Will the Real Estate Market Crash Ruin Us? How To Survive in 2023

So you're saying even if the market is just absolutely terrible, if I find a good deal, it's still a good deal? Revolutionary. What's up, YouTube? It's Christian. I'm here with Matt Hawkins. Matt, the Lumberjack Landlord, the smartest investor in the real estate space. The two of us, we both have about 100 units. We're on totally opposite coasts, so we have a totally different perspective as far as geography on what's happening with the market. So we wanted to share with you today what's happening in 2023. Is this the time to invest? Is it the time to get out? Is everything on fire and crashing down? Find out on this episode. Before we get into it though, we spend a lot of time on this, and quite frankly, we spent millions of dollars to figure out what the market's doing by buying all these darn units. So please like and subscribe to both channels, Cody and Christian Osgood Multifamily Strategy you're watching today, and Lumberjack Landlord. Here we go. Matt, there's a lot of crash videos out there. I hate the market's crashing videos. That being said, the algorithm said we have to mention it. So is everything on fire? Is it all over? Is it time to just sit on the sidelines and give up real estate? What are we looking at?

Yeah, I mean, I don't know about you, but I was actually just answering some questions in one of my videos and somebody said I should sell everything. So I called my agent right after I read that comment and I said, somebody commented on my YouTube channel that I should sell everything. Let's get to it. Of course I didn't do that because my guess is that guy lives in his mom's basement. So, or he's a renter, and even better, he's probably one of my renters. So at the end of the day, I think the most important thing that everyone has to realize is they have to take it all in stride and they have to look at the overall market. I can tell you that in my market, um, a fourplex just broke a record in my market with debt costs being what it is right now today, over 6%. A fourplex just broke a record in my market for $800K. That had not been touched since the early '80s. So extremely dated, nothing special, wrought iron outside, like not a nice, not that nice a place. And it sold for $800,000. So what I can tell you is based on my experience is that if it's a cash flowing asset, people don't care what they're paying. And that's the right approach. It's not, it doesn't make a difference what the price is or what the interest rate is. It only matters what they are together and what that equals for a payment. Because when it's an investment property, it's all about what is my payment and how much money can I charge in rents and what does that mean I'm going to make for a return on my capital? That's all that matters.

So you're saying even if the market is just absolutely terrible, if I find a good deal, it's still a good deal? Revolutionary.

I know. Shocking, right? But that's the other thing too, is you buy something now and even if it's overpriced, you know, maybe 5 years from now or 10 years from now, you refi it. I bought deals that I didn't love, but they cash flowed. They cash flowed 10%, 12% when I bought them. Then over the years, they cash flowed 20% and 25% and 30% because I had 30-year fixed rate debt. And then after 12 years, I was able to get out of a 6.5% interest rate and I was able to get into a 3.5% interest rate or a 4% interest rate. So I could pick up those points. And now guess what? I was able to recapitalize them, but I get a nice 7-figure chunk back that I could then reinvest. And pick my poison of what the next asset was that I was going to invest in.

So let's get down into it. There's a lot of things going on in the market. We know that a good deal is a good deal in any market. If it cash flows and you can hold it, you answer our two questions from our channel: how do I buy it, how do I never lose it, and will it be fun? There's a third question. If it's not fun, you're just working a job. But how do I buy it, how do I never lose it? That's all based on buying a deal, finding the deal, and does it cash flow? You wait long enough, you're rich. That's how real estate works. What is the market doing right now? Is this a time where people need to be more cautious? Are they sitting on the sidelines? The big thing everyone's screaming right now is interest rates, which is funny because right before that everyone was saying prices are too high. Now the prices are coming down. Now we're worried about interest rates. How do we look at this? How do we navigate it? What does it mean for someone who is starting in the game right now?

Yeah. So, I mean, I think if you were looking at 2020 and 2021 and early '22, I think you missed it. You totally missed it. Because if you were expecting to get the pricing then that you can get now, here's what the issue is. Now, if you were betting that things are going to come down, you need to be looking at a 46% correction in price in order to get the same deal that you would have gotten a year ago. Literally 46% reduction in price. I don't think any real estate's crashing 46%. That's just my opinion. So my belief is, is that it's just like you always do, which is like you said, how do you buy it? How do you keep it? And then if those numbers pass the muster, then at the end of the day, the only thing that happens over time is your margins continue to get better as you own the asset. So I look at these deals and say, yeah, at the end of the day, if it's a great deal now, it's only going to get better. The key is I'm not buying based on appreciation. I don't even have a calculator. That figures out what the potential appreciation might be in 10 years. And I also don't cheat and say, well, I'm counting my principal buydown as part of my income too. No, no, no, no, no. That's not how you do it. The deal has to stand on its own and it has to be not counting principal paydown, not counting appreciation. That's how you know you get a good deal. If you're making your spreadsheet bleed, the only thing you're going to ensure that happens is you buy a deal that has too thin a margin. And that you were buying for the sake of buying, not actually being a good operator and even more importantly, a better investor.

