#117 How To Invest In Real Estate During A Recession, ft. Leti Alto, MD & Kenji Asakura, MD

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Hey, everyone.

We're here to talk to my good friends Letitia Alto and Kenji Asakura of semi retired md. They're also the founders of an amazing course talking about cash flowing rentals. It's called Zero to Freedom. We're going to be talking all about that today. We're actually going to be starting out by talking all about the economy. There are so many things that are happening right now with inflation raging, interest rates. Are we in a real estate bubble? You know, there are probably no better people that I know that are poised to talk about it, especially when it comes to the rental market, especially this time, than my good friends here. So, hey, how you guys doing?

Hey, Peter, thanks for having us.

I'm excited to talk to you guys because, yeah, obviously you guys are in the thick of it. You know, you not only own a ton of rental properties yourself, I know you're always looking at the market. You also have a ton of students who are looking at the market as well. And your community has grown so much of people who are just owning rental properties, creating cash flow. We want to talk about the economy today, the market. Before we do that, real quick, did I do okay introducing you guys? Is there anything else you wanted to add to that?

Well, no, I think it was great introduction. I think the main thing is we have a pretty long history of investing in real estate. And since we're talking about the economy, I've invested through two recessions. Well, three if you include Covid. But I started investing in real estate in 2001, which was in the midst of a recession, and then the big one in 2007, 2008 invested through that as well. And then more recently, the COVID recession, which had its own kind of unusual twists and turns. So, yeah, so lots of experience going back now a couple of decades.

I mean, where are you guys now sitting at this point?

So we moved to Puerto Rico, but our properties are in a couple states in the US right now. Three different states. And we own long term rentals and short term rentals and a mixed use property as well. So we have a variety of properties.

Awesome. Okay, so you guys have been through a bunch of recessions. You guys mentioned that. How does this one feel that we're coming into right now, how does it feel in terms of, compared to some of the previous ones that you've been through? Does it feel the same, different? Are there some other concerns that you might have and how should we start thinking about some of these things?

Yeah, I think this one definitely feels different than the 2007, 2008 recession, mainly because that one was related to, as you guys may have seen in the Big Short. Right. It talked about how that was a real estate recession. It was caused by real estate problems and lending issues. And a lot of those lending issues have been cleaned up. And so there aren't as many kind of risky loans as there were in the past. Underwriting standards have tightened up. So they're not just giving loans to anybody like me back then, where they were giving me essentially they were giving me no money down loans. And also short term loans, which are really risky, especially if you're in the middle of the downturn trying to refinance and you can't get a loan because lenders aren't lending out money anymore. And so that caused a lot of problems for me back in 2007 and 2008. This one feels definitely different. I think a lot of people are in longer term loans. When you look at the percentage of people who have adjustable rate mortgages, it's way, way lower than back in 2007, 2008, where maybe a third of the loans back then were adjustable rate mortgages. Now it's like less than 5%. So that's a huge difference. I think other difference is that the employment numbers are actually pretty good right now. So people have jobs, people are working. So that also is different. Although that can certainly change. If companies stop spending money and investing, then you can certainly start to see people losing their jobs. But overall, I'd say this one definitely feels different than the last one.

Yeah, and I mean, we're not technically in a recession yet, but I think a lot of people are anticipating it. And I think that we've already seen patterns change in how people are purchasing properties. Even within our own community. You know, people are definitely. There's a little bit of fear, which I think over time for us real estate investors will turn into more of elation because actually there's a lot of opportunity for us when there is a downturn, especially for people who have trained to look for deals and have the team members in place. You know, opportunity can be one of the highlights of a recession. Even though it may seem scary when you watch your stock portfolio dropping. Yeah.

Why don't we talk about that fear a little bit, like, what do you think's behind a lot of that fear? I know we all see these headlines on CNN or whatever it might be. What's behind the fear? What's driving that? What are the key factors? And then we can start talking about kind of how we can work past that or maybe even how to actually use that to our advantage.

Yeah. So I think there's a big component of it driven by what's in the news, certainly. And then people start to hear stories about friends losing their jobs or salaries being cut. Or like I said, there are a lot of people who are closer to retirement and they're heavily invested in stocks, and that drops. And all of a sudden you hear stories about people having to work another five to ten years as clinicians. And so obviously, when you start to hear those types of stories, it's going to generate some fear. As you know, just as anybody. Controlling that fear is probably one of the most important things that you can do during a recession, because at the end of the day, the sky isn't falling. There's lots of opportunities out there, and if you can kind of keep a level, you can take advantage of those deals that are out there.

