Scaling Real Estate And Finding The Opportunity - Interview With J Scott

Welcome back, Invest Like a Billionaire podcast listeners. We're really excited about this episode. This is with Jay Scott of Bar Down Investments, and Jay shares kind of his journey from kind of a tech career and scaling tech companies to real estate and kind of got into it by accident, he said, and then ended up flipping 450 homes and is now syndicating multifamily. And he's part of the BiggerPockets community. He's written 4 books on their publishing platform and hosts one of their podcasts. So he's a wealth of knowledge. He's really zoned in on the multifamily space. So it's an asset class that we're excited about in this kind of economic environment. And so he shares a lot of, uh, kind of the ins and outs of the things he's seen as, you know, the, the, the tailwinds as well as the headwinds in the multifamily space. So if you're invested in that space, if you're looking to get into that space, definitely check out this episode.

Find out what's coming for multifamily.

There you go. Enjoy. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome back to the Invest Like a Billionaire podcast. I am your co-host Ben Frazier, joined by fellow co-host Bob Fraser. And today we're joined by Jay Scott. Jay, thanks for coming on the show.

I appreciate you guys having me. Thanks so much.

Yeah, so for those that aren't familiar with Jay, um, Jay has been a real estate investor for a long time. He's very tied into BiggerPockets and runs a one of their podcasts. He's written 4 bestselling books on real estate. He's been investing in real estate for many, many years and super excited just to dive into your background, Jay, and just how you are positioning your portfolio and investing in this market right now. So give us a little bit of your background. And I know you kind of started in the, in the tech world and tell us a little bit about how you made that jump and what that was like into real estate.

Yeah, so my original career was engineering and business. So I started out as an engineer, spent a long time in the tech world, a lot of time in Silicon Valley working for some big companies like Microsoft and eBay. I went from engineering to going the business route, which largely influenced a lot of what I've been doing over the last 15 years, did some mergers and acquisitions work, but very much entrenched in technology and business for many years. 2008 rolled around and I met my future wife, my soon-to-be wife, and we decided that it really didn't make sense for us to be working the 60, 70, 80 hours a week. She was traveling literally 4 weeks a month. I was traveling a couple of weeks a month. It just wasn't a lifestyle that was conducive to having and starting a family. So 2008, we decided to get married. We quit our jobs. We moved from the West Coast to the East Coast. And I won't go into the long boring story, but we fell into real estate by flipping a house. And that flipping a house turned into a second and a third and a 10th and a 50th. And over the next 10 years, we flipped about 450 houses. Which gets us to around 2017 when I was starting to get the itch to do more business-related work again. Real estate's fantastic. I enjoy real estate. I love scaling any type of business, including a real estate business, but I really missed the business side of things. I missed the team side of things, having partners and other people that I could work with to really scale something large. So 2017, I started to think about other opportunities unrelated to real estate. And what I realized after a few months of not really finding anything that really excited me, what I realized was I liked real estate. I was good at real estate. I knew real estate, but I still, I wasn't happy doing the single-family flips, buying the single-family rentals. I wanted to be doing something larger and more scalable. So 2018, I reached out to a friend of mine, Ashley Wilson, who ran a large multifamily investing company and asked her to teach me the business. I offered to work for her for a year for free. She had access to my knowledge, my efforts, my network, my cash, whatever she needed if she would teach me the multifamily, the apartment business. She agreed. And since 2018, we've been partners in Bar Down Investments, which is a business that buys, repositions, and resells large apartment complexes around the country. So we currently have about $100 million in assets in that business, nearly 1,000 units. And so that's mostly what I'm focused on these days, though I still do a good bit of tech consulting and advisory work as well.

Very cool. That's a cool, cool story. So you flipped 450 homes over 10 years. That's— you say it's not scalable. It sounds pretty big scale to me.

Well, it's funny. One of the things I realized was I'm not good at real estate and I don't particularly enjoy real estate. Yeah, but I love scaling businesses. I love growing businesses. And real estate is really no different than any other business. I mean, it's a different inventory. I mean, but regardless of whether I'm selling shoes or food or cars, a business is a business and the pieces are all the same. And so, with real estate, I kind of found a niche even though I didn't enjoy the nitty-gritty day-to-day real estate pieces. I love the idea of still scaling a real estate business.

