Real Estate Investing in 2024 (6 "Rules" You Can't Ignore)

00:40:19
https://www.youtube.com/watch?v=J5Fl9xxSbkc

Summary

TLDRIn a discussion hosted by Dave Meyer with Jay Scott, real estate investment strategies for 2024 are explored, pinpointing six crucial rules. Key economic concerns driving these rules include inflation, high property valuations, and the current interest rate landscape. Jay suggests that rather than strategizing strictly for property appreciation, investors should focus on conservative underwriting and maintaining properties that can sustain 5-10 year investment horizons. Adjustable rate mortgages are deemed risky, with fixed-rate debt advocated to ensure stability. As the housing market faces potential volatility, staying informed on legislative changes and meticulously assessing investment strategies is essential. Despite market challenges, maintaining a long-term perspective and focusing on reliable cash flow can afford sound investment opportunities even in unpredictable conditions.

Takeaways

  • 📈 Don't rely on appreciation solely when investing.
  • 💼 Be conservative in financial assumptions, especially rents.
  • 🏠 Consider sustainable strategy amidst market risks.
  • 📉 Avoid adjustable rate loans; prefer fixed-rate options.
  • 🔒 Ensure capability to hold properties long-term.
  • 📝 Stay informed about legislative impacts on investments.
  • 🌟 Focus on stable cash flow and fundamental property values.
  • 🔍 Pay attention to economic indicators like interest rates.
  • 📊 Understand risk implications of current market conditions.
  • 🗣️ Engage with economic discussions and adapt strategies accordingly.

Timeline

  • 00:00:00 - 00:05:00

    The video open by discussing the challenges of investing in real estate during the pandemic. Investors, even seasoned ones, must adapt to the continuously evolving market. The host introduces Jay Scott, a seasoned investor and co-author, who will present six rules for real estate investing in 2024.

  • 00:05:00 - 00:10:00

    Jay Scott begins by discussing the market conditions affecting investment strategies, focusing on inflation. While inflation generally raises rents beneficial for real estate, current inflation surpasses wage growth, limiting how much rents can increase. High inflation paired with high real estate values pose challenges similar to historical trends, where real estate appreciated in line with inflation.

  • 00:10:00 - 00:15:00

    Scott analyzes the current market compared to 2008's conditions, noting differences that suggest flat real estate prices rather than a major crash. Factors such as low supply, continued demand, and historical resilience to value drops are outlined. Inflation remains a concern, but housing prices may remain stable without significant depreciation.

  • 00:15:00 - 00:20:00

    The discussion shifts to interest rates and economic slowdown. Interest rates, currently high, inhibit transactions and cash flow, complicating investments. A slowing economy also poses risks of real estate value drops, compounded by foreclosures. Additionally, Scott talks about the yield curve inversion, affecting banks' lending practices, thus impacting real estate investors.

  • 00:20:00 - 00:25:00

    The host and Scott recap key economic conditions before moving to six investment rules. Emphasizing long-term strategies, Scott advises not buying based on appreciation expectations, highlighting the need for cash flow-focused investments. Market conditions should be evaluated critically, avoiding reliance on price growth or rent increases as primary decision factors.

  • 00:25:00 - 00:30:00

    Scott elaborates on conservative underwriting, suggesting investors should assume minimal rent growth and higher operating expenses due to inflation and increasing costs like insurance. Careful evaluation and realistic projections are crucial given current economic uncertainties, with emphasis on preparing for limited cash flow growth.

  • 00:30:00 - 00:35:00

    Transactional real estate strategies like flipping face higher risks in volatile markets. Scott warns against short-term investments without cash flow, acknowledging current profits but cautioning unpredictability. Long-term holding ability is crucial, recommending readiness to manage potential downturns without relying on market conditions for profits.

  • 00:35:00 - 00:40:19

    The video concludes with broad advice: avoid adjustable-rate debt given uncertain interest rate movements and ensure investment decisions align with long-term holding capacity. Understanding regulatory environments affecting real estate investments is pivotal. Despite cautious tones, Scott encourages a conservative, yet opportunity-seeking approach to real estate investment in 2024.

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Mind Map

Video Q&A

  • What does Jay Scott recommend considering due to inflation?

    Jay Scott suggests not factoring in appreciation and being conservative in income and expense assumptions due to high inflation.

  • Why might real estate values remain flat according to Jay Scott?

    Real estate values might stay flat due to high valuations currently sitting above historic inflation trends.

  • What is the first rule for real estate investing in 2024?

    The first rule is not to buy strictly for appreciation.

  • How does Jay Scott view interest rate changes affecting investors?

    Jay Scott warns that high interest rates may slow transactions and advises against adjustable rate mortgages.

  • What should investors avoid, based on Jay Scott's advice?

    Investors should avoid adjustable rate debt and ensure they can hold properties for 5-10 years.

  • Is flipping still a viable strategy according to Jay Scott?

    Jay cautions that flipping requires being prepared for potential rapid changes in housing prices.

