The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE!
Every recession isn’t created equally. And believe it or not, recessions happen more often than we remember. Of course, we all remember what happened in 2008 and the crash in 2001. But what were the factors that led up to those events? If we do land in another recession, it will most certainly be for different reasons.
My guest today is J Scott, and I absolutely loved this interview. I didn’t know where the conversation would go, but I was happy to go deep while discussing economics, inflation, and real estate strategies. It’s a very timely episode, and I hope you’ll get a ton of value out of it.
Since leaving Microsoft over 14 years ago, J Scott has become a very successful investor, entrepreneur, advisor, and author. He’s the co-host of The BiggerPockets Business Podcast, and he’s flipped over 400 homes and has held over $150 million in properties, primarily focusing on the Houston market.
His newest book, The Numbers Book on Real Estate, explores multifamily property, evaluation, underwriting, debt, cap rates, and how to do due diligence on deals. If you need to know more about his qualifications, consider this: he literally wrote The Book on Flipping Houses, which has also sold over 300,000 copies.
In this episode, we’ll dig into how to make sense of deals and use this information in today’s economy. You’ll learn why housing so rarely takes a major hit during an economic downturn, how to build safe and effective deals during a recession, and why J wishes he kept all the properties he flipped.
Key Takeaways with J Scott
- How the housing market is fundamentally shifting right now–and why the US economy actually experiences a recession on an average of every 5 years.
- The importance of creative deal structures.
- What the Fed’s doing right now to try to prevent a full-blown recession–and how this affects your money.
- How J got ahead by treating his real estate investments like a business.
- Why experienced investors often leave money on the table when they flip and why he wishes he kept those properties.
- Sign up for Josh’s newest Forever Passive Income Mastermind in New Orleans in December by visiting JoshCantwellCoaching.com
J Scott Tweetables
- Connect with J Scott
- Follow J Scott on LinkedIn | Instagram | Twitter
- Real Estate by the Numbers: A Complete Reference Guide to Deal Analysis by J Scott, Dave Meyer
- Amazon.com: J Scott: Books, biography, log, audiobooks, Kindle
- The Book on Flipping Houses: How to Buy, Rehab, and Resell Residential Properties by Mr. J Scott
- The Book on Estimating Rehab Costs: The Investor’s Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs (Fix-and-Flip, 2) by J Scott
- The Book on Negotiating Real Estate: Expert Strategies for Getting the Best Deals When Buying & Selling Investment Property (Fix-and-Flip, 3) by J Scott, Mark Ferguson, Carol Scott
- Recession-Proof Real Estate Investing: How to Survive (and Thrive!) During Any Phase of the Economic Cycle by J Scott
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Connect with Josh Cantwell
Sign Up For The Forever Passive Income Partnering, Mastermind and Coaching Program with Josh Cantwell
Josh Cantwell: So, hey, welcome back. Hey, this is Josh Cantwell, your host of Accelerated Investor. And today, I’ve got a really special interview for you today. My guest is a fellow named J Scott. He’s an entrepreneur, investor, advisor, and author. He has flipped over 400 homes in the last 14 years after leaving a spectacular career at Microsoft in Silicon Valley. He has held over $150 million in property around the country, primarily today in the Houston market.
He’s also written four books and was part of some of the early phase books that were released by the BiggerPocket’s publishing company, including the book called The Book on Flipping Houses. That book has sold over 300,000 copies in the past eight years and is one of the most prolific books as far as sell units in the country on flipping homes. J is actually coming out with his most recent book, which comes out in just about a couple of weeks right now, it’s up for preorder, which is called the Numbers Book on Real Estate. And it’s all about multifamily property and evaluation, underwriting, the cost of debt, cap rates, how to evaluate deals, how to underwrite deals, due diligence on deals.