Yeah, very cool. When did you get kind of tied into the BiggerPockets community and world?

I got tied in back in 2008. So, as soon as we decided to flip that first house, the first thing I did was I did what everybody does. I hopped on the internet and I said, "Teach me about flipping houses. Where do I go?" I found the BiggerPockets forums and community and I started posting questions. And within a couple years, I had flipped a bunch of houses and I was answering questions. And then I became good friends with the founder of BiggerPockets, Josh Dorkin. And I actually did some consulting to him and for him and with him to help grow BiggerPockets in the early years, 2008 to 2012. And so, I've been tied into that community for a long time and It's been like a home to me. I've— they've served me very well, and I like to think that I've provided some value there as well.

Yeah, very cool. Well, talk a little bit about, um, you know, just what you guys are seeing right now and just how you're kind of positioning, you know, going from the single-family world to doing multifamily, scaling that, that business. Um, what are you seeing in the market right now? So it's obviously very competitive. It's, it's hard to find cash flow going in and where are you guys kind of finding opportunity in the multifamily?

Yeah, 2018 was a great year to get into multifamily, right? And you've seen, I mean, the market has radically shifted in just 4 years, right?

Yes, it has.

And we've seen cap rates drop to incredible lows and now inflation hitting big time and now debt changing. So talk about some of the, where you guys are at and and really where the risks are today and where the opportunities are today in multifamily specifically.

Sure. Yeah. There's a lot of uncertainty in the market. Anybody that's paying attention knows that. I mean, things are still really strong, unemployment down around under 4% again, and wage growth is pretty strong, and rent growth is strong for those of us in the real estate game. Everything is looking pretty rosy if you don't take into account the elephants in the room, which is a tremendous amount of debt for the country, ridiculous inflation at this point. And we can talk about whether that's demand-side inflation or supply-side inflation. But regardless, there's inflation. There's affordability of housing is through the roof, or depending on how you think about it, is very low. I mean, people can't afford housing. Market rents are through the roof, which again is good for us as real estate investors, but not good for the average lower middle-class family out there. So it's a very mixed bag right now. And what a lot of people believe, and I think it's hard to argue this, is that to some extent we're in a bubble. Maybe we're in multiple bubbles, multiple asset bubbles. And so the question moving forward is, is that bubble going to pop? Is it going to deflate? Is the Fed going to figure out a way to— to slow things down. I mean, they're trying to slow things down. Can they do that without popping the bubble and causing an economic crisis? And we don't know. And so what I'm seeing in my industry right now is a whole lot of people who are very circumspect and taking things slowly and really trying to let the market play out before they make too many large moves. So I think being in multifamily right now, being in commercial real estate, several commercial real estate asset classes are a good place to be. If for no other reason, then real estate's a great hedge against inflation. So even if all you want to do is you want to wait out the market to see where things go, if you think there's going to continue to be inflation over the next couple of years, real estate's a great place to kind of just park your cash because two reasons. One, real estate tends to track inflation. So if inflation's at 3%, 4%, real estate tends to grow at 3%, 4% long term. Inflation's at 6%, 7% like we saw back in the '70s, real estate tended to track inflation at those rates. And so from that perspective, real estate's a great place to be. But secondarily, real estate gives you the opportunity to employ long-term fixed rate debt. And that's probably the single best hedge against inflation that there is. If I put in place debt today, I get to pay off that debt while my wages might go up, while the cost of food is going to go up, while the cost of housing is going to go up, everything's going up in price. One thing that doesn't go up is my mortgage payment every month. So while we're making more money at work and there's more money out there, my mortgage payment's the same. So debt's a great hedge against inflation. So if I had to be putting my cash anywhere right now, I'd rather it be in real estate than in the bank, in the stock market, in other non-cash flowing assets or non-leveragable assets. So do I know where the real estate market's heading over the next couple of years? I don't. Nobody knows. I don't have a crystal ball. But I will say that if my money has to be anywhere, I'm more comfortable in real estate right now than anywhere else.

Sounds like he's listening to some of our recent episodes.