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  • 00:00:00
    ever since the start of the pandemic it
  • 00:00:02
    seems like investors have to craft a
  • 00:00:04
    brand new playbook for investing in real
  • 00:00:07
    estate H and every year even for a
  • 00:00:10
    seasoned investor it's hard to determine
  • 00:00:12
    what the best guidelines are for
  • 00:00:14
    investing in this continually evolving
  • 00:00:16
    and changing Market So today we're going
  • 00:00:19
    to be bringing you six rules for real
  • 00:00:22
    estate investing in 2024
  • 00:00:28
    [Music]
  • 00:00:30
    hey everyone welcome to this week's
  • 00:00:31
    episode of bigger news I'm your host
  • 00:00:34
    Dave Meyer and today I've brought on my
  • 00:00:36
    friend a co-author of a book of mine and
  • 00:00:39
    a longtime friend of the Bigger Pockets
  • 00:00:41
    Community Jay Scott to talk through his
  • 00:00:44
    six rules for investing in the current
  • 00:00:46
    real estate market and if you guys don't
  • 00:00:48
    know Jay he is a renowned flipper he's
  • 00:00:51
    the co-author of a book I wrote called
  • 00:00:53
    real estate by the Numbers he's written
  • 00:00:55
    four other books he's also a seasoned
  • 00:00:57
    investor and keeps a super sharp eye on
  • 00:01:00
    the market and the economy and his rules
  • 00:01:02
    that he's going to go over today will
  • 00:01:04
    help you determine which deals you
  • 00:01:05
    should be going after and how you should
  • 00:01:07
    think about investing in this type of
  • 00:01:09
    Market cycle before we bring on Jay I
  • 00:01:13
    just wanted to thank our sponsor for our
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    bigger news episode today rent app rent
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    app is a free and easy way to collect
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    rent and if you want to learn more about
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    it you can go to rent. app SL landlord
  • 00:01:25
    and with that let's bring on Jay to talk
  • 00:01:27
    about his six rules for investing in
  • 00:01:30
    2024 Jay scottt welcome back to the
  • 00:01:32
    Bigger Pockets real estate podcast it's
  • 00:01:35
    always great to have you here I
  • 00:01:37
    appreciate it thanks it feels like it's
  • 00:01:38
    been a minute since I've been on the
  • 00:01:39
    show thrilled to be back I'm happy
  • 00:01:41
    you're back with us because I'm really
  • 00:01:43
    excited to dig into your rules that
  • 00:01:45
    you're going to give us on investing in
  • 00:01:47
    2024 but before we jump into those rules
  • 00:01:50
    maybe we should talk about what are some
  • 00:01:52
    of the conditions that you're monitoring
  • 00:01:55
    that have influenced the creation of
  • 00:01:57
    these rules what metrics economic
  • 00:02:00
    conditions are top of mind right now
  • 00:02:03
    yeah so there are a number of them and
  • 00:02:04
    and the economy is constantly changing
  • 00:02:07
    the the markets constantly changing but
  • 00:02:09
    there are a few big themes that we've
  • 00:02:10
    been seeing over the last couple months
  • 00:02:12
    even the last couple years that are kind
  • 00:02:14
    of driving how we as investors should be
  • 00:02:16
    thinking about investing moving forward
  • 00:02:18
    and the first one I don't think will
  • 00:02:19
    surprise anybody uh but that's inflation
  • 00:02:22
    and the fact that we have seen High
  • 00:02:24
    inflation and even persistent inflation
  • 00:02:26
    over the last couple years normally we
  • 00:02:29
    as Real Estate Investors we love
  • 00:02:31
    inflation inflation means that rents are
  • 00:02:32
    going up and so if we're Buy and Hold
  • 00:02:34
    investors normally speaking inflation is
  • 00:02:37
    really good for us the problem is when
  • 00:02:39
    we see really high inflation when we see
  • 00:02:41
    persistent inflation especially in this
  • 00:02:43
    case where we see inflation that is
  • 00:02:45
    higher than wage growth so people are
  • 00:02:48
    are literally losing money um because
  • 00:02:51
    the things that they're buying cost more
  • 00:02:52
    than than the money that they're making
  • 00:02:54
    um the cost of goods is going up faster
  • 00:02:56
    than our wages when that happens people
  • 00:02:59
    can't afford to pay higher rents and
  • 00:03:01
    with the super high inflation that we've
  • 00:03:03
    seen over the last couple years um in
  • 00:03:06
    many cases we've come to the point where
  • 00:03:07
    we we've come close to maxing out rents
  • 00:03:10
    people are paying close to 30% of their
  • 00:03:12
    income towards their housing cost
  • 00:03:14
    towards their rent and when you get
  • 00:03:16
    close to 30% you get to the point where
  • 00:03:18
    apartment owners aren't going to be
  • 00:03:19
    willing to rent to you because they want
  • 00:03:21
    to see three times income for for rent
  • 00:03:24
    um and so we're just getting to that
  • 00:03:25
    point where as investors we may not have
  • 00:03:28
    the ability to raise rent much further
  • 00:03:30
    thanks to inflation so so inflation is
  • 00:03:33
    the first one the second one simply the
  • 00:03:35
    fact that we have seen such high real
  • 00:03:37
    estate values over the last couple years
  • 00:03:40
    going back 100 120 years or so we can
  • 00:03:43
    see that real estate tends to track
  • 00:03:45
    inflation for values so from like 1900
  • 00:03:48
    to 2000 so for that 100 years basically
  • 00:03:51
    we saw the inflation line go up and the
  • 00:03:52
    real estate values line go up in lock
  • 00:03:55
    step real estate goes up at the the rate
  • 00:03:57
    of inflation now we know that before 200
  • 00:03:59
    8 prices kind of got wild uh real estate
  • 00:04:02
    values went up much higher than
  • 00:04:03
    inflation but between 2008 and
  • 00:04:06
    2013 those prices Came Crashing Down and
  • 00:04:09
    we were again right around that
  • 00:04:10
    inflation trend line so historically
  • 00:04:13
    speaking we can say that real estate
  • 00:04:15
    goes up at the rate of inflation and if
  • 00:04:17
    we're much higher than that rate of
  • 00:04:18
    inflation one of two things is going to
  • 00:04:20
    happen either we're going to see real
  • 00:04:22
    estate prices come crashing down back to
  • 00:04:25
    that that trend line or we're going to
  • 00:04:27
    see real estate uh prices stay flat for
  • 00:04:29
    a long period of time while inflation
  • 00:04:31
    catches up and so I think it's likely
  • 00:04:34
    that over the next couple years that
  • 00:04:35
    we're going to see one of those two
  • 00:04:36
    phenomenons and and I do have a thought
  • 00:04:38
    on which one it's going to be but I
  • 00:04:40
    think it's likely that we're either
  • 00:04:41
    going to see prices come down or prices
  • 00:04:43
    stay the same for the next few years I
  • 00:04:44
    think it's unlikely that we're going to
  • 00:04:46
    see uh much higher real estate values
  • 00:04:48
    over the next couple years just thanks
  • 00:04:50
    to the fact that that real estate values
  • 00:04:52
    right now are so far above that trend
  • 00:04:54
    line all right well Jay I'm curious what
  • 00:04:57
    you know just very briefly do you think
  • 00:04:59
    it was a pull forward and we'll just see
  • 00:05:01
    sort of flat appreciation or do you
  • 00:05:03
    think we're going to see a big uh leg
  • 00:05:06
    down in terms of housing prices I think
  • 00:05:08
    the Market's a lot different than it was
  • 00:05:09
    in 2008 when we did see that big crash
  • 00:05:11
    in prices um the fundamentals are
  • 00:05:15
    different back in 2008 basically we had
  • 00:05:17
    a recession that was driven by bad
  • 00:05:21
    decisions in the real estate industry by
  • 00:05:23
    lenders by Brokers uh by buyers we don't
  • 00:05:27
    see those same conditions now secondly
  • 00:05:30
    there's a lot of demand in the market
  • 00:05:32
    now whereas we didn't see a lot of
  • 00:05:34
    demand back in 2008 and there's not a
  • 00:05:36
    lot of Supply there about 80% of of
  • 00:05:38
    homeowners right now who have uh
  • 00:05:41
    mortgages with interest rates under 4%
  • 00:05:43
    those people don't want to sell why sell
  • 00:05:46
    a property with a mortgage under 4% just
  • 00:05:48
    have to go out and buy an overvalued
  • 00:05:49
    property with a mortgage now at 8% or