Mm-hmm. I hate it when people use the debt paydown as a metric. It's—

it is.

You're, you're absolutely right. It's like, do you technically grow your net worth? It's like, yes, but also if I was interest only, it would just be cash that I can actually use. When it's debt paydown, I'm just increasing my risk to the bank. It's not like a huge asset until the asset's paid off and I have no mortgage, then it helps my cash flow.

Sure.

But that is just the wrong way to look at real estate. What you really should be doing is how much does this thing cash flow on a monthly basis? Because that's how you own it. Basic math problem that I like to do for people is look at if a property loses $1,000 a month, but your numbers look fantastic because you're like, well, look, it doesn't cash flow, but I'm in a super high appreciation area, so I'm slaying it there over time. And I'm gonna be paying down this loan at an accelerated rate. I love the deal. It's like, cool, buy 10 deals like that and you are now out of money. And if anything goes wrong, you're out. You find a deal that cash flows $1 positive every month, how many properties can you buy? Technically, mathematically, infinite. Now, you should have a better margin than $1, but for the sake of illustration, if every property is barely positive cash flow but it makes you more money every time you buy it, You're uncapped. You can become a Matt, own 135 rentals all on yourself, or you can do what Cody and Christian did and create a finance and—

yes, partner.

And granted, we don't own nearly as much of our portfolio as Matt does. Matt is the stronger investor. He's been doing this for 20 years. He knows how to play the game. He knows how to manage the assets better. And Matt owns all of his stuff. It's just you, right? There's no LLCs, there's no partnerships.

Nothing. No JVs, just me.

But however you do it, we buy cash flowing deals because if you buy cash flowing deals, you can answer how do I buy it? How do I never lose it? You never have to stop buying. You can just buy everything. It's awesome.

Yeah. The key, the key to it was, is that, you know, never count year 1 to comparing to somebody year 22. That's not a reasonable thing. You know, it doesn't matter what it is. It's like comparing a 1-year-old to a 22-year-old. Who's going to be more athletic? I promise 22-year-old is going to win any activity that you do unless it's filling a diaper. And even then, so you look at it and you really have to figure out comparing year to year and starting out. The most important thing that you can do is house hack to start. That's the way that I would absolutely get started. It gets you used to becoming an operator. It gets you used to becoming a landlord. And you know what? It gets you a free place to live in most cases. You can buy it with the cheapest debt that you can buy anything with, and you're right there on-prem. So because you're on premises, you can really see and start to learn the building. I house hacked 9 times in 13 years. People make the mistake of saying, I wanted to have as many units as Cody and Christian. I want to be over 100. No, you don't. What you really want is you want to do a great deal and then you want to do another great deal and then you want to do another great deal. And if that is doing 150 units worth of deals in 5 years, awesome. If that means you're only doing 4 deals in 4 years, That's okay. It comes down to doing only great, only fantastic deals. Try the— and again, I would, if I had to do it all over again, I would still house hack 9 times in 13 years to start building my empire. I got the cheapest debt there was. I lived for $300 or $400 a month in the high side of things, and that meant that instead of spending $2,000 a month to live, I spent $400 or $300. I saved $1,700 a month, and that's when 20 or 30 or $40,000 at the end of the year, guess what? That could buy me my next property. So that's the thing that new real estate investors and new operators need to understand is you don't need 100 good deals. You don't need to have a goal of getting to 100 units. The only thing you need to have as a goal is getting the next great deal. That's the only goal that you should have is getting the next great deal.

And that's perfectly said. I will add one thing to the house hacking. As someone who has done the house hack one time, I didn't like it. I didn't like sharing walls. So my solution was I bought a house and then I bought two duplexes, and those duplexes paid for the house. They were perfect. One of them was nearby. My first one was nearby. I'm not on premises. You lose some efficiencies. You'll go a little bit slower. But if you look at the trajectory and you followed this channel for any amount of time, and if you don't, again, please subscribe now. Like, I've been playing the game for 2 and a half years. We bought enough real estate without house hacking to really build the life we wanted to build. Can most people go this fast? Probably not, because most people have like a job and kids and other things that take time. I only do real estate to move this fast. That being said, yeah, if you hate the idea of sharing a wall with someone, just commit to what is the number of rentals I need to cover the mortgage on the house I want to live in. I started with a starter home. I'm not upgrading from a starter home. You live within your means like you would in a house hack and just add doors till your cost of living is free. It's another way to do it. You can do it fairly inexpensively.