I know. Yeah. So, yeah, in, in high inflation, the worst investment you can have possibly have is cash, right? Which is, which is being, you know, lit on fire and burning up at 8.5% per year. And so, so basically you want to be short cash in the way you're short cash is you're borrowing, you know. But as you point out, you want to have good, good debt, right? Which is fixed rate debt and it's affordable fixed rate debt, meaning you can service the debt because when you get into trouble, you know, is when you, when you can't service and you can't weather the storm, any storm that comes. That's the only time you really get creamed. And we are seeing, I mean, huge prior to this inflation stretch we're in right now where we're seeing most of the big operators, big multifamily operators, and we're deploying not what I call bad debt, right? Which is the bridge debt and very, very high LTVs, sometimes multiple debt stacks, multiple equity stacks to reduce the amount of cash in. And also there are adjustable rates with You know, and that's, that's when it gets super risky. One, what are their debt service covenants? You know, and what is their— how much equity they have in there.

This is—

there's going to be some fallout if there is a, there is a, uh, you know, any, any kind of a hiccup. But, you know, yeah, so, so you, you gave some worries, but really you gave a lot of reasons why you should be in real estate, you know, on balance, you know.

Yeah, again, we, we can't control the, the, the macroeconomic, uh, landscape. We can't control the market. Um, all we can do is basically make investments that allow us to weather whatever particular storm may be brewing and then hope that it's not. Hope that the Fed does things correctly and we get lucky and, and we don't see a bubble pop or deflate. Basically, um, maybe we could come in for a soft landing in over the next 2 or 3 or 5 years. I'm not necessarily confident of that, but I'm hopeful.

Yeah, but even if, you know, let's say, let's say it's just so hard to see, okay, is unemployment gonna suddenly spike up? I mean, right now the job market is hotter than blazes and huge pent-up demand for, you know, it's hard to see certainly in the next, let's say, year to 24, 24 months, you know, is inflation going to let up? It's pretty unlikely, right? And if inflation doesn't let up, well, then real estate is kind of magic. I mean, it it definitely is the place to be, right? So it's, it's, you know, so, so I was going to say, if you're super worried, you want to liquidate, you know, yeah, please, uh, please give us a call. Yeah, yeah.

I mean, certainly where inflation's headed is the, is the trillion-dollar question. And, uh, um, I mean, I'm sure you've had other people talk about this, but we don't know exactly what's driving inflation right now. So there's, there's demand-side inflation Certainly, there was a lot of money that's been printed over the last several years. Obviously, when you print a lot of money and you start putting a lot of money out there, it's going to flow upwards. I'm not a big believer in trickle-down theory of money. The wealthy end up with a lot of this money, and what do they do with it? They put it into hard assets. So what happens? You see hard assets go up in value. And so certainly, we're seeing some demand-side inflation. We're seeing a lot of investors, big investors, institutional investors, seeing maybe even governments buying a lot of real estate in the US. That's driving prices up. We're seeing a lot of large companies and institutional investors buying stock. We're seeing them buy— now we're seeing them buy crypto. And so basically, we're seeing inflation in all of these asset classes. We're also seeing inflation across commodities as well. But that makes you think, well, maybe it's not all demand-side inflation. Maybe there's some supply-side inflation as well, because with with COVID certainly we've seen supply chain issues. We've seen a lot of small mom-and-pop businesses going out of business. We've seen a lot of larger businesses that are, that are generating record profits. And so there very well may be some supply-side constraints here that are contributing to inflation as well. And so the Fed, they can raise interest rates, and interest rates will certainly fix the demand side when it becomes too expensive to borrow money to buy stuff and it becomes more attractive to put your money in a savings account than it was last year, people are going to spend less money. And so that's going to, that's going to fix the demand side, but that doesn't necessarily fix the supply side. And I think a lot of what we're seeing on the supply side was still fallout from COVID And so is that going to take 6 months to fix or 6 years? We don't know.

If you look at the last inflation print, it was by far the largest component of inflation increase. Was oil and gasoline. So, you know, and that's mostly a supply side issue. And it's kind of a wild card, right? I mean, it could go down tomorrow, you know, assuming we have peace in the, you know, Russia and Ukraine. And it could not. It could keep going up, you know. And so, you know, although we are seeing, I mean, long term, I mean, oil is an interesting commodity because, I mean, you know, the world's largest producer of oil today is America. And people don't realize. And what happened is the magic of technology and horizontal drilling has completely changed the industry. And when, when we saw oil prices rise a few years ago, all the producers in America ramped up their production only to be creamed when the prices went back down. So this time they're not ramping up their production. They're just saying, we're going to wait because they were punished by this, by the markets. And so they're being a little slow. But if we see prices continuing high, we're going to see a lot of— there's a ceiling on prices, I guess, is my point. And we will see— there's a huge amount of idling capacity still in America.