And J and I have a fantastic conversation about today’s economy, some specific things that you have to hear from J including how the United States economy has had over 35 recessions in the last 160 years, averaging one every five years, and also, why real estate has only been significantly affected in two out of those 35 recessions. You’re going to love this interview with J Scott, author, founder, investor, and of course, author of this most recent book, co-published by BiggerPockets called The Numbers Book on Real Estate, comes out October 10th. You’re going to love this interview. Trust me, you’re going to love this, especially the talk on today’s economy and how to pivot your business and invest in a recession. Here we go.
Josh Cantwell: So, J, listen, thanks so much for joining me today on Accelerated Investor. Thanks for carving out some time. I know you’ve got a brand-new book coming out shortly that you’re super pumped about, so thanks for carving out some time for us today.
J Scott: Yeah, thanks. I really appreciate being here.
Josh Cantwell: Absolutely. So, J, tell me a little bit about you have this brand-new book coming out. It’s your fourth or fifth book published by BiggerPockets. I was going to ask you about some new things that you’re working on, some passion projects, but that’s probably at the top of your mind. Tell us about it.
J Scott: Yeah, really excited. So, it’s the fifth book published by BiggerPockets. Of the five, this is the one I’m kind of most excited about. I think it’s going to impact the most people. It’s called Real Estate by the Numbers, and it’s really a book all about strategic concepts, the math, the finance, the way investors think. If I were to rename the book, I’d probably call it Thinking Like an Investor because it really is all those strategies and concepts and math that go into being able to look at deals and look at investments and look at your business and look at your financial statements in a way that really allows you to think like a great investor. It’s a 400-page book. I mean, for anybody that’s brand new, you’ll probably skim it the first time and get a ton out of it. For anybody that’s really seasoned, you’ll probably read it cover to cover and think, wow, like so dense with information in there. So, yeah, excited about the book. Thank you.
Josh Cantwell: Got it. Awesome stuff. Yeah, so J, usually when somebody writes a book, I’ve written a couple too, it’s usually because you see a problem in the marketplace or a message that the marketplace is not delivering, that you feel like you could kind of fill up a hole there in the marketplace. So, what was the motivation behind this versus the others?
J Scott: Yeah, so I guess every time I write a book, I ask myself two questions. One, does it exist? And two, can I do it better than anybody who’s ever done it before? And if I can’t say yes to at least one of those, I won’t do it. So, for example, first two books I wrote, The Book on Flipping Houses, I really felt like I could do it better than the books that I saw out there. There are a lot of great inspirational and motivational books out there, but there wasn’t anything that was really nuts and bolts. I’m an engineer by education and mindset, so I really wanted to write a nuts and bolts-type book, and it ended up being one of the top five bestselling books of all time in the real estate investing category. So, I think I accomplished that.
And I wrote a book called Estimating Rehab Costs, the book on estimating rehab costs. There was nothing out there that had kind of done this before, so I liked it because it could be new. Then I wrote a book called The Book on Negotiating Real Estate. Again. I just couldn’t find a good book on negotiating. My wife and I co-wrote the book and we couldn’t find anything that really went deep into the psychology of negotiating real estate specifically. Fourth book I wrote was called Recession-Proof Real Estate Investing. It was all about economics and the economy and how real estate cycles work and how we as real estate investors can leverage different parts of the economic cycle to really either reduce our risk or increase our profits. And again, it just wasn’t a book that I had seen before.
And so, this kind of follow that same track. There are a couple of books out there that I thought are pretty good about real estate concepts and strategic thinking and the math and the finance and the underwriting principles and all of the formulas. But there wasn’t anything that I felt really brought it all together in a way that was relatable to both novice investors and experienced investors. And so, I said, I can write this book. And it took five years, honestly. I started writing this book in 2017, the hardest book I’ve ever written. And now, I see why it doesn’t exist because it’s a really tough book to write. But I’m excited because, again, I think it’s something that’s new, isn’t really out there and people will find value.
Josh Cantwell: Yeah, fantastic stuff. Help me understand, from a book publishing perspective, where did the connection with BiggerPockets come in? How are they involved? If our audience are authors or they’re interested in possibly writing books, people familiar with BiggerPockets, so how did that relationship come together?