Yep. Yeah. Another approach too is you can also do an ADU approach, which is you buy a house that has an ADU. So auxiliary dwelling unit, added dwelling unit, sometimes called a granny flat, sometimes it's called a casita. But you can use that type of approach where if you're that diametrically opposed to sharing a wall, you can still have your single-family home. They can still be somebody that's there on-prem. And again, the key is, is you're buying that with— that debt doesn't disappear when you move to your next house. You still bought it with owner-occupied debt. You still bought it with 3.5% down or 5% down. You still get that FHA or that conventional loan. So it really does turbocharge the strategy. And again, I totally agree with Christian. I didn't necessarily want to share a wall either. We did it because ADUs were tough around where we are, but there's a lot of areas where ADUs are readily available and it's something— or you can build a room on top of the garage and it's like at the end of the day it might cost you $20,000 or $30,000 to do that, but you can finance it, then you can rent it out. You can usually get $1,000, $1,200 a month for something like that. That means that you're making your interest payments on that thing that might be $200 a month. Means you're making $1,000 a month. Imagine being able to buy a house and get $1,000 a month towards your mortgage. So you're not spending $2 or $22, you're spending $1,000 to live in your own single-family home just because somebody else happens to have a room above the garage. There's a lot of innovative ways that people can get on the property ladder. And quite frankly, when you can get owner— when you can get owner-occupied debt, It's the least expensive debt you're going to have. It's also the least risky debt that you're going to have.

Yeah, absolutely. And I think we hit the main things that I want people to hear on this economic podcast, which is— or not podcast, but YouTube video. What is the most important thing? You buy real estate, you buy great deals, you find great deals, you get into the game. The timing of the market is not the focus. And I think we really drilled that home. Since we did promise we're going to talk about the economy a little bit, Matt, what are your economic forecasts for the next couple of years? Like, what do you really see happening to the market while we're finding— everyone on this channel, we're finding our great deals, we're buying real estate, we're not timing the market. But what do you see happening as headwinds that we're up against the next couple of years?

Yeah, I mean, I think rates remain higher than, than a lot of people want. I think they remain higher for longer. I think that that continues to put downward pressure on transactions. I called about a year ago that I expected a 10 to 20% correction in median price over the next 2 years. So I believe by the end of '24, I believe that rates will have taken the effect that they need to. I believe that it will have slowed down the economy. I believe that will have broken housing. And so I think really what I'm looking at is it's still a deal-by-deal scenario. If I get a deal that crosses my desk tomorrow that gives me a 20% return on my capital, I don't care. I'm buying it. It's just that simple. So, when you're buying for return, not for increased value, when you're buying for that return and for that cash flow, that's how you build a business. You build a business with cash flow. We aren't lucky enough to be like all of these startup companies that can just tell a really good story to a bunch of investors and then they're going to get 4 rounds of funding and the investors are a billion bucks in the hole. And then they realize that that company's not quite going to fly. That doesn't work that way for a real estate investor. The best thing that we can do is leverage debt from a bank or do seller financing, which is by far more attractive. The key is get on the ladder, get into a house hack, and then as you understand your real estate journey, you can't help but appreciate the cash flow. And as you continue to reinvest in the business, all you do is create more and more cash flow over time because it's 30-year fixed rate debt. And that's the magic to real estate investing.

Yeah, and if you guys are looking to get into the game with creative finance, themultifamilystrategy.com. Cody and I put together our methodology of exactly how we scaled to 100 units really quickly. I just want to encourage everyone, it still works in this economy. Actually, it works even better in that you can choose your own interest rate. Like, when we were buying, everyone thought, oh, you're 6%, like 6%, 7% debt. Is insanely high. Well, now that's the average. So all these things that we got excellent pricing on, we got excellent terms on, and the interest rate may be a little bit higher. Well, now I'm paying the same interest rate as all of you. So if you want to learn how to play the game, uh, feel free to take the course there. We also have a mentorship group if you want to be the best operator you can be. We focus on how to buy real estate and how to hold it. If you want to optimize Matt, you came out with a course and you should have this going into 2023. Matt, if I recall correctly, your course launches on the 31st of January. It's coming out really soon, right?

Yeah, it comes out in the next— yep, 31st of January. We're excited that it's finally going to be making it out to market. And it's basically— it's a little over 20 years of experience pushed into about 10 hours. We also have boot camps available where investors can iron sharpen iron and they can be with like-minded people that are really trying to achieve that going from good to great, great to amazing, and amazing to elite as landlords. But yeah, it really teaches you all that you need to know to become a great operator, not just a great investor. I think buy strategy, that gets you there. But now that's, that's a task and a skill that once you understand that and you can then master that, sky's the limit when you know how to then manage your properties.

That's fantastic. So everyone check that out. This all launches in February. So by the time you all see this, It already happened. So the course will be live, it will be linked below. You can link to both courses if you want to master the game, learn from the players who've done what you want to do. If anything we've done has inspired you in any way, we are all people who are readily available. So Matt, thank you for joining. Like and subscribe, and we'll see you guys next week with Matt one more time to end out February.