Yeah, the second largest increase in the latest CPI was oil, and then it was cars. Yeah. Right. And so that's been a big supply chain. Chain issue with the car manufacturers not being able to—

So a lot of that, I mean, my view is that we're going to continue to see inflation, but it's probably going to be not much higher than this. It's not going to— I think we're probably at the peak. We'll see it start to ease a little bit, but it's not going back to 2% in the next 24 months. So, so I think it's a, it's a safe bet, right, to bet on where inflation's going.

I mean, there are a whole lot of things that contribute to inflation, but if you want to see where inflation is going, you look at energy. Prices. Because yeah, that's obviously a big component of what we spend money on. We have to, we have to heat our houses, we have to fuel our cars. But it's also a huge component of everything else we do in the world. So if you travel, I mean, where are your travel costs coming from? Well, a lot of it is, is, is transportation, and transportation gets more expensive when oil prices go up. And we're an importing country. I mean, our trade deficit is, is close to— what is it— close to $1 trillion now. And so it takes a lot of oil to get those, those widgets from China or, um, or wherever over to, uh, to our ports. And so when the cost of oil goes up, it costs a lot more to get those things, uh, imported, and the price of our stuff goes up. Um, so looking at oil prices is going to be a good indication of where inflation's headed. At the same time, I mean, we look over the last couple of weeks and gas prices haven't come down, but crude oil prices have come down about 20%. So that's a good indication that, that oil companies are taking some profits. Now, you can't fault them for that. That's, that's how, that's how our economy works. But at the same time, part of what we're seeing in this inflationary environment is a lot of the big companies showing record growth, showing record profits, because they're leveraging the fact that they can push prices, not take a lot of flak for it, because everybody's just talking about this generalized inflation. So Coca-Cola doesn't have to worry about them saying, hey, Coke's raising their prices. Well, no, everybody's raising their prices. And so yeah, there's a lot of things going on here, and nobody knows how it's going to shake out. But oil—

If inflation is a fairly safe bet, And I think it is whether or not it's, you know, continues at this rate or not or just moderately high. I would argue that— I mean, to me, I don't see a better place to be than multifamily, right? As probably primary and really every other real estate class to a lesser degree. I mean, you know, because it's, you know, multifamily, not only is it inflation indexed as you and as you point out, it's, it's short the dollar. You know, short, short cash. And, and 3, it's, you know, even if there is a recession, which, you know, again, I'm— my prediction is we're not going to see recession, but, but let's say we do. You still have all this pent-up demand for, for places to live and all this household formation that's systemic, you know. So, um, so it seems, seems like it's kind of the perfect investment right now, but, you know, for this environment.

And what I like to tell people is if you I think we're headed towards an economic downturn. The most telling piece of data that I've found over the last— looking at data over the last 100 years is that during a recession, asset prices tend to fall. Housing prices fall, stock market falls, gold and silver goes up, but most hard assets go down in value. But market rents don't. Market rents tend to stay flat. And likewise, you don't tend to see a big bump in market rents, excluding the last 2 years. Over the last 100 years, we don't see big bumps in market rents during boom periods, but we also don't see a decrease in market rents during bust periods, right? Um, you look back at 2008 and everybody that wasn't directly impacted, that didn't own cash-flowing real estate, probably assumes that market rents dropped considerably back in 2008, '09, and '10. But that's not, that's not the case.

Yeah.

Most markets, market rents were either stable or up a little bit. In the worst-hit markets, they were down maybe 1 or 2%. So, I mean, if you're going to put money somewhere and you think a recession— Yeah.

Again, isn't it? It just seems like it's, it's the place to be. But okay, so let's say it's not that. Where do you see the most compelling place to put your money right now if it's not multifamily?