  • 00:05:51
    have to rent at extremely high rents so
  • 00:05:54
    people aren't selling people are sitting
  • 00:05:55
    on the houses that they own so given the
  • 00:05:58
    supply and demand given that the the
  • 00:05:59
    fundamentals are pretty strong and given
  • 00:06:01
    the fact that historically real estate
  • 00:06:04
    doesn't go down in value I think it's a
  • 00:06:07
    lot more likely that over the next
  • 00:06:08
    couple years we see flat prices flat
  • 00:06:11
    values while that inflation line kind of
  • 00:06:13
    catches up to the real estate values so
  • 00:06:15
    that that's my best guess at what's
  • 00:06:17
    going to happen I don't think we're
  • 00:06:18
    going to see a big drop we may see a
  • 00:06:20
    softening we may see a small drop in
  • 00:06:22
    values I wouldn't be surprised but I
  • 00:06:23
    don't think it's going to be anything
  • 00:06:24
    like 2008 that does tend to be the
  • 00:06:26
    general consensus around most
  • 00:06:28
    experienced investors an economist and
  • 00:06:30
    here's hoping you're right I do think
  • 00:06:32
    something needs to change for us to uh
  • 00:06:34
    experience more normal levels of
  • 00:06:36
    affordability again uh but obviously we
  • 00:06:38
    don't want a huge shock to the system so
  • 00:06:41
    far the two conditions you've listed are
  • 00:06:42
    inflation and high home prices what are
  • 00:06:45
    the other conditions Jay yeah so the
  • 00:06:47
    next one is simply interest rates we all
  • 00:06:50
    know interest rates are are high at
  • 00:06:52
    least compared to where they've been
  • 00:06:53
    over the last 20 years when interest
  • 00:06:55
    rates are high a couple things happen
  • 00:06:57
    one there's a Slowdown in in trans
  • 00:06:59
    actions um so we've seen that with
  • 00:07:01
    sellers sellers don't want to sell their
  • 00:07:03
    houses because they have low interest
  • 00:07:05
    rates from a couple years ago and they
  • 00:07:06
    don't want to have to trade those low
  • 00:07:07
    interest rates for high interest rates
  • 00:07:09
    and secondly it's a lot harder for us as
  • 00:07:11
    Real Estate Investors to get our numbers
  • 00:07:13
    to work it's hard to get cash flow when
  • 00:07:17
    interest rates are higher than than what
  • 00:07:19
    we call Cap rates basically the uh cash
  • 00:07:21
    flow we can expect from our properties
  • 00:07:24
    and so just given the situation I think
  • 00:07:25
    it's very unlikely that we're going to
  • 00:07:27
    see a lot of transactions over the next
  • 00:07:28
    couple years um which as Real Estate
  • 00:07:31
    Investors we want to see a lot of
  • 00:07:32
    transactions because at the end of the
  • 00:07:34
    day the more transactions the more
  • 00:07:35
    distress sellers we're going to have and
  • 00:07:37
    the better deals that we're going to get
  • 00:07:39
    yeah I don't think you're surprising
  • 00:07:40
    anyone there with uh interest rates that
  • 00:07:42
    is definitely a common topic what are
  • 00:07:44
    the last two you got yeah last two I
  • 00:07:46
    have uh number four is just a slowing
  • 00:07:48
    economy so um we've seen great economic
  • 00:07:51
    growth over the last couple years but
  • 00:07:52
    we're starting to see the economy slow
  • 00:07:54
    down uh GDP came in a lot lower than
  • 00:07:57
    expected don't know if this is going to
  • 00:07:58
    be a trend if this was just a blip on
  • 00:08:01
    the uh on the radar but assuming the
  • 00:08:03
    economy slows down that could impact
  • 00:08:05
    real estate values I talked before about
  • 00:08:07
    how I think values are going to stay
  • 00:08:09
    propped up for the next couple years but
  • 00:08:11
    if people start losing their jobs if
  • 00:08:12
    foreclosure foreclosures start to
  • 00:08:14
    increase then it's really it's possible
  • 00:08:17
    that we could see real estate value
  • 00:08:18
    soften and start to come down so a
  • 00:08:19
    slowing economy is the next one and then
  • 00:08:22
    finally this thing called the yield
  • 00:08:23
    curve and I know it's it's it's a
  • 00:08:26
    somewhat complicated topic I'm not going
  • 00:08:27
    to go into the details but let me leave
  • 00:08:30
    it at this Banks like to borrow money at
  • 00:08:33
    very low rates they like to borrow
  • 00:08:35
    What's called the short end of the curve
  • 00:08:36
    they like to borrow money um overnight
  • 00:08:39
    or for a couple days or a couple weeks
  • 00:08:41
    and then they want to lend it out for a
  • 00:08:43
    long period of time they want to lend it
  • 00:08:45
    at the long end of the curve they want
  • 00:08:46
    to lend it for 10 years 20 years 30
  • 00:08:48
    years and historically speaking
  • 00:08:51
    borrowing money at the short end of the
  • 00:08:53
    curve shortterm is a lot cheaper than it
  • 00:08:56
    is at the long end of the curve so banks
  • 00:08:57
    are used to being able to borrow money
  • 00:08:59
    short-term at very low prices and lend
  • 00:09:01
    it out longterm at very high prices
  • 00:09:04
    right now we're in a situation where
  • 00:09:06
    borrowing money shortterm is actually
  • 00:09:08
    more costly than borrowing money
  • 00:09:10
    longterm and so banks are kind of upside
  • 00:09:13
    down on this thing called the yield
  • 00:09:15
    curve where they're borrowing money at
  • 00:09:16
    higher costs and lending them out at
  • 00:09:18
    lower costs and when the banks are not
  • 00:09:20
    making as much money on the money that
  • 00:09:22
    they're lending when they're not making
  • 00:09:24
    as big a spread what they're going to do
  • 00:09:26
    is they're going to slow down they're
  • 00:09:27
    going to tighten up their lending
  • 00:09:28
    standard and they're going to lend less
  • 00:09:30
    money and anytime Banks lend less money
  • 00:09:32
    that's going to be bad for us as Real
  • 00:09:33
    Estate Investors yeah makes sense and I
  • 00:09:35
    know that this is something of a uh
  • 00:09:38
    complex topic for people but as J just
  • 00:09:40
    said this really makes sense if you
  • 00:09:41
    think about the way that a bank works if
  • 00:09:44
    they have to borrow money in the short
  • 00:09:47
    term at a higher rate it increases their
  • 00:09:49
    risk and they are not in a position to
  • 00:09:50
    be taking on extraordinary amounts of
  • 00:09:52
    risk everything that's going on with the
  • 00:09:54
    economy and credit markets right now so
  • 00:09:57
    thank you for sharing those conditions
  • 00:09:59
    with us J and just to recap we talked
  • 00:10:01
    about inflation we talked about record
  • 00:10:04
    high median home prices interest rates a
  • 00:10:06
    slowing economy and a yield curve
  • 00:10:09
    inversion let's move on now to your six
  • 00:10:13
    rules for how to navigate them because
  • 00:10:15
    frankly Jay those six conditions don't
  • 00:10:17
    sound great for Real Estate Investors
  • 00:10:20
    there's not a lot of happy or positive
  • 00:10:23
    conditions that you're tracking there so
  • 00:10:25
    how do you get around that so let's
  • 00:10:28
    start with the fact that that most real
  • 00:10:30
    estate strategies are long-term and most
  • 00:10:33
    economic and market conditions are
  • 00:10:35
    short-term so if we go back to 200 2008
  • 00:10:37
    and we think about the fact that yeah
  • 00:10:39
    2008 was a really bad time uh to be
  • 00:10:42
    buying certain types of properties same
  • 00:10:44
    with 2009 even 2010 but if in 2008 you
  • 00:10:47
    were buying properties for the long term
  • 00:10:49
    you're buying to hold for three five 7
  • 00:10:52
    10 years well in retrospect as we see
  • 00:10:56
    property values have gone up everything
  • 00:10:58
    has worked out
  • 00:10:59
    and I would suggest that if you look
  • 00:11:02
    back through uh real estate history
  • 00:11:04
    there's never been a 10-year time period
  • 00:11:06
    where real estate values didn't go up
  • 00:11:09
    and so while today it's really easy to
  • 00:11:10
    say yeah things are bad it's not a good
  • 00:11:12
    time to be buying consider that if you
  • 00:11:15
    buy something today and you're still
  • 00:11:16
    holding it 10 years from now you're
  • 00:11:18
    likely going to have made money so with
  • 00:11:21
    that said let let's jump into some some
  • 00:11:23
    rules that that I'm following today um
  • 00:11:26
    as a real estate investor and I would