Yeah. And a recession always comes to an end, and then there, you know, then there's another high where things get better again. So it's not forever. You know, it's just the fear of the unknown is difficult for people. And you don't know where we're going to be in a year or two, but you can assume that probably in five or ten years we'll be in a different place than we are right now. So things do have an end.

Awesome. I want to hear some of the major points that some people have brought up in terms of why this market is also a little bit scary for them. Let's start with interest rates. Interest rates have kind of risen recently. I think we all know that. We've all heard that. We had this amazing run of really, really low interest rates, which have made purchasing and buying power. It was kind of abundant, and people were buying properties. Property values kept rising. And so now we're in a different environment where interest rates have gone up. Perhaps they're going to continue to raise interest rates and it makes it more difficult for people to buy properties. And in fact, I'm starting to hear a little bit here that some of these property values are starting to either level off or even drop off a little bit. Like, how do you start thinking about things in this time? Are you backing off and how are you and maybe even your students approaching buying properties at this period?

Yeah, so that's part of the fear. I think that when people start to see rates going up, then there's some concern because that is a change. It creates uncertainty. People go, should I sit on the sidelines? Things like that. I did want to distinguish between interest rates and mortgage rates. Interest rates are, you know, the Fed controls interest rates, they can increase the interest rates and then, you know, banks and, and other lenders will follow. But really the mortgage rates are actually driven by not the interest rate increases, but by inflation. So what the lenders are doing, they're trying to kind of keep their mortgage rates ahead of inflation. If inflation is going up, then they're the, their mortgage rates are going to go up. And so, so let's focus on mortgage rates because that's kind of what we're talking about here. When mortgage rates go up, then your borrowing power goes down. You're going to be able to borrow less. It's going to become much more expensive to borrow. So you can't buy as big of a property or is it expensive as property as you might have anticipated. So that does change things. But what I would say is that if you can keep a level head about it, it shouldn't change what you do. All it does is it changes one of the variables in your cash on cash calculator. And that just means that you don't change your criteria, you don't lower your threshold of what you're going to buy. You keep buying good deals and all you have to do is you have to keep buying better deals. So you have to kind of make it up somewhere else. And that can be buying a property at a discount. If you can buy a property at a discount, that will then make up for the higher mortgage rates and the higher borrowing costs. And so that's one way to do it. What we've been saying in our communities is just go out, keep buying good deals, and as the economy changes, there will be better and better deals out there. So don't change your criteria, stick to your criteria. You know, cash flow is so important. You want to make sure you're buying for cash flow and keep finding those great deals.

Yeah, and I'll also add that some in our community now, instead of going with a traditional 30 year loan, they're starting to go with arms, those adjustable rate mortgages. But we're really encouraging our community members to get longer ones. The ones that are more like seven or maybe 10 years, maybe not ones that are one or three years. Just because you don't know where the economy is going to be in one or three years. And if we are going into a recession, you don't want to be in the situation in one or two years that your loan needs to be repaid and you can't get it refinanced and you have to come up with all that money. You don't want to be in that situation.

Yeah, I can tell you exactly what that feels like because I went through it in 2008. So basically I had an adjustable rate mortgage that. A three year adjustable rate mortgage, right. So I got the loan in 2005 and it was 2008. It was like the height of the downturn. And the lender was like, okay, here's, you know, your, your loan is due. Pay us your balloon payment, right? And it was like $125,000. I'm like, I don't have that kind of money, like laying around. And they were just like, well, you have to pay it. And so then I was just like, okay, well, I'm just going to not pay it. I'm going to, you know, you can, you can foreclose on the property, come after me. The property that I bought for 150,000 is worth, worth $5,000. Like, good luck, right?

This was land.

This was land. I just, I bought raw land. And then, you know, a couple weeks later they wrote me back and said, okay, let's work out a payment plan. And so what I had to do was I had to pay $25,000 a month, right, until, for five payments, until I paid off the $125,000 loan. That's what it feels like when your adjustable rate mortgage expires and the lender comes after you for the full amount.