So it's funny, I got into multifamily back in 2018. The single biggest reason I chose multifamily syndication was because I had started investing with other real estate investors and other people's syndications. I was investing in multifamily through other people. I'm a control freak. I don't sleep well at night when other people are controlling my money. I like to control my money. And so the single biggest reason I decided to— when I came back to real estate, I decided to go into multifamily was because it allowed me to place my own cash in deals that I was doing. That is my preferred asset class, not just as an active investor, but as a passive investor. And so instead of passively investing in somebody else's deal, I passively invest in mine. And the last deal, uh, the last 3 deals my partner and I have done, we put about $3 million of our own cash in, um, because we think that is the safest place for our cash right now.

Um, and it's stuff that you're in charge of, whatever that is, stuff that we're in charge of as well.

So, so, um, So yeah, I like multifamily and that's where I'm putting my money. And it's literally the reason that I got into multifamily because I decided a few years ago that it's where I want to be putting my money long-term. Yeah.

Yeah. Yeah.

So I mean, it is an interesting time because we all know that cash is on fire, but at the same time, you know, there is this frothy feeling in the market, right? And we're all seeing the deals that are trading for just, you know, almost negative cap rates.

It feels like we were looking in, in Texas and Dallas, uh, you know, what, a few months back and before, you know, right before this inflation hit. And you're seeing cap rates in the 2s, you know, in the high 2s. It's like, what? I mean, you're taking all this risk to invest in a multifamily. You know, it's not a bond, right? It's not a Treasury bond. And you're getting, you're getting Treasury bond yields. I mean, it's nuts, right? And people were paying it. So super frothy markets. Super frothy.

So are you, you actively buying right now? Are you, are you kind of buying into the, you know, the run-up in price here? Are you being a little more cautious? How are you structured?

We'll see things ease up with that, with, you know, you know, yeah, you're seeing bank rates right now on multifamily is in the, you know, mid to high 4s, right? Um, so definitely it's gonna maybe cool things.

Yeah. So one of the nice things is with investing in my own deals, a good bit of my own deals, is it makes me very conservative. I have to align my interests. I like to think I align my interests with my investors anyway, but this absolutely forces me to align my interests with my investors, and I'll never do a deal that I wouldn't have a lot of fun—

Because you are your investor.

Right.

I do align.

You align with yourself pretty well.

Yeah. And so, my partner and I kind of have this kind of spoken, it's not unspoken, it's a spoken rule. We're not going to do a deal just to do a deal. We like to keep our team relatively lean. We don't have more employees than we need. We keep more 1099s than we keep full-time employees because we want to know that if we don't do a deal for a year, and let's be honest, 2021, we did zero deals. We would have loved to have done 10 deals. We would have loved to have bought 2,000 units last year. We didn't find a deal, so we didn't do a deal. And the fact that we keep our team lean allows us to basically modulate what we're doing without having to do deals to get acquisition fees to pay our team. And so, yeah, in 2021, we did no deals. So far this year, we've done 2. We got very fortunate to find 2 off-market deals. We may not find another deal until next year or the year after, I don't know. But I'd say anybody that feels like they have to be doing deals right now is not in a good position because as you said, it can be really tough to come by. And when you see cap rates in the 2s and 3s, even the low 4s, it's really hard to generate cash flow for your investors. Certainly, you may still be able to find a good value-add project that needs a lot of renovation that in 3 or 5 or 7 years, you can sell for a huge profit. But with cap rates at 2% or 3%, in that 3 or 5 or 7 years, you're not going to be generating much more than 4% or 5% or 6% in cash So any investors that actually need cash flow to survive, it's a tough place to be.

Yeah, we're pretty excited about multifamily, but we're also— we think industrial, there's, there's a lot of money to be made in industrial markets, tighter than a drum right now. We think self-storage is a good place to be. There's, there's, there's a lot of things that we think are, are— I mean, really, you know, inflation kind of heals all mistakes, truthfully. I mean, if you just stay into a deal, even if you overpaid, you got a bad deal. And as long as you can service that debt and hold it, you're going to make money.

Generally, in 2018, I decided multifamily was the best place to be. In hindsight, now that we're 4 years in, I love multifamily. But like you said, I actually have 2 asset classes I like better— self-storage, because self-storage has a lot of the benefit of multifamily. But I think during an economic downturn— not I think, during an economic downturn, self-storage tends to boom.

Which is crazy, but it is, it's true, you know.