  • 00:11:28
    consider I would suggest other people
  • 00:11:29
    probably consider following as well um
  • 00:11:32
    number one I wouldn't S Suggest anybody
  • 00:11:35
    thinks about buying strictly for
  • 00:11:38
    appreciation anymore um when you were
  • 00:11:40
    buying in 2008 9 10 11 12 with values as
  • 00:11:43
    low as they were it was really easy to
  • 00:11:45
    buy basically anything and say okay if I
  • 00:11:48
    hold this property for a few years it's
  • 00:11:50
    probably going to come back in value
  • 00:11:51
    it's probably going to make me money I'm
  • 00:11:53
    probably going to get more cash flow I'm
  • 00:11:54
    probably going to get uh all the
  • 00:11:56
    benefits of real estate but today we
  • 00:11:58
    have really real estate values that are
  • 00:12:00
    tremendously high and so buying with the
  • 00:12:03
    expectation that they're going to go
  • 00:12:04
    higher is a very risky proposition and
  • 00:12:07
    so the first thing I would suggest is
  • 00:12:09
    that people who are buying right now
  • 00:12:11
    don't Factor appreciation into your
  • 00:12:14
    deals don't assume that you're going to
  • 00:12:16
    get appreciation um from the deals that
  • 00:12:18
    you're doing maybe you will and if you
  • 00:12:20
    do consider it a bonus but right now you
  • 00:12:22
    should be buying for the fundamentals
  • 00:12:24
    you should be buying for the cash flow
  • 00:12:26
    you should be buying for the tax
  • 00:12:27
    benefits you should be buying for the
  • 00:12:29
    long-term principal pay down that you're
  • 00:12:31
    going to get by holding that property
  • 00:12:32
    longterm but don't necessarily factor in
  • 00:12:35
    the appreciation into your metrics again
  • 00:12:37
    hopefully you'll get it but you may not
  • 00:12:39
    Jay when you say don't factor in any
  • 00:12:42
    appreciation I think there are different
  • 00:12:43
    ways people approach this some people
  • 00:12:45
    treat quote unquote appreciation as
  • 00:12:48
    above and beyond the rate of inflation
  • 00:12:51
    or are you saying actually flat zero
  • 00:12:54
    price growth you know for the next few
  • 00:12:56
    years yes so histor Al I've always said
  • 00:13:00
    don't factor in inflation don't factor
  • 00:13:03
    in price appreciation um and that was
  • 00:13:05
    even before we're in the market that
  • 00:13:07
    we're in now um I've always been a big
  • 00:13:09
    believer that yes over the long term we
  • 00:13:11
    should see real estate values go up but
  • 00:13:13
    again historically we see them go up at
  • 00:13:16
    around the rate of inflation which means
  • 00:13:18
    we're not making money on real estate
  • 00:13:19
    values going up we're just not losing
  • 00:13:21
    money real estate holding real estate
  • 00:13:23
    long term is a wealth preservation
  • 00:13:25
    strategy if you're not getting any other
  • 00:13:27
    benefits and so from my pers perspective
  • 00:13:30
    I don't like to assume appreciation in
  • 00:13:32
    any forms um whether it's it's current
  • 00:13:35
    conditions or whether it was conditions
  • 00:13:36
    10 years ago or 10 years from now that
  • 00:13:39
    said there is one other type of
  • 00:13:40
    appreciation that that we can factor in
  • 00:13:42
    and that's called forced appreciation
  • 00:13:44
    and this is where a lot of us make our
  • 00:13:45
    money we buy properties that are
  • 00:13:48
    distressed in some way uh maybe they are
  • 00:13:50
    physically distressed meaning that they
  • 00:13:52
    need Renovations that they're in
  • 00:13:53
    disrepair maybe they're in management
  • 00:13:55
    distress maybe they're being managed
  • 00:13:57
    poorly the person that owns the property
  • 00:13:59
    is a tired landlord or just doesn't have
  • 00:14:01
    the time to to spend or the attention to
  • 00:14:04
    to spend on the property and it's just
  • 00:14:06
    not being managed well they're not uh
  • 00:14:08
    managing the expenses well they're not
  • 00:14:09
    managing the income well if you can go
  • 00:14:11
    into a property like that and you can
  • 00:14:13
    renovate it again either physically or
  • 00:14:15
    through management changes you can
  • 00:14:17
    increase the value tremendously well
  • 00:14:18
    above the rate of inflation well above
  • 00:14:21
    the long-term trend of increase in in
  • 00:14:23
    real estate values and so I'm a big
  • 00:14:24
    proponent of that I'm a big proponent of
  • 00:14:26
    force depreciation to make money but
  • 00:14:28
    again if you're just going to sit back
  • 00:14:30
    and wait for the market to help you make
  • 00:14:32
    money historically it doesn't happen the
  • 00:14:34
    market will help you preserve your
  • 00:14:35
    Capital it will help you kind of keep
  • 00:14:38
    the same spending power for the value of
  • 00:14:39
    the property that you own but it's not
  • 00:14:41
    going to make you money long term yeah
  • 00:14:43
    that makes sense and I you know
  • 00:14:44
    typically what I've done is underwritten
  • 00:14:47
    deals at the rate of inflation like you
  • 00:14:50
    said they it usually tracks inflation
  • 00:14:52
    and so I count on properties going up
  • 00:14:55
    you know 2% a year or something like
  • 00:14:57
    that to keep Pace with the rate of
  • 00:14:59
    inflation so I'm wondering Jay if you
  • 00:15:01
    were a investor listening to this and
  • 00:15:04
    you're intending to buy something for 15
  • 00:15:07
    years and you're saying you know maybe
  • 00:15:08
    the next few years we're going to have
  • 00:15:10
    flat would you just put 0% appreciation
  • 00:15:13
    for the next 15 years or how would you
  • 00:15:15
    like actually go about underwriting a
  • 00:15:17
    deal on that time frame I would
  • 00:15:20
    literally put 0% appreciation for the
  • 00:15:22
    next 15 years and uh to be honest this
  • 00:15:24
    is what I've done and this is what I've
  • 00:15:26
    been recommending people do um for as
  • 00:15:28
    long as I've in this business so it's
  • 00:15:30
    not just something I'm saying now I was
  • 00:15:31
    saying this back in 2008 9 10 11 12 um
  • 00:15:35
    My Philosophy is always been if we get
  • 00:15:38
    that appreciation that's fantastic um
  • 00:15:41
    but don't assume you're going to get it
  • 00:15:43
    and don't Factor it into your numbers
  • 00:15:44
    considered the cherry on top awesome
  • 00:15:47
    great advice for rule number one Jay
  • 00:15:50
    what's rule number two rule number two
  • 00:15:52
    is we need to be super conservative in
  • 00:15:55
    our underwriting assumptions these days
  • 00:15:57
    both on the income side of things and
  • 00:15:59
    the expense side of things I mentioned
  • 00:16:02
    earlier that inflation tends to be good
  • 00:16:04
    for us as Real Estate Investors and
  • 00:16:06
    that's true typically um during
  • 00:16:07
    inflationary times rents are going up
  • 00:16:10
    and what we saw in 2021
  • 00:16:12
    2022 uh rents went up really quickly
  • 00:16:15
    really high and that was because of
  • 00:16:17
    inflation unfortunately again because
  • 00:16:20
    inflation is higher than wage growth
  • 00:16:21
    right now there are a lot of people who
  • 00:16:23
    aren't making more money inflation isn't
  • 00:16:26
    helping them and when people are making
  • 00:16:28
    less money in real terms they're going
  • 00:16:30
    to have less money to spend on rents and
  • 00:16:32
    so we're unlikely to see the same
  • 00:16:34
    historic rent growth that we've seen
  • 00:16:35
    over the last 10 20 30 years
  • 00:16:38
    historically in most markets we've seen
  • 00:16:40
    rank grow somewhere in the 2 to 3% range
  • 00:16:43
    these days I'm assuming that for the
  • 00:16:45
    next year or two rank growth is going to
  • 00:16:47
    be closer to 1% maybe 2% in some markets
  • 00:16:50
    I'm I'm actually uh underwriting rank
  • 00:16:52
    growth is flat for the next year or two
  • 00:16:54
    it's hurting my numbers it's making it
  • 00:16:56
    more difficult to get deals to pencil
  • 00:16:58
    but again I like to go in conservatively
  • 00:17:00
    and then if everything works out and we
  • 00:17:02
    do see more rent growth than we expect
  • 00:17:04
    then again that's the cherry on top
  • 00:17:06
    that's the the bonus that we weren't
  • 00:17:07
    expecting but if things happen the way
  • 00:17:10
    we are expecting which is little rent
  • 00:17:12