J Scott: Yeah. So, I’ve been friends with the founder of BiggerPockets since 2008. In 2013, I went to publish the first two books, the flipping book and the estimating book, and I didn’t know what I was doing, but I wanted to publish these two books. I reached out to him, his name Josh Dorkin, and I said, hey, I’m thinking about publishing books. Do you want to just throw them on BiggerPockets? We can co-brand them and we can sell them on BiggerPockets. And it took a little convincing, but finally, he realized, yeah, sure, why not?
So, we put the BiggerPocket’s name on it. We put my name on it. We created a professional cover and kind of threw it out there. Ended up doing really well. Those first two books were kind of the start of BiggerPockets’ Publishing. BiggerPockets Publishing is now the largest real estate investing publisher on the planet. And it kind of just started because I wrote two books and said, hey, let’s give these a try. And so, I’ve had a relationship with them since kind of the beginning of the company and the publishing business. And so, now, any time I write a book, that’s obviously the first place I go because I mean, they’ve got such great people there, such great information, and they’re like family to me.
Josh Cantwell: Yeah, I love it. Fantastic stuff. So, as you look at the analysis of what you just put into that book, and now, we’re experiencing a fundamental shift in the marketplace, if I had to estimate, J, I would anticipate the peak of the market that we’re in was probably July or August of 2021. That was when the economy was absolutely on fire. The jobless rate was very low. There was no war in Ukraine. There was none of this, some of the stuff with China, Taiwan. The market was flooded with cash. There was a supply problem with housing, which created a supply problem with apartments which forced values up.
And then as the Federal Reserve saw this inflation data coming, which was basically coming at the same time last May, June, July, August is when that all kind of started, then the Fed started to have to push rates and all this kind of stuff. And so, the markets tapered off a little bit. Now, you’re still seeing multiple offers on quality buildings, but you’re seeing people pull back on hard earnest money and offers that are way above whisper price and some deals that are retrading now. So, the market’s fundamentally shifting.
So, the book is about all these different ways to underwrite a deal, all the levers that you could pull, whether it’s rents, cap rates, cost of debt. We’re obviously seeing a major shift in that the last six months or so. And so, where do you think the market’s going now? Or what have you changed? Or what are you looking that you’re going to change? What are you looking out for as the market continues to evolve?
J Scott: Yeah, I think the first thing we need to realize is recessions aren’t rare events. I mean, if you look over the last 160 years, this would be the 35th recession we’ve had in the last 165 years. Do the math, 165 divided by 35, we have recessions every five years on average. Now, a lot of people don’t recognize that, especially if you started investing in the last decade, decade and a half, it’s been 2008 to 2020, we didn’t see a recession. 2020 was so quick that most people don’t even think of it as a recession. So, it’s basically been 14 years since the last recession.
And so, people are in this mindset that recessions don’t happen, and when they do, they’re 2008-type events. The reality is any of us old guys like me, I’ve been around for five decades now, I remember these past recessions and I’ve done a lot of research into the history of economic recessions in this country. And the reality is, very rarely does real estate get hit like the broader economy when we have a recession. Real estate tends to be countercyclical to much of the economy.
So, 2008 was obviously a catastrophic event, but it was foundationally a real estate issue, was a real estate lending issue, was a banking issue, those issues with mortgage-backed securities. And at the end of the day, real estate took a hit in 2008 because 2008 was the cause of that downturn. But you look back to 2001 and we had the tech collapse and we had 9/11, real estate didn’t even take a hit. You go back to the late 80s, early 90s, we had the savings and loan crisis, and yeah, it wasn’t great for housing, but housing didn’t take much of a hit compared to the rest of the economy. You go back to four recessions between the mid-60s and the late 70s, and while the economy was struggling, inflation was super high. What did real estate do? It kept going up.
And so, you go all the way back, last time real estate took a big hit during a recession was during the Great Depression in the late 20s. So, over the last 150 years, again, we’ve had 34, 35 recessions, two of them have had major impacts on real estate. The other 32 or 33 have essentially not impacted real estate. Real estate has seen some countercyclical cycles where it’s gone down when the economy was good. But in reality, most recessions aren’t going to impact real estate anywhere near as badly as other asset classes get hit.
