, the raw, what\u2019s actually happening and racking our brain to come up with strategies that will work. In times of feast or famine, there\u2019s always something to study and there\u2019s always something to do to improve. Ben, thank you for being here today and sharing your wisdom. It\u2019s not often we get to talk to someone who actually studies worst-case scenarios and how to survive in those. Everybody, go give Ben a follow and reach out and let him know that you appreciate him on today\u2019s show. If you\u2019re watching this on YouTube, leave us a comment. Let us know what you thought. This is David Greene for Rob, the short-term speed racer, Rob Abasolo, signing off.<\/p>\n