    growth for the next couple years we're
  • 00:17:13
    not going to find ourselves in a bad
  • 00:17:15
    cash flow position or in a position
  • 00:17:16
    where uh we're at risk of losing a
  • 00:17:18
    property because we were over optimistic
  • 00:17:21
    or we were over aggressive in our
  • 00:17:22
    assumptions all right so similar idea
  • 00:17:24
    here to rule number one is obvious you
  • 00:17:27
    don't want to count on too much
  • 00:17:28
    appreciation
  • 00:17:29
    in price appreciation for home values
  • 00:17:32
    same thing in terms of rents as well and
  • 00:17:36
    I just want to call out not only are
  • 00:17:38
    rents growing slower than uh inflation
  • 00:17:42
    right now rents are also growing slower
  • 00:17:44
    than expenses right now and so that is
  • 00:17:47
    something I think that really
  • 00:17:49
    complicates underwriting a little bit in
  • 00:17:51
    a way that at least I'm not super
  • 00:17:53
    familiar with or used to in my investing
  • 00:17:55
    career where you might have to forecast
  • 00:17:57
    Lower cas flow at least in the next
  • 00:18:00
    couple of years yeah and you beat me to
  • 00:18:03
    it um the the rent the income is one
  • 00:18:06
    side of the equation that we as
  • 00:18:07
    investors are kind of getting getting
  • 00:18:09
    beaten up a little bit on these days but
  • 00:18:11
    the other side of the equation the
  • 00:18:12
    expenses we're getting beaten up on as
  • 00:18:14
    well um if you just look at normal
  • 00:18:16
    operating expenses things like
  • 00:18:18
    electricity and water and other
  • 00:18:20
    utilities um things like uh labor costs
  • 00:18:23
    and material costs all of those things
  • 00:18:25
    are going up at the rate of inflation
  • 00:18:27
    and as we already discussed dust
  • 00:18:29
    inflation is pretty high right now it's
  • 00:18:30
    not the typical 2 2 and a half% that
  • 00:18:32
    we've seen historically and so in our
  • 00:18:34
    underwriting we can't assume that those
  • 00:18:37
    expenses are going to go up at the
  • 00:18:38
    Historical rate of 2 or 2 and a half%
  • 00:18:41
    like we always have these days inflation
  • 00:18:43
    is closer to three 3 and a half maybe
  • 00:18:45
    even 4% and so we need to be
  • 00:18:47
    underwriting future uh expense growth at
  • 00:18:50
    these 3 or 4% numbers now unfortunately
  • 00:18:53
    it's even worse than that those are our
  • 00:18:55
    regular operating expenses we're seeing
  • 00:18:57
    certain operating expenses I'll use the
  • 00:18:59
    example of insurance as the big one in
  • 00:19:02
    some markets we're seeing insurance go
  • 00:19:03
    up at many many times the rate of
  • 00:19:05
    inflation I'm in the I'm in the Florida
  • 00:19:07
    market and I've seen INF uh Insurance on
  • 00:19:10
    not only my rental properties but my
  • 00:19:12
    personal residence go up literally two
  • 00:19:14
    to three times over the last couple
  • 00:19:16
    years and so do I expect that to
  • 00:19:18
    continue no I don't expect that we're
  • 00:19:20
    going to see 50 or 100% uh rate
  • 00:19:22
    increases on insurance over the next
  • 00:19:24
    couple years but I certainly think it's
  • 00:19:26
    likely that we're going to see rate
  • 00:19:27
    increases above inflation so personally
  • 00:19:30
    when I'm underwriting Insurance
  • 00:19:31
    increases on deals I'm assuming that
  • 00:19:34
    we're going to see four five six even 7%
  • 00:19:36
    Insurance increases year-over-year for
  • 00:19:38
    the next couple years and so it's really
  • 00:19:40
    important that on the expense side of
  • 00:19:42
    things that were uh that were
  • 00:19:43
    conservative as well and we recognize
  • 00:19:46
    that uh that the numbers that we've been
  • 00:19:48
    using for the last 10 or 20 or 30 years
  • 00:19:50
    aren't necessarily going to be
  • 00:19:51
    applicable this time around yeah that's
  • 00:19:54
    great advice and I just want to add one
  • 00:19:56
    thing on top of just insurance I read an
  • 00:19:58
    article recently that was talking about
  • 00:20:00
    how property taxes across the country
  • 00:20:03
    have gone up 23% since the beginning of
  • 00:20:05
    the pandemic but in the same period home
  • 00:20:09
    values went up 40% indicating that even
  • 00:20:12
    though taxes have already gone up
  • 00:20:14
    they're likely to go up even more
  • 00:20:16
    because property taxes are tied to the
  • 00:20:18
    value of homes and so it shows that
  • 00:20:20
    taxes are probably still lagging all the
  • 00:20:23
    appreciation that we've seen over the
  • 00:20:25
    last couple of years so you definitely
  • 00:20:26
    want to underwrite and understand what
  • 00:20:29
    any properties that you're looking at
  • 00:20:31
    what they're assessed at right now and
  • 00:20:32
    if that's a reasonable assessment rate
  • 00:20:34
    or if they're likely to go up in the
  • 00:20:36
    future as well all right we've covered
  • 00:20:38
    two rules so far which are similar one
  • 00:20:41
    is don't assume appreciation and
  • 00:20:43
    property values the other is don't
  • 00:20:45
    assume you're going to get rent growth
  • 00:20:48
    uh in excess of inflation right now
  • 00:20:51
    let's move on to our third rule J what
  • 00:20:53
    is it it's basically be very cognizant
  • 00:20:56
    about the strategy that you're using to
  • 00:20:58
    invest and at the end of the day there
  • 00:21:00
    are essentially two investment
  • 00:21:01
    strategies that that every real estate
  • 00:21:04
    uh investment falls into it's either a
  • 00:21:06
    Buy and Hold investment you're buying
  • 00:21:08
    something um to hold for some period of
  • 00:21:10
    time where you're going to generate
  • 00:21:12
    appreciation or cash flow or tax
  • 00:21:14
    benefits or loan principal pay down or
  • 00:21:17
    or some other benefit from the property
  • 00:21:19
    or you're buying something for the the
  • 00:21:21
    purpose of of of just doing a a quick
  • 00:21:23
    transaction you're buying it to uh Flip
  • 00:21:26
    or or raise the value quickly and res
  • 00:21:28
    sell it and so basically we have Buy and
  • 00:21:30
    Hold versus the the transactional flip
  • 00:21:33
    models and historically both of those
  • 00:21:36
    models work pretty well but in a market
  • 00:21:38
    where it's possible that we're going to
  • 00:21:41
    see a reduction in in home values and
  • 00:21:44
    potentially even a significant reduction
  • 00:21:46
    in home values if we see a slowing in
  • 00:21:48
    the economy and a lot of people lose
  • 00:21:50
    lose their jobs and we see a lot of
  • 00:21:51
    foreclosures we could see a decent drop
  • 00:21:54
    in the housing market I don't expect it
  • 00:21:55
    but it could happen um when that's case
  • 00:21:59
    you don't want to be in a situation
  • 00:22:00
    where you're buying properties with the
  • 00:22:02
    expectation of being able to sell them
  • 00:22:04
    for a profit in the short term
  • 00:22:06
    especially when you're buying those
  • 00:22:07
    properties without the expectation of
  • 00:22:09
    cash flow so if I buy a property today
  • 00:22:12
    and I expect to sell it in 6 months and
  • 00:22:14
    I'm not going to have any opportunity to
  • 00:22:16
    make cash flow from that property what
  • 00:22:17
    happens when the property or when the
  • 00:22:19
    market drops and the property value
  • 00:22:20
    drops 5 or 10% over the next few months
  • 00:22:23
    I'm going to be in a situation where I
  • 00:22:25
    either have to sell for a loss or I need
  • 00:22:26
    to hold on to the property normally hold
  • 00:22:28
    holding on to a property isn't bad but
  • 00:22:30
    if I'm not generating any cash flow and
  • 00:22:32
    I'm paying my mortgage every month and
  • 00:22:33
    I'm paying my utility costs every month
  • 00:22:35
    and my property taxes and everything
  • 00:22:37
    else I need to upkeep that property what
  • 00:22:39
    I'm going to find is I'm losing money
  • 00:22:41
    long term and so what I recommend to
  • 00:22:43
    people right now is I'm not saying don't
  • 00:22:45
    flip I'm not saying don't do anything
  • 00:22:47
    transactional but recognize that there's
  • 00:22:50
    a much higher risk for flips and
  • 00:22:52
    transactional Deals right now than there
  • 00:22:54
    has been in the past and make sure that
  • 00:22:56
    you are ready to deal with a situation
  • 00:22:59
    where values drop quickly if that