Yeah. People don't like to get rid of their stuff. They downsize, they move in with family, they move in with roommates, they need to put their stuff somewhere. Instead of selling it, they think, okay, I'll just store it. And so, self-storage, I think, is a great place to be right now. And industrial, light industrial warehouse also is a fantastic place to be because the landscape of retail is changing and a lot of companies are now moving to to warehousing their inventory.

We're actually looking very, very smartly at some retail as well. I mean, it's the cap rates. We're seeing 10 caps, you know, is that oversold? I mean, you know, on current cash flows at 10 caps, are you kidding me? You know, and especially if there's repositioning plays and real estate. I mean, retail is not dead. It's, you know, it's, it's shifting, it's changing, but it is not dead. And so, you know, the guys who, you know, JPMorgan said, if you really want to make money, you invest when there's blood in the streets, right? And so you got to be fearless when everybody else is afraid. And when everybody else is afraid, it's really probably a good time to take a look, right? And go say, hey, well, is this overdone a little bit? You know, and to me, that's a huge contrarian opportunity. There's always something good, right? There's always a place play.

Yeah, going back to the multifamily acquisition. So I think we're all in agreement that, you know, hey, inflation's here and hey, real estate's a great place to be protected against that. And I think what we're seeing though is some of the risks that investors are taking in this market are not, you know, getting into a good deal, but getting into a bad structured deal, a poorly structured deal with too much prefunding.

Where the real estate will do fine. But the investment might not be fine, right? Yeah, because it's poorly structured.

Yeah. I mean, we're seeing a lot of these deals that are, you know, they're using bridge financing. You have some of the adjustable rate risk. You know, you're probably buying an interest rate cap that gets expensive. And then you're also putting pref equity on top of, you know, the debt. You're effectively leveraging to 90% or more sometimes. And that's—

and if you have it and with the debt service, they might be just on the fringe of their debt service coverage. So if they have any kind of a hiccup in ability to rent, they literally lose the deal, you know? So yeah, the smartest, the smartest place to play is to make pref equity right now or debt, right? To be, be, be offering those kind of terms to people and being ready. Hey, they stumble, I take over the property at a discount, you know?

Yeah. One of the biggest things that I'm seeing these days, one of the biggest risks I'm seeing is that 5 years ago, like, like you said, 2018 was a great time to get into multifamily, a lot of people did. And what they found is they projected these 3, 5, 7-year holds, and by 2020, their properties—

Exactly.

—had gone up tremendously in value, so they sold.

Now what?

The stuff in 2019, they sold in 2020. The stuff in 2020, they sold in 2021. And so, they started to get this idea that, well, we always project 3 and 5 years out, But we've been able to sell things after a year and a half to 2.5 years. Let's start taking on properties where we can project out a sale in 2.5 or 3 years, which we can talk about is pretty unrealistic for a full repositioning. Generally, a repositioning takes about 2 years to do all the renovations, then you need a year of stabilization to get your trailing 12 months of financial data, and then you need a few months to sell. So 3 to 5 years is is pretty reasonable for a full repositioning. But all these investors saw that they were able to sell for huge profits after a year and a half or 2 years or 2 and a half years. They're spoiled. Profits. And so, the properties they started syndicating in 2021 and now 2022, they're projecting out, "Well, we can keep doing that. We can do a 2 or 3-year projection where we don't do a full repositioning and we only need a bridge loan for 3 years. We'll buy a rate cap. We'll get 1 or 2 extensions." And maybe that'll be great, but who knows? You could get 3 years in and then you see the downturn and now they're running out of extensions and they're running out of— and the rate cap's about to expire in year 5. And so what do you do? And so what I like to tell anybody that's in this business, yeah, it's great to have a plan A that's 2 or 3 or 5 years, but make sure you have a plan B and a plan C and a plan D. Absolutely. That will allow you to hold this property for 7 years or 10 years, or at least be able to tell your investors, if something bad happens, here's my mitigation, here's what I'm planning to do. And so, we're a big fan these days, pretty much everything we're looking at and putting offers in on, and the last 2 properties we bought last month and the month before, they were assumable loans with 10 years left on them. Yeah. Wow. So, that's our mitigation plan. We have fixed rate debt for 10 years. And so, worst case, if there's a downturn, hopefully 10 years will allow us to weather.