Yeah, I'm sure that can be really scary. I mean, one of the things you did mention was you mentioned the word inflation. I think that's the other kind of interest rate that I. And then inflation, the other eye, is what freaks out a lot of people. So tell me, for those who are wondering, how do real estate investors right now look at inflation and do they think this is a good thing for them or is this something that brings them concern when they keep hearing all these reports about inflation and consumer price index kind of skyrocketing? So how do you guys think about that?

I think inflation is a big problem and it shouldn't be something you fear, but it's something you have to deal with when you have inflation. That is, let's say 10% and your investments are returning 10%, then you're not growing your wealth at all. And so that means that you need to stay ahead of inflation to make matters worse. And I recently wrote an article about this where I wrote the inflation problem is worse than you realize or worse than you think. And the reason is that the government doesn't care about inflation. They don't actually adjust their taxes for inflation. So for example, if your investments grow at 10% for seven years, your investment doubles. But let's say inflation is 10% over those seven years. Well, your wealth hasn't grown at all. Even though you're, your, the value of your investment has gone from 100,000 to 200,000. But the government doesn't care. They still tax you on that even though you really haven't grown your wealth. And that's the reason why inflation is a bigger problem if your investments don't stay ahead of it. And so what we're really talking about in the community is you need to do everything you can to stay ahead of inflation. So make sure that your cash on cash return is greater than that 10%. Make sure that you are also forcing appreciation which further adds to your return return. And then the last thing is be maximally tax efficient. Right. We just said the government doesn't care, you know, if, if there's inflation or not, they're still going to tax you. So what if you can set up a situation where you pay zero in taxes? And that's what we do, right? We set it up where we get real estate professional status or we take care, take advantage of the short term rental tax loophole and then we shelter our income and pay zero income taxes.

Yeah, I think Kenny just made the argument that I was gonna make, which is real estate is absolutely where you want to be when there is inflation. It's real property. You've got a mortgage rate that right now is lower than inflation so you're locking it in. So it's actually an inflation hedge. Then you're maximally tax efficient. So you're not paying those taxes when you do decide to sell or when, when you're deciding if you can get real estate, professional short term rental and, and shelter your W2 income. And then you know, you have, you have all this other valuable part about real estate that, that you don't get in the stock market where it's raising in a certain amount or it's dropping in this case and you have none of the ability to have real property or shelter taxes.

Now I have A question that a lot of people ask in our communities. Then how do they get started? Then how do they get started investing in real estate? And where's a good place for them to like? Well, what's like a good first step for them? I mean, according to you guys, I.

Think the most important thing is to get educated. And if you're going to be investing in something like rental properties, you have to know what you're doing. But I want to want to let everybody know that it's not like going to med school. Right. It's not med school hard as Latey would say. And it can be learned in a short amount of time if you really focus and you really kind of learn a good strategy. And you also are very focused in terms of what the content you're consuming because there's so much content out there. I mean, I think that's actually the problem with real estate is that there's so much stuff out there. And what you really want is you want to condense it down to something that's really manageable and easy and you can consume it in a few weeks. Right. That would be ideal if you can consume everything in a whole few weeks. I mean, you obviously can't consume med school content in a few weeks, but real estate, I really do think that you can consume the content in, let's say, four to eight weeks or so. So that's what I would say is that get yourself educated and then also make sure that you find somebody who is going to condense that information down to something that's manageable.

Yeah. And I think get yourself in the right community. All of us always talk about proximity as. But if you're around naysayers and people who've never done it, they can't offer you any guidance and they're going to hold you back because they're going to tell you all the reasons it's not going to work. So I would highly encourage people to be in our communities like Passive Income MD there are people doing real estate in there in our community as well and be around people who actually have experience doing this instead of people who heard that their uncle didn't do well five years ago or who are just. Are just scared to try anything new because this is something new. This is something different. If you've never done invest in real estate before, but it's totally doable for physicians and, and their families.

Yeah, it's a good point. I mean, it's the people you surround yourself with. I mean, I know you talk about that A lot. You have articles on it as well. It's so important. I mean, if you see people who are successful doing it every day and they're just, just like, just like me, right? Like they're, they're also a radiologist or, you know, an anesthesiologist. Right. It's like. And they're doing it and they're, they're killing it, right? They're, they're doing, you know, we have some people in our community who have grown their portfolios to 60 units, 80 units within 140. Yeah, 140 units, you know, in, in like a 12 to 24 month period and also increasing their cash flow to over six figures in that same time period. So, you know, if you surround yourself with those types of people, then you're just like, you know, you're, you're, there's.