  • 00:23:01
    happens uh do you have the Reserves um
  • 00:23:04
    to to to handle holding the property a
  • 00:23:06
    little bit longer or are you willing to
  • 00:23:07
    sell the property quickly fire sale the
  • 00:23:09
    property and uh Break Even or even take
  • 00:23:12
    a loss on the property be prepared for
  • 00:23:14
    those situations and know what you're
  • 00:23:15
    going to do all right so that's the
  • 00:23:17
    third Rule and Jay I I have some
  • 00:23:18
    follow-ups for you there because I think
  • 00:23:20
    this is a bit of a change from how
  • 00:23:22
    things have gone recently uh first and
  • 00:23:25
    foremost I just speaking to a lot of
  • 00:23:26
    people flipping has been pretty
  • 00:23:28
    profitable over the last couple of
  • 00:23:30
    months and I I'm curious if you think if
  • 00:23:35
    you're just cautioning against you know
  • 00:23:39
    what could happen and just want everyone
  • 00:23:41
    to be conservative or you actually think
  • 00:23:44
    that there's some risk that prices will
  • 00:23:46
    decline 3 5% in a relatively short order
  • 00:23:50
    certainly there's that risk do I think
  • 00:23:52
    it's a high risk no but we as investors
  • 00:23:55
    it's our job to assess all the risks and
  • 00:23:58
    to determine is this something that if
  • 00:24:00
    it happens even if it's a a 1% or 5% or
  • 00:24:03
    10% chance um for us to assess that risk
  • 00:24:06
    and determine what we would do if it
  • 00:24:08
    should play out so I don't think it's a
  • 00:24:11
    high risk but I do think it's a risk
  • 00:24:13
    that we should be looking at another
  • 00:24:14
    thing to consider is that for much of
  • 00:24:16
    the last 15 years up until well even
  • 00:24:19
    including today for much of the last 15
  • 00:24:22
    years real estate's gone up in value so
  • 00:24:24
    we didn't need to be good house flippers
  • 00:24:26
    to make money flipping houses um we
  • 00:24:28
    could take a house and we could do a
  • 00:24:30
    poor job flipping it we could do not the
  • 00:24:32
    best renovation we could overspend on
  • 00:24:33
    the property we could overspend on the
  • 00:24:35
    renovation costs and even with all of
  • 00:24:37
    those things conspiring against us we
  • 00:24:39
    probably made made money because the
  • 00:24:41
    market was just going up so quickly and
  • 00:24:44
    so over the last 15 years a lot of us as
  • 00:24:47
    flippers have gotten into some bad
  • 00:24:48
    habits and we've gotten the attitude
  • 00:24:50
    that no matter what we do good or bad is
  • 00:24:52
    going to result in profit and so I think
  • 00:24:55
    we need to recognize that even if price
  • 00:24:58
    don't go down in the near term they
  • 00:25:00
    probably aren't going up very much
  • 00:25:02
    higher and if prices stay flat then we
  • 00:25:05
    as house flippers or we as transactional
  • 00:25:07
    investors need to get really good at
  • 00:25:10
    what we're doing to ensure that we're
  • 00:25:11
    making money based on our efforts and
  • 00:25:14
    doing the right things with with our
  • 00:25:15
    Renovations and with our management
  • 00:25:17
    improvements as opposed to just hoping
  • 00:25:19
    that the Market's going to bail us out
  • 00:25:20
    because prices keep going up and what
  • 00:25:22
    would you say Jay then to this narrative
  • 00:25:24
    that seems to be everywhere that if and
  • 00:25:26
    when rates drop that we're going to see
  • 00:25:28
    this massive increase in property values
  • 00:25:31
    again it's possible um I I think if and
  • 00:25:35
    well not if and when we see rates drop
  • 00:25:36
    we are going to see rates drop um but
  • 00:25:38
    the the big question is when are we
  • 00:25:40
    going to see rates drop and I know a lot
  • 00:25:43
    of people were expecting that it was
  • 00:25:44
    going to happen early this year and then
  • 00:25:46
    people were expecting it was going to
  • 00:25:47
    happen in the summer of 2024 and now
  • 00:25:49
    people are talking about it happening at
  • 00:25:51
    the end of 2024 but the reality is we
  • 00:25:54
    don't know and it could be a year away
  • 00:25:57
    it could be two years away for all we
  • 00:25:58
    know we could see rates actually
  • 00:26:00
    increase before they eventually drop I
  • 00:26:02
    mean uh the the FED chairman Jerome pal
  • 00:26:05
    came out last week and said um it's
  • 00:26:07
    there's not a high chance of it but for
  • 00:26:09
    the first time in many months he's
  • 00:26:12
    acknowledged the fact that we may have
  • 00:26:13
    to raise rates or they may have to raise
  • 00:26:15
    rates again before they lower rates
  • 00:26:17
    again I don't think it's a high chance
  • 00:26:19
    and I don't think that rates are going
  • 00:26:20
    to be this high for the next five or 10
  • 00:26:23
    years but it is possible that we're
  • 00:26:26
    going to have high rates for the next
  • 00:26:28
    several months or for the next year or
  • 00:26:29
    two and we may even have a spiking rates
  • 00:26:31
    between now and when they start coming
  • 00:26:33
    down and so we need to factor that in
  • 00:26:35
    especially if we're going to be flipping
  • 00:26:37
    houses because remember flipping houses
  • 00:26:39
    we don't want to hold properties for
  • 00:26:40
    longer than three or six months and I
  • 00:26:42
    think it's unlikely that we're going to
  • 00:26:44
    see rates drop in the next three to six
  • 00:26:45
    months all right let's move on to rule
  • 00:26:48
    number four what do you got Jay rule
  • 00:26:50
    number four um and I'm going to be
  • 00:26:53
    channeling my 2008 invest yourself when
  • 00:26:55
    I say avoid adjustable rate debt so we
  • 00:26:59
    saw a lot of this back in 2004 2005 2006
  • 00:27:03
    where investors were assuming um that
  • 00:27:06
    interest rates were going to stay low
  • 00:27:08
    long term um and I know right now we're
  • 00:27:10
    we're thinking interest rates are going
  • 00:27:11
    to go down a good bit long term um but
  • 00:27:14
    we were surprised back then and I think
  • 00:27:16
    there's a risk of being surprised right
  • 00:27:17
    now so uh adjustable rate debt basically
  • 00:27:21
    puts you in a situation where when that
  • 00:27:23
    debt expires whether it's a year from
  • 00:27:25
    now two years from now 5 years from now
  • 00:27:27
    um you're going to be at the whims of
  • 00:27:29
    the market to see what your new rate is
  • 00:27:31
    and I'm hopeful that rates are coming
  • 00:27:33
    down over the next 5 or seven years but
  • 00:27:36
    I'm not positive it's going to happen
  • 00:27:38
    not to mention a lot of adjustable rate
  • 00:27:40
    debt is 5 to seven years out a lot can
  • 00:27:43
    happen in 5 to 7 years maybe we see
  • 00:27:45
    rates drop over the next year or two and
  • 00:27:47
    then three or four or five years from
  • 00:27:49
    now we find ourselves in in another
  • 00:27:51
    recession or or or I'm sorry in another
  • 00:27:53
    expansion Market booming and the FED has
  • 00:27:56
    to raise rates again and so we could be
  • 00:27:57
    in the next cycle by the time adjustable
  • 00:28:00
    rate debt um uh adjusts if you bought it
  • 00:28:03
    today and so uh I highly recommend that
  • 00:28:06
    anybody that's that's getting mortgages
  • 00:28:08
    today take that hit I know it costs a
  • 00:28:10
    little bit more you're going to get a
  • 00:28:11
    little bit higher interest rate on fixed
  • 00:28:13
    rate debt but personally I sleep better
  • 00:28:15
    at night knowing that I don't need to
  • 00:28:17
    worry about what's going to happen three
  • 00:28:18
    or five or seven years from now and
  • 00:28:20
    knowing that even if I get fixed rate
  • 00:28:22
    debt if uh rates do drop a good bit in
  • 00:28:25
    the next couple years I can refinance
  • 00:28:27
    and I can take advantage of of it but I
  • 00:28:28
    want to I want to know that the deal is
  • 00:28:30
    going to work today at today's rates and
  • 00:28:32
    again if I get that that benefit of
  • 00:28:34
    being able to refinance at a lower rate
  • 00:28:36
    again just another cherry on top I'm
  • 00:28:38
    definitely with you on that one and
  • 00:28:40
    honestly right now the spread between
  • 00:28:41
    adjustable rate mortgage rates and fixed
  • 00:28:44
    isn't even that big so it just doesn't
  • 00:28:46
    even feel worth it given everything
  • 00:28:48