So, I just want to kind of start with the fact that for any real estate investors out there that are concerned about the recession, concerned about a downturn, yeah, I can’t say that this time won’t be one of the few times the real estate doesn’t get hit, but the reality is real estate is a safe place for your money during recessionary periods. Even more so, real estate is a great place for your money during inflationary periods.
The single best hedge against inflation on the planet is long-term, low-rate debt, fixed-rate debt because I take out a mortgage at 3% last year and I’m paying whatever, I’m paying $1,000 a month on that mortgage. In 15 years, wages have doubled because of inflation. The price of everything is double because of inflation. But guess what? I’m still paying that same thousand dollars a month on that mortgage. So, I’m making more money, and there’s inflation all around me, but my mortgage hasn’t gone up in price. So, I’m paying down that mortgage in inflated dollars in the future. So, it’s literally the best hedge against inflation.
Additionally, real estate, in general, if you look over the last 100 years, 120 years, real estate values tend to go up in most places at about the rate of inflation. So, if nothing else, real estate is just a hedge against inflation, plus you take the benefits of the debt, and now, you have literally arbitrage against inflation. Real estate is the best place to be right now.
So, again, I’m not saying that real estate can’t go down. There are certainly markets that have gone through the roof over the last couple of years. We’re already seeing drops in values in some big cities like San Francisco and Seattle and LA, some smaller cities like Boise that saw huge run-ups. So, I’m not saying values won’t go down in some places, but my take is or my guess is that real estate values, in general, aren’t going to correlate to the broader market. And we’re going to see less of a downturn in real estate than we are in other asset classes, like stocks and bonds, not necessarily bonds, but stocks and crypto and other conventional asset classes that tend to suffer during downturns.
Josh Cantwell: Yeah, absolutely. I love it. Thanks for that analysis, J. That was fantastic. The other thing, too, which I’m sure you talk about in the book, is that real estate is a very inefficient market. There’s a lot of inefficiencies between you and I could both look at the same asset and value it very differently.
J Scott: I love that about real estate.
Josh Cantwell: How we structure it versus if there’s a stock for sale, everybody looks on the stock exchange and everybody can buy it at the same price. So, the inefficiency of the market allows very sophisticated operators and general partners to structure deals differently that allows for this spread or yield to go up way more than inflation. And in the book, you talk about all these analyses, all these levers that you can pull to make a deal when somebody else doesn’t see a deal. And that’s one of my favorite things about real estate and about even investing in this downturn is if less people are offering and we know they are and deals are starting to retrade which they are, and there are not many people offering on deals because maybe bridge debt is not an option anymore and they have to make the deal debt cover these types of things. If there are less people buying, I only have to get through the heartburn I might have over that the cost of my debt right now is a little higher than what I was used to, even though we both know, J, that the cost of debt is historically still below historical standards. So, if you’re a great at the inefficiencies and structuring deals and finding value, this is still a fantastic time to invest. No? I’m bullish on it.
J Scott: Oh, absolutely. And here’s the thing, that’s the funny thing with debt prices where they are, I mean, fixed-rate debt these days is in the mid sevens, adjustable rate debt is a little bit lower, but with the SOFR rate likely going up over the next six months, we’re going to see adjustable rate debt go up a good bit. We have rate caps that are in the seven figures. I mean, people are literally paying a million, $2 million for rate caps. Debt is relatively expensive.
But here’s the cool thing, my investors, my equity investors, my individual investors, institutional investors, while debt might cost me at this point 7%, 7.5%, if my investors are getting 6%, 6.5% cash flow every year, they’re pretty happy. So, I can actually use this as an opportunity to say, okay, I’m going to go into a deal with less debt. I’m going to go in at 50% LTV, 55%, 60% LTV. I’m going to raise more equity. And suddenly, I’m now paying more to my investors, less to my lenders at 6% or 6.5% than I am to my lenders at 7% or 7.5%. And my cash flow, my annual cash flow numbers are actually going up.