There'S no question, there's no excuses, you know, to do it yourself.

Right.

All right, let me ask you a few details about the course then. How long does it run for, like, in terms of like, how long is the actual learning and the course and the course modules? And then when does it actually start for people?

Yeah, so we say our course is seven weeks long, but actually it's a little bit longer. If you join towards the beginning of the sales week, then it's more like eight weeks. And during those eight weeks we take people from knowing nothing about real estate all the way through buying their first rental property and having all the knowledge and confidence and team and everything to do that because they make progress all along the way. And we actually have a significant amount of people who buy properties during the course and then afterwards they go on to build these empires that we've been describing where people have 20, 60, 80 units. And so the course is on sale from July 26th through August 3rd. And during that time you can sign up, you get the first introduction module right away, and you can start making progress on day one. We help you build your team members, like Kenji mentioned. We just really condense all the information and condense all the steps you need to take because you do need to build the team, do need to know how to negotiate, you need to have your lenders set up, you need to have your investor agents, we give you all of those pieces and teach you how to do it. So this is something that, a skill that stays with you for the rest of your life and it's just rinse and repeat. And that's why people are so successful in going on and doing it over and over and over and building portfolios that then lead to enough income that they can make medicine a choice if they choose to. Or at least they have that financial security to know that. That they're not just dependent on one income anymore.

Yeah, I think one other point I want to make was that, you know, the people who take our course, they. They do this so much faster and efficiently and then than we ever did, just because they. Taking a foundation of knowledge, getting that, and then building on that. Right. And that's how, you know, science works. Right. Or medicine works, is that we build on prior research and knowledge and then we kind of build on that. And that's what. That's what our students are doing. They're building on our mistakes.

They.

They learn from all the different experiences that we do. And that's what we do. We love to do that. We love to go out and experiment and try new things. And the reason why we do that is because we want to be on the forefront and then bring that back to our students so that they can go and then try it themselves.

But it's not just the knowledge. It's also all the team members, and then it's also the community. We never had any of that when we started.

What if people don't take it right now? Like, when's the next time you're going to offer it?

Probably next spring at some point. Usually we offer it about twice a year, so it'll be next year. But we would highly encourage people to take it now because again, if we're heading into a recession, the people who have the teams in place, the people who have the knowledge, are the people who are going to be able to act. And if there are great deals three, four months from now, you don't want to be in the position where you miss it all. And next year you're signing up and now you got to do the work that takes a couple months to get to the point that you're ready to really start actively building an empire. So I think most people, if you ask them who are investing in real estate, you know, what's the biggest mistake you made? I bet you 95% would say not starting earlier.

I mean, for those who are interested, because you're part of the passive income MD community, as many of you know, we have an upcoming conference on September 23rd through 25th, which Leyte and Kenji will be there speaking, interacting with all of us. We're going to be giving you a free virtual pass to that conference. And by the way, if you want to Be there in person. Some of that virtual pass will give you credit towards being there in person as well. Just know that by using our exclusive link, you'll have that opportunity. We'd love to see other members of our community and their community be there in person. And this is an incentive for you guys to join this course. I also believe that this time, right now, is an opportunity that I think we only get a few times in our working prime lifetimes. You know, so many of us say, hey, I wish I'd been there at the beginning of the cycle. Oh, I would have crushed it. Well, this is your opportunity to be there right now to set up that education, be poised and ready so that when that opportunity does arise, you'll be ready and set up for that. So that's why I think that being at conferences right now, taking courses to get all the education in, like this is the opportunity I think that many of us have been waiting for for so many years at this point. So anybody else is interested? I've taken the course myself. I know so many members of our community have done it, created amazing cash flow sources. I can't stop. Yeah, I have a hard time not talking about this course. Got to know that the impact that it's had on myself and so many members of our community. So I think you guys are doing amazing work. Keep it up. I always love talking to you about the market. I love talking to you about rental properties, seeing the amazing things that you and your community are doing. So thanks for spending this time with us and let's talk again soon.

Thank you, Peter.

Thanks, Peter.

Thanks, everyone. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you a part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple, multiple streams of income. You can join us on our Facebook group, Passive Income Docs, and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.