    you're talking about all right rule
  • 00:28:50
    number five what do we got rule number
  • 00:28:52
    five don't buy anything or hold anything
  • 00:28:55
    right now that you're not willing to
  • 00:28:56
    hold for the next 5 or 10 years I I kind
  • 00:28:58
    of like this this rule regardless of
  • 00:29:00
    what Market we're in but especially when
  • 00:29:02
    we're in a market where we don't know
  • 00:29:04
    that where values are headed only
  • 00:29:06
    holding things that you're willing to
  • 00:29:07
    hold or able to hold and there's two
  • 00:29:09
    they're two very different things
  • 00:29:10
    willing and able to hold for the next
  • 00:29:12
    five or 10 years on the willing to hold
  • 00:29:14
    side you want to make sure that that you
  • 00:29:15
    have properties right now that are cash
  • 00:29:17
    flowing to the point that that you can
  • 00:29:19
    you can continue to survive if they cash
  • 00:29:22
    flow a little bit less or your return on
  • 00:29:24
    Equity is high enough that you don't
  • 00:29:25
    have much better options um but also
  • 00:29:28
    your ability to hold so um are you going
  • 00:29:31
    to need that cash are you 5 years from
  • 00:29:33
    retirement where you're going to need
  • 00:29:35
    cash flow from something else because
  • 00:29:37
    you're not going to get it from your
  • 00:29:38
    from your job well what happens if we
  • 00:29:40
    find ourselves in a recession in the
  • 00:29:41
    next couple years values drop and it
  • 00:29:43
    takes s or 10 years for those values to
  • 00:29:45
    come back like we saw in some markets
  • 00:29:47
    after 2008 um you could be in a tough
  • 00:29:49
    position so right now um assume that
  • 00:29:54
    you're going to need to hold for 5 or 10
  • 00:29:55
    years hopefully that won't be the case
  • 00:29:58
    but if you make all decisions with the
  • 00:29:59
    expectation that your horizon is 5 to 10
  • 00:30:02
    years out you're probably not going to
  • 00:30:03
    be disappointed because again if you
  • 00:30:05
    look historically speaking uh real
  • 00:30:07
    estate tends to only go up over any
  • 00:30:09
    10-year period I totally agree with you
  • 00:30:11
    on this one and also agree that this is
  • 00:30:13
    just a good principle when you're buying
  • 00:30:14
    Buy and Hold investments in general
  • 00:30:17
    there's just usually even in Good Times
  • 00:30:20
    it takes several years for Buy and Hold
  • 00:30:22
    properties to earn enough equity and
  • 00:30:25
    money to overcome just some of the
  • 00:30:27
    selling costs there also as you hold on
  • 00:30:30
    to debt longer you pay down more
  • 00:30:32
    principal relative to the interest
  • 00:30:34
    you're paying and so there are a lot of
  • 00:30:35
    benefits to holding on for a long time
  • 00:30:38
    and in this type of Uncertain economy I
  • 00:30:40
    often tell people if you're uncertain
  • 00:30:42
    about the next year if you're uncertain
  • 00:30:44
    about two years from now sort of look
  • 00:30:46
    past it and think about where the
  • 00:30:48
    housing market might be at your time
  • 00:30:50
    Horizon 5 years 10 years from now 12
  • 00:30:52
    years from now at least for me that
  • 00:30:54
    makes it easier to make decisions but
  • 00:30:56
    that sort of brings up the question if
  • 00:30:59
    you're someone who's retiring in 5 years
  • 00:31:02
    Jay you've said you don't think flipping
  • 00:31:04
    is particularly safe right now and you
  • 00:31:06
    got to be extra careful if you're a Buy
  • 00:31:08
    and Hold investor you got to be thinking
  • 00:31:09
    on a five-year time Horizon are are
  • 00:31:12
    people who have that short time Horizon
  • 00:31:15
    you know out of luck in this type of
  • 00:31:16
    housing market I'm going to be honest
  • 00:31:18
    it's it's a it's a bad time to have a
  • 00:31:21
    short-term time Horizon for Real Estate
  • 00:31:23
    Investors that said um if you have a
  • 00:31:26
    short-term time Horizon what what are
  • 00:31:28
    your Alternatives your alternatives are
  • 00:31:30
    the equities markets the stock market
  • 00:31:32
    also at Hall time highs exactly um I
  • 00:31:35
    think there could be a lot more
  • 00:31:36
    volatility in the stock market over the
  • 00:31:37
    next 5 years than there could be in real
  • 00:31:39
    estate uh the bond market well maybe
  • 00:31:41
    there's some opportunities with bonds
  • 00:31:43
    but most of us don't invest in bonds um
  • 00:31:46
    what else are you going to invest in
  • 00:31:47
    where you're going to get the consistent
  • 00:31:50
    returns even if you don't get those
  • 00:31:52
    outsize returns that we've become
  • 00:31:53
    accustomed to over the last 15 years I
  • 00:31:56
    can't think of any other asset class
  • 00:31:57
    where we're going to get the consistent
  • 00:31:59
    Returns the cash flow again the tax
  • 00:32:01
    benefits the principal pay down having
  • 00:32:03
    our tenants pay down our mortgage month
  • 00:32:05
    after month I can't think of any other
  • 00:32:07
    asset class where we're going to get
  • 00:32:09
    that so yes it is going to be a tougher
  • 00:32:10
    time for Real Estate Investors over the
  • 00:32:12
    next few years to make as much money to
  • 00:32:14
    make as much cash flow or as
  • 00:32:16
    appreciation as they made the last 15
  • 00:32:18
    years but I would still rather be in
  • 00:32:21
    real estate right now than any other
  • 00:32:22
    asset class yeah it makes sense to me
  • 00:32:25
    and I appreciate your honesty I don't
  • 00:32:26
    want people who have that short Horizon
  • 00:32:30
    making bad decisions and so if that is
  • 00:32:32
    you take this advice carefully and think
  • 00:32:35
    about where you want to allocate your
  • 00:32:36
    resources because although there are
  • 00:32:39
    risks in every investment every asset
  • 00:32:42
    class there are more risks in real
  • 00:32:43
    estate as Jay's been talking about right
  • 00:32:45
    now than there has been for most of the
  • 00:32:48
    last 10 or even 15 years just to put a
  • 00:32:51
    finer point on it I think we're going to
  • 00:32:52
    see a whole lot fewer people over the
  • 00:32:54
    next 10 years quitting their jobs to
  • 00:32:56
    become full-time real real estate
  • 00:32:58
    landlords um than we've seen over the
  • 00:33:00
    last 10 years but what I would tell
  • 00:33:02
    anybody out there is that doesn't mean
  • 00:33:03
    you should sit around and wait for times
  • 00:33:05
    to get better those 10 years are going
  • 00:33:07
    to go by whether you're buying real
  • 00:33:08
    estate or not and you're going to be
  • 00:33:10
    much happier if you bought real estate
  • 00:33:11
    now than than waiting 10 years for the
  • 00:33:13
    next Bull Run or the next good Market
  • 00:33:15
    all right let's get to our last rule Jay
  • 00:33:18
    yeah last rule is an interesting one um
  • 00:33:21
    and one that I've hadn't really talked
  • 00:33:23
    about uh until the last few months but
  • 00:33:26
    that's we really need to start paying
  • 00:33:27
    attention to some of the legislation
  • 00:33:29
    that's governing us as Real Estate
  • 00:33:31
    Investors these days and there are a
  • 00:33:32
    couple categories of that legislation
  • 00:33:34
    number one and a big one that
  • 00:33:36
    everybody's talking about is short-term
  • 00:33:37
    rentals short-term rentals have been a
  • 00:33:40
    super popular asset class over the last
  • 00:33:42
    couple years a lot of people have bought
  • 00:33:44
    a lot of property made a lot of money uh
  • 00:33:46
    but what we're seeing in some markets
  • 00:33:47
    and again I'm in Florida I'm I'm in a
  • 00:33:50
    Beach town in Florida um cesta key and
  • 00:33:54
    even here where you would expect that
  • 00:33:55
    the government should be very friendly
  • 00:33:57
    towards short-term rentals uh because we
  • 00:33:59
    love tourists here that's where our
  • 00:34:00
    income comes from that's where our
  • 00:34:02
    Revenue comes from what we're finding is
  • 00:34:04
    that a lot of citizens and therefore a
  • 00:34:07
    lot of government officials are now
  • 00:34:09
    taking kind of a a negative stance
  • 00:34:12
    against short-term rental owners and so
  • 00:34:15
    we've seen again in my area we've seen
  • 00:34:17
    short-term rental legislation the tides
  • 00:34:19
    turned and we're now seeing longer
  • 00:34:21