Now, obviously, the cost of that equity is going to be more expensive on the back end. I’m going to see less profits for me, but I can encourage my investors to come into these deals because they’re still getting their 6%, 6.5%. It’s actually easier for me to pay them their 6%, 6.5% because it’s cheaper than the 7%, 7.5% I’d be paying to a lender. So, I actually want more equity now than I want more debt.
And this is something that a lot of investors, a lot of syndicators aren’t thinking about. They aren’t thinking about how to creatively structure their deals. There are also a lot of people that are just assuming that a downturn now means that rates are going to be high for the next 10 years and they think, okay, well, I need to lock into a fixed rate loan. And with fixed-rate loan, you’re going to have the maintenance penalties, defeasance, prepayments, whatever. And so, it can be expensive to get out of it, to refinance, but again, if you look back through economic history, what we found is over the last 16 years, there have been 10 of these cycles where the Fed starts to raise interest rates to fight inflation.
And all 10 of those times, raising interest rates has led to a recession. And all 10 of those times, after we’ve gotten into that recession and inflation has dropped, the Fed has started lowering interest rates. What people don’t realize, the longest period of time between rate hikes and rate drops, the Fed starting to hike rates and then the Fed starting to lower rates, has been three years. So, again, maybe this time is different, but assuming we’re going to follow that same pattern that we followed during the 70s major inflation crisis, during 2008, during all these other major economic crises, so we can follow the same pattern. That means within two and a half years from now, since it’s been about six months since the rate hikes have started, we should see the Fed start cutting rates.
Josh Cantwell: Right.
J Scott: And typically, the Fed cuts rates a lot faster than they increase rates. So, it’s reasonable to say that within three years, we should see rates, maybe not where they were six months ago, but starting to approach that level, which means we shouldn’t be terrified of taking a five-year term loan, an adjustable rate five-year term loan or three plus one plus one or four plus one because I think it’s probably pretty safe to say in five years, rates are going to be down, we’re going to be able to refinance. And so, I would rather take that risk, lock myself into a 10-year fixed rate that I can’t really sell or refinance because I’ve got these huge yield maintenance penalties.
Josh Cantwell: Right. J, everything you said now, we’ve made that exact bet. We’ve locked in, I wouldn’t say long-term debt, but five to seven-year money, bank money, bridge, three plus one plus one, four plus one, that type of stuff, making that exact bet that rates might go up. But if I lock in now and I think the big thing, J, that you’re saying too, which is that when we buy the real estate, we want to own it forever. So, whatever the cost of the debt is today is just is what it is. I’ve got to structure the most creative deal I can today knowing that if my business plan supports me owning that asset forever, which could be five, seven, ten years or beyond, I want to own the real estate and I want to structure it the right way, at the right price.
And if I can get in at the right number, I don’t have too much heartburn over the debt, this is an area where rates might go up, but it’s only going up for 10, like we’ve been watching the 10-Year Treasury for the last four months because they got a deal that’s 225 bps over the 10-year Treasury. Well, 10-year Treasury has been going up and up and up. All of a sudden, now that deal that was going to cash flow break-even four months ago is now going to bleed about $50,000 a year. Big deal.
$50,000 a year is nothing to get into a deal with heavy value add, with rents going up, being able to turn units raised rents that I want to own forever if it bleeds for the next 12 months because the rents will course correct that $50,000 bleed 13 months from now, that’s the question I keep asking myself. Do I want to own that piece of real estate forever? The answer is yes. The short-term heartburn that people have over debt shouldn’t stop you from investing. It might make you rethink, you’d be a little bit more conservative on your offer price, but I think now, because there are less people offering, there’s less competition, there are more people getting out of the market, taking a pause, now, you’re maybe competing with four or five or six buyers versus before it was 12 or 15.