Oh wow, those are probably pretty good interest rates, I'm assuming, too, on the assumable.

One was just under 3%, one was just under 4%.

Wow, that's awesome. Dope.

And the one that was just under 4% has 3 years of IO left, so yeah, they were great rates.

Yeah, and that's such a great point. I mean, yeah, you may have a 3-year plan, but you better have a 10-year plan that's workable. In 10 years. So at just 8% inflation, you're going to see the price of the value of that property, just based on inflation, will go up about 50, uh, about, uh, about double, over double in 10 years, the value of that property. Just if you can raise rents to keep with inflation. That's without any changes in cap rates, without any change in cap rates. I mean, dude, you're gonna make money. It's just you've got to hold on to the property. You got to not lose the property no matter what you do. So, so we're prepared as we're buying our multi— exactly. In inflation it does, and in real estate. And so, so you just had— so we're, we're going in with business plans, you know, 3 to 5 year business plans on all of our purchases, but we have a secret 10-year plan, you know, on the shelf. And, and that's— it's very doable, and we're gonna, we're gonna make our investors whole no matter what happens, really. You know, so that's what I love about this, right? It's like, you know, you're gonna, you're gonna make, make money one way, you're gonna make it another way.

Yeah, I think the last 5 years in multifamily has been about acquisitions. The next 5 or 10 years is going to be about asset management. And it's really going to boil down to who can manage their properties the best, who has the best business plan, who has the best property managers and the best asset managers, who has the best relationships with lenders. That's really what's going to drive the next 5 or 10 years. I mean, a lot of big syndicators in this business are my friends, but I'll still say, I mean, a monkey could have made a lot of money.

I have invested—

when I have investors that ask me about my historic returns, what I like to tell them is, don't listen to me. I can give you big numbers, but if I I couldn't give you big numbers. I'm not giving you big numbers because I was that smart. If I didn't make a lot of money, I'd have to be an idiot. It was so easy to make money the last year.

Luck has always been the best investment strategy. Absolutely.

Absolutely. But moving forward, it's really going to be about who can manage their properties the best and who can carry out their business plans.

Yeah. Yeah. One of those kind of interesting thought I'd love to hear you comment on is, we've seen pretty incredible rent growth the past 2 years. And as multifamily investors, that's been a big benefit. You know, what do you see any headwinds from, you know, rent control or other regulatory risk that is going to, you know, as you mentioned, affordability, you know, on the single-family side has been going down quite a bit. Well, same with rent, right? And wages are increasing but not at the same rate as rent. And that's going to, if it is sustained, going to create some friction. So what do you see there? Are there going to be challenges and headwinds for rent growth going forward? Yeah.

So let me start with your specific question about rent control. I like to stay away from politics. And unfortunately, rent control is one of those political hot buttons, whether it should or shouldn't be, that's besides the point. People will take a very political stance there. A very partisan stance there. Certainly, I see many markets around the country that are moving towards more rent control, more, more control of, of the, the real property markets in general. And I think it's going to be much harder for us as investors, landlords, syndicators, um, to, to be profitable in those markets. Um, so, so I certainly recommend that people, um, be aware of the political landscape in whatever markets they look to invest in, and then take that into account. Now, as to the larger question of where I see market rents headed, I mean, 5 minutes ago, I said one of the nice things about real estate is that market rents never seem to drop, or very, very rarely seem to drop. They just slowly kind of go up. But over the last 2 years, that's slow increase has jumped. So I do wonder, and I hate to say this time is different because this time is never different, but you almost have to wonder, is this time going to be a little bit different? Are we going to see a reversion to the mean when it comes to rents? When people start seeing— when unemployment starts to go up and wages start to stagnate, if they do. I'm not saying they will. I mean, who knows? Maybe this crazy market will continue for 10 more years. But if we see a stagnation in the market, if we see unemployment increase, if we see wage growth, or even not nominal wage growth, just real wage growth, like wage growth compared to inflation, be negative, it's very possible people just aren't going to be able to afford where they're living now. And we may see a drop in market rents. Now, that said, we've seen such a boost in rents over the last couple of years. I think anybody that bought back before 2022, middle of 2021 is probably still okay. Um, but I think we could see a reversion to the mean in rents, and I think we could see, um, a drop in rents, or at least a flattening out until, until, um, until GDP kind of catches up a few years out.