    periods that landlords are required to
  • 00:34:23
    rent for we're seeing um tighter
  • 00:34:25
    restrictions on rental on short-term
  • 00:34:27
    rentals in which areas they can be uh
  • 00:34:29
    employed and so if you're a short-term
  • 00:34:32
    rental owner definitely be cognizant of
  • 00:34:34
    the fact that where you invest your
  • 00:34:36
    local government may or may not be
  • 00:34:38
    friendly towards you as as a short-term
  • 00:34:40
    rental owner and that could impact your
  • 00:34:42
    ability to make money longterm what I
  • 00:34:44
    say to anybody who's still thinking
  • 00:34:46
    about buying short-term rentals and what
  • 00:34:47
    I've been saying for the last couple
  • 00:34:48
    years is your plan B should always be to
  • 00:34:51
    be able to hold that property as a
  • 00:34:53
    long-term rental and anytime I look at a
  • 00:34:55
    short-term rental I underwrite a
  • 00:34:56
    short-term rental if the numbers work
  • 00:34:59
    the very next thing I do is I I
  • 00:35:00
    underwrite it as a long-term rental and
  • 00:35:02
    I say do the numbers still work if the
  • 00:35:04
    laws were to change in my area where I
  • 00:35:06
    can no longer rent this thing short term
  • 00:35:08
    could I rent it for a year at a time and
  • 00:35:10
    still make money and if the answer is
  • 00:35:12
    yes well then you've got a good backup
  • 00:35:13
    plan if the answer is no then you need
  • 00:35:15
    to figure out what your backup plan
  • 00:35:17
    might be well definitely agree with you
  • 00:35:18
    there Jay in terms of short-term rentals
  • 00:35:21
    but I do want to just underscore Jay's
  • 00:35:24
    Point here which is that you need to
  • 00:35:26
    understand regulations and legislation
  • 00:35:28
    because they can be both detrimental to
  • 00:35:30
    your investing strategy just like
  • 00:35:32
    short-term rental regulations and
  • 00:35:34
    there's some other ones that we'll talk
  • 00:35:36
    about in a minute but also they can be
  • 00:35:38
    positive too there are now things on the
  • 00:35:40
    west coast where there's up zoning you
  • 00:35:42
    can build adus or there's more
  • 00:35:44
    municipalities state governments
  • 00:35:46
    enacting things that can help you afford
  • 00:35:49
    a down payment especially if you're a
  • 00:35:50
    first-time home buyer and looking to
  • 00:35:52
    house hack so I think the point really
  • 00:35:54
    here is to understand the
  • 00:35:56
    particularities and details of what's
  • 00:35:58
    going on in any Market that you are
  • 00:36:01
    considering investing in absolutely um
  • 00:36:04
    and and like you said there are good
  • 00:36:06
    things going on we've seen affordable
  • 00:36:08
    housing grants and affordable housing
  • 00:36:10
    laws popping up in a lot of States
  • 00:36:12
    federal government starting to spend
  • 00:36:14
    more money on affordable housing um
  • 00:36:16
    local state governments again are
  • 00:36:18
    spending more money there but then
  • 00:36:19
    there's other negative regulations that
  • 00:36:21
    we need to consider as well a lot of
  • 00:36:23
    states and a lot of cities are starting
  • 00:36:24
    to implement rent control and basically
  • 00:36:27
    impacting the the ability to raise rents
  • 00:36:30
    which might be good for tenants but
  • 00:36:32
    isn't good for us as landlords
  • 00:36:33
    especially when we see operating
  • 00:36:35
    expenses and insurance and property
  • 00:36:36
    taxes going up as quickly as they are if
  • 00:36:38
    we don't have control over our ability
  • 00:36:40
    to raise rents and allow the uh the
  • 00:36:42
    supply and demand the market forces uh
  • 00:36:45
    to determine what our our rental
  • 00:36:47
    increases are going to be we could be at
  • 00:36:48
    a disadvantage there are a number of
  • 00:36:50
    other pieces of legislation that that
  • 00:36:52
    have been proposed in a number of states
  • 00:36:54
    again as you said some good for for us
  • 00:36:56
    as real estate investor some bad for us
  • 00:36:58
    as Real Estate Investors but it is
  • 00:37:00
    important that we know what legislation
  • 00:37:02
    is likely on the table and how that
  • 00:37:04
    legislation is going to affect us not
  • 00:37:06
    only shortterm but long-term yeah that's
  • 00:37:08
    that's very good advice and I think
  • 00:37:10
    people there's good ways to do that and
  • 00:37:13
    you should be looking not just on a
  • 00:37:15
    national level but on a state level and
  • 00:37:18
    really on a municipality level I think a
  • 00:37:20
    lot of the very specific things like
  • 00:37:22
    short-term rentals rent controls are
  • 00:37:24
    often handled by States and local
  • 00:37:26
    governments and I know it's boring in
  • 00:37:27
    but going to those types of meetings or
  • 00:37:30
    subscribing to a local newspaper
  • 00:37:32
    something like that so that you're
  • 00:37:34
    constantly informed is really going to
  • 00:37:36
    help your investing strategy and let me
  • 00:37:38
    just summarize here the six rules we
  • 00:37:39
    discussed number one was don't assume
  • 00:37:41
    that you're going to get appreciation in
  • 00:37:43
    terms of property values number two was
  • 00:37:46
    don't assume rent growth for the next
  • 00:37:48
    couple of years number three was be very
  • 00:37:51
    cognizant of what strategies you're
  • 00:37:52
    using particularly if you're considering
  • 00:37:55
    buying non-cash flowing properties so
  • 00:37:57
    that's properties just for appreciation
  • 00:37:58
    but also strategies like flipping four
  • 00:38:01
    was avoid adjustable rate debt five was
  • 00:38:05
    consider your time Horizon and don't buy
  • 00:38:07
    anything you aren't able to and willing
  • 00:38:09
    to hold for 5 to 10 years and lastly we
  • 00:38:13
    talked about understanding potential
  • 00:38:15
    legislation and how it can affect your
  • 00:38:17
    Investments Jay thank you so much for
  • 00:38:20
    sharing your thought process and your
  • 00:38:22
    rules with us today we appreciate your
  • 00:38:24
    time absolutely and let me just end by
  • 00:38:27
    saying that I know a lot of that sounded
  • 00:38:29
    uh overly negative and maybe uh a bit
  • 00:38:32
    alarming to a lot of people but my
  • 00:38:34
    attitude has always been be conservative
  • 00:38:37
    assume the worst that's going to happen
  • 00:38:39
    and I I'll say it again when the worst
  • 00:38:41
    doesn't happen just consider that to be
  • 00:38:43
    uh an additional bonus or or the extra
  • 00:38:45
    cherry on top so if we go in with with
  • 00:38:47
    that negative attitude and the
  • 00:38:48
    skepticism and then everything works out
  • 00:38:51
    everybody's going to be happy it's much
  • 00:38:52
    better than going in with an optimistic
  • 00:38:54
    attitude and then finding something bad
  • 00:38:56
    that kind of throws us off I totally
  • 00:38:58
    agree I always I always say I love
  • 00:39:01
    putting myself in a position where it's
  • 00:39:03
    great when I'm wrong and it's uh that's
  • 00:39:05
    exactly what you're talking about just
  • 00:39:07
    be conservative and if you're wrong it's
  • 00:39:09
    only a good thing for you and if you
  • 00:39:12
    think underwriting with these types of
  • 00:39:14
    strict criteria is not possible I'll
  • 00:39:17
    just tell you from my own personal
  • 00:39:18
    experience it is still possible I
  • 00:39:20
    underwrite very similar to what Jay is
  • 00:39:22
    talking about here and I've still been
  • 00:39:25
    able to find deals this year you do have
  • 00:39:27
    to be patient you do have to work hard
  • 00:39:29
    to find good deals but it is absolutely
  • 00:39:31
    still possible to stick to these
  • 00:39:34
    conservative underwriting tactics to
  • 00:39:36
    stick to the fundamentals and still
  • 00:39:38
    invest here in 2024 for anyone who wants
  • 00:39:41
    to connect with Jay he of course has
  • 00:39:44
    five books with Bigger Pockets you can
  • 00:39:46
    check those out we'll put all of his
  • 00:39:47
    contact information in the show notes
  • 00:39:49
    below thanks again Jay and thank you all
  • 00:39:52
    for listening to this episode of bigger
  • 00:39:54
    news we'll see you again soon for
  • 00:39:56
    another episode episode of the Bigger
  • 00:39:58
    Pockets real estate podcast
  • 00:40:00
    [Music]
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