That’s again why I’m super bullish about making the right investments today. It’s just a different– man, if you’re bullish about real estate, no matter what the economy, J, you could probably always find a reason to tell yourself to be bullish because it’s just, like you said, recession-proof, inflationary-proof, it’s an asset you got to be in long term, whether you’re active, whether you’re a limited partner, it’s got to make that kind of sense. Then I can’t wait till your book comes out because I’m sure after all, with all of your experience that you’ve talked about these levers that you can pull in a recessionary environment.
J Scott: Yeah. And here’s the other thing. I mean, you made the point yourself, like knowing history is important. I’m sure when you locked in your 10-year plus, plus 25 bps, you probably did your research and saw that over the last 15 to 20 years, there’s been a ceiling on the 10-year in about 3.25%, which is about where we are now. So, again, maybe this time is different, maybe it’s going to break that ceiling and break out, but most likely, 10 years probably topped out. That’s where it was when interest rates were at 6%, 7% 20 years ago. And so, it’s probably a safe bet.
Here’s the other thing. Right now, the stock market’s not doing that poorly. Other asset classes aren’t doing that poorly. They’re not doing great, but they’re not doing that poorly that people started pulling their money out and start looking for a new home. But here’s the thing, when we start to see a bigger downturn, when we start to see the slide in the economy, what we’re going to see is people are going to start pulling money out of the stock market and out of other asset classes and they’re going to be looking for a safe haven. What’s that safe haven? Historically, it’s been real estate.
And what part of real estate tends to make the most sense for investors who don’t know real estate well? They move into residential and a lot of them move into multifamily residential. So, what happens when all this investment money comes into multifamily residential? Well, what happens is cap rates start to compress again. There’s more competition for deals. And so, while the rest of the economy might be suffering, my guess is that while we’ve seen some cap rate expansion over the last few months, my guess is we’re going to see cap rate compression starting in the next six months as the rest of the economy starts to go to hell because all these smart investors are going to be looking for a safer home for their money. They’re going to move into real estate, and that’s just going to push cap rates down.
Josh Cantwell: Yep. I love it, J. I love the analysis. I didn’t think we were going to go this route with this interview, but this is so timely and perfect. Thanks for sharing it. The other thing is, I think, look, investors have started the second guess where they got maybe a little, I don’t know if the word is lazy or if it’s fat and happy when the stock market was booming, crypto was booming. I had some guys that were in real estate, and they’re like, oh yeah, you’re only giving me an 8 pref and I’m getting 1,000% return on my crypto. I’m like, yeah, I can’t really compete with that.
But now, your crypto just absolutely got smashed by, whatever, 75%, 80%. and it’s made people think about the fundamentals of investing. And when you’re investing fundamentally and you drop $200,000 into a limited partner type of deal into a syndication and you’re getting a 6 pref or an 8 pref or something while on this, plus equity, now, you’re thinking, sh*t, inflation is 8.5. And my stock portfolio is down 27% and it’s come back obviously recently. But like I said, it’s not doing terrible, but the fundamentals of investing is about getting cash flow that you can take and then reinvest into the next deal. And that fundamental has changed.
And I think it’s our mission, guys like you that are syndicators, investors in us, we have to be more aggressive in telling that message because investors will get lulled into, oh my God, my mutual funds are up 34%, or oh my God, my stock, I pick the right stock and it’s flying right now. Great. But do you really ultimately achieve for that limited partner their end result goal of I want to retire and I need a nest egg that’s going to throw off cash, right?
So, one of my traits that I focus on and I teach you about is investing for cash flow now, not investing for cash flow when you’re retired. Invest for cash flow now, and again, multifamily if bought the right way and structured the right way just has that fundamental built in forever. This is not something that’s new. It’s something that’s always in that and it’s always going to be there. So, J, are there any other pivots, changes, things that you’re second guessing or looking at based on the economy right now because some of the pullbacks, some of the retrades that are happening?