Yeah. So what did we see in rent growth last year? It was— wasn't it— it was over, uh, 10%, I believe. It wasn't it 14%, something like that? I mean, incredibly high. So here's Here's a— I'll go out there on a prediction. I'll go out there. I think we might see one more of those, another pretty big jump in rent increases. And here's why.

In 2022. Yes.

And the reason why I would say is because of the Great Recession caused a massive amount of wage growth. We saw pretty dramatic wage growth. So I think people are feeling pretty flush. And I have, you know, there's some other stats that show, you know, household net worth is super high, household net income has taken a big jump up.

And so, so we could see one more, one more, not to mention all the supply shortages of houses, household formation.

So we'll see, we'll see. But, uh, yeah, yeah.

One other thing that's worth mentioning is that, um, and I see this a lot from folks in my position that are doing syndications, and I'm sure you've seen this as well, where you hear about these crazy rent growths you see forecasted through CoStar, Yardi, or whatever tool you like to use. You see these 5%, 6%, 8%, 10% forecasted rent growths. You bake that into your numbers, but at the same time, you don't bake in 8% inflation in your expenses. You say, oh, that's just transitory. That'll only be 2% or 3%, so I can rely on the rent growth. But don't even worry about the expense growth. So then they have 8% rent growth and 2% expense growth, and that's just not realistic. So, I mean, unfortunately, it's, it's, it's a double-edged sword.

It goes both ways. Yeah. Jed, I'd love to hear your kind of final thoughts here on, you know, you wrote the book, um, might get the name wrong, but Recession-Proof Real Estate Investing. You know, how, how do you, you know, from a passive investor's standpoint, you know, what, what are the kind of words of advice advice or caution even that you would give a passive investor that's looking to allocate more to real estate, especially in this environment?

Yeah. So in this environment, cash flow is king. So 5 years ago, 8 years ago, I would've said lending's a great way to make money, but obviously with inflation, basically the lender's getting crushed and transactional type investments don't make sense. I mean, I was investing in partnerships, flipping partnerships 5 years ago or 8 years ago. And these days, I mean, all it takes is, like we've seen, interest rates bump and who knows prices. I'm not saying they will, but could drop 5% next week. We don't know. So basically, when I invest now, what I recommend anybody that's investing passively now is rely on the cash flow. Because cash flow is consistent and cash flow can weather storms, and not negative cash flow, positive cash flow. So I really like any investments that have at least a 5-year horizon. I prefer an 8- to 10-year horizon. I like those investments that can weather a vacancy bump like multifamily. Multifamily tends to be pretty pretty resilient to vacancy. Triple net leases tend to be pretty resilient to vacancy. Self-storage tends to be pretty resilient to vacancy. So I like just the bread and butter real estate investments. I mean, I know it sounds boring and simplistic, but really now is not the time to get fancy and invest in alternatives and invest in crazy asset classes. And I'll also point out, and I think this is really important, that the biggest indicator of risk is always going to be returns. So if you want lower risk at this point, don't go into a deal that's promising you 30% and 40% returns. Can they return 30% and 40%? Very possibly. I see a lot of those deals, and a lot of those deals have been returning 30% and 40%. The new construction, ground-up development stuff over the last couple of years, some alternative-type investments have returned a ridiculous amount of money. But there's, there's a correlated amount of risk when, when you're, when you're being promised 30% and 40% returns. And I think a lot of people don't realize that, that returns are directly correlated to risk. So the higher the return, the higher the risk. If you want lower risk, go after those investments that tend to be lower return. Obviously, also, you need to trust the the operator, you need to trust the asset, you need to trust the business plan, you need to know what the other risks are. But generally speaking, I'm looking at lower risk, even if it means lower return investments these days, just to weather the storm, if there's a storm. And again, there may not be a storm, but all indications are that it's possible.

Awesome. Well, Jay, thanks so much for joining us on the podcast and sharing some of your thoughts and wisdom. What's the best way for listeners to get a hold of you if they, uh, want to get some of your books or learn more about the Bar Down?

Yeah, if anybody wants to, to learn more or contact me, connectwithjscott.com, www.connectwithjscott.com, that'll link you out to everywhere.

And it's just the letter J. Awesome. All right, thanks so much.