J Scott: So, obviously, we’re not seeing as many deals cross our desks as we did before. I’m one of those people that I have no problem saying, okay, I’m going to take three months off, not really take three months off, but I’m going to sit back for three months and see where things go. I think it’ll be interesting what we’re recording this on September 21st, so I know it’s a few weeks before it actually came out, but in about an hour and a half, we’re going to get information from the Fed on what they’re doing with interest rates in September. And so, it’s going to be a good indication of whether we can expect two more rate hikes after this for the rest of the year and how big those rate hikes are likely to be.
And so, right now, I think we’re in a period of uncertainty and the Fed is kind of signaled that they’re going to be more aggressive this time than they have been in the last couple of recessions, in which case, maybe they’re going to be some much better deals that are come along in three or six months, or who knows, maybe in an hour and a half, the Fed’s going to release their rate hike information, their determination, and it’s going to be like, okay, they’re stepping off the gas a little bit and maybe tomorrow is the right time to buy it. So, I have no problem kind of sitting back and saying, let’s gather up a little bit more information first. And I think all good investors do that. I mean, you never have to be full steam ahead at all times.
And so, for now, really, I’m sitting back, I’m really curious to see what the Fed does today. I’m really curious to see what the September inflation numbers look like in a few weeks. And obviously, by the time this interview is released, we’ll already have known. But I think that’ll give us a good indication about whether we can expect rates to be topping out at the end of this year or the middle of next year. And again, doesn’t make a huge difference, but it helps us a little bit with our timing, whether we should know if we should be more aggressive now or if we have a few months to wait before a few sellers might start to get desperate.
Josh Cantwell: Great. The other thing I’ll be interested to hear is what they’re going to do with quantitative tightening because the 10-year Treasury has a lot to do with that number. So, when the Fed came out, if everybody remembers Fed came out, we’re going to do quantitative tightening and they said, okay, we’re going to start selling off our bonds or just basically letting them roll off our balance sheet, then people didn’t realize that if they let that happen when there’s less liquidity in the market, the rate is going to go up. And that’s why the 10-year Treasury started to go up.
Then they said, okay, we’re going to start letting roll off or sell off $45 billion a month. Well, they didn’t do that for the first couple of months that they said they were going to do it and the Treasury started to creep up. Then they said, well, we’re going to start doing $90 billion a month. So, I’m really curious to see what happens in two hours about that because the Fed funds rate is going to affect residential. It’s probably going to affect the SOFR rate, which will affect bridge, but the 10-year Treasury is much more indicative of what’s going to happen with bank financing and long-term Fannie/Freddie debt.
And we like to lock in, like you said, three, five, seven-year money or longer, get through times like these because we all know, guys, if you only lose a piece of real estate or get in trouble when you’re at a refi or a balloon event, in an event that you have to sell when you don’t want to. Otherwise, you just hold it and get through, and then you’re better off on the other side. So, I’ll be taking a look at that. Is that a number that you’re looking at heavily? If so, why?
J Scott: Absolutely. And I think it’s one of the things that too many people ignore. I’ve come across the number a couple of times recently that for every trillion in liquidity that the Fed pulls out of the market through tightening equates to about a quarter point in Fed funds rate increase. So, it’s the equivalent of about that.
So, if we’re pulling out or if they’re rolling off $90 billion a month, that’s a trillion a year. And that means that’s the equivalent of them raising rates by an extra quarter of a point which when we’re expecting rates to be at about 4%, that’s not a non-trivial percentage of the total rate. Yeah, so I think the smart investors are definitely looking at the tightening.
And here’s the thing, with $9 trillion on their balance sheet, the Fed has to figure out how to get some of that money off of there or we’re screwed over the next 5, 10, 15 years. And so, it’s a question of do they do it now? Do they wait a few years? And I certainly think what they decide to do is going to factor into how quickly where we are now turns into a real recession.
Josh Cantwell: Yeah, I love it. Fantastic stuff, J. Listen, this is such a timely topic. We’re going to push this interview up, release it as fast as we can because of the stuff that we’re talking about. I think it’s great for our audience. Last question for you is just really around advice. You’ve written these four or five different books. You’re an author. You’re involved in many other places as sort of an authority speaking on this. You’re obviously connected to some really big hitters in a lot of places, including BiggerPockets. But if you were to look back on the things that you think you’ve done right, that our audience could say, hey, if I could repeat what J did, that’s going to help me in my journey.
And then also, things that you maybe didn’t do right or things that you learned from that you would change, let me just kind of wrap up with that question. What do you think you did right in your journey, a couple of things that maybe stand out? What are some things you’d maybe do differently?
J Scott: Yeah. So, I think I would attribute the biggest part of my success to the fact that I got into real estate back in 2008 and I knew nothing about real estate, like literally nothing. I was mid-30s and I literally bought my first house in 2008. I came from the tech industry. I worked for Microsoft for a long time, so I was in Silicon Valley and I couldn’t afford a house back then.
And so, when I got into real estate, I was forced to think about real estate as a business guy as opposed to a real estate guy because I didn’t know anything about real estate. I didn’t know the mechanics of buying houses. I knew kind of renovating houses. I didn’t know the mechanics of staging or selling houses. So, what I was forced to do was I was forced to hire people and build a team of people who were a whole lot smarter than I was. And basically, I focused on the strategy while they focused on the nuts and bolts of real estate.
And for me, that allowed me to scale my business much more quickly than if I were actually working in my business. I was the one that was out there looking for deals and I was the one managing contractors or buying materials or doing the staging. No way I could have been flipping 30 or 40 houses a year, like I was back in ‘08, ‘09, ‘10, ‘11. And so, I really attribute a lot of my success to the fact that I always focused on treating my real estate business like a business. And in the single-family world, that’s sort of important. But as you move into the commercial world, you move into the multifamily world, it’s a team sport.
Josh Cantwell: No doubt.
J Scott: And nobody is smart enough to basically run a syndication themselves. I mean, maybe you’re good enough to do the acquisitions yourself or maybe you can do the underwriting yourself or maybe you can do the fundraising yourself. Maybe you can do the asset management yourself, maybe you can do certain pieces yourself, but you can’t do all these pieces. So, you need to know what you’re good at and then you need to be able to build a team and a business around you so that you can get everything else done in a way that everything is cohesive and really scales.
And so, what I would encourage anybody out there to do is really figure out, learn how to run a business, learn how to be a good entrepreneur, not just a good real estate investor because there’s a difference. Knowing how to swing a hammer or to acquire property is important, but knowing how to rebalance sheets, knowing how to deal with cash flow issues, knowing how to hire and manage people, knowing how to scale a business, in general, is literally more important when you’re building a real estate business than the real estate because you can always hire people that can do the real estate piece.
Josh Cantwell: I love it. That’s fantastic advice, J. Listen, as we wrap up, I want to just again remind my audience, J’s main website is Connect with J Scott. That’s kind of initial J. ConnectwithJScott.com. And J, the book is coming out very, very soon. Obviously, the Fed fund’s meeting is this afternoon. There’s a lot of things happening. So, we’ll get this episode out as early as we can. But you’ve written a number of books, this new one is coming out again. Tell our audience again where they can pick up the book and where they can just engage with you after they hear this interview.
J Scott: I appreciate that. So, books available, Amazon, BiggerPockets, basically, and where you get books. If you go to NumbersBook.com, that will link you out to the different places. And you didn’t ask me the biggest mistake I made, but I need to say this because I want everybody to hear this. I remember back in 2008, when I was starting out investing, I had lunch with an experienced investor in my area and I didn’t know what I was doing. And he always asks the question like, so what would you have done differently?
And at the time, his answer was something that I didn’t really think about, but I think about a lot now. He said, I regret every house I ever sold. I had to do it all over again. I never sell a single thing I bought. It took me 400 flips to realize that that was the best lesson I had ever gotten. And I said that I ignored him, but honestly, the biggest mistake I’ve ever made in this business is literally every property I’ve ever sold. My wife and I went back and did the math a year or two ago and realized we left something like $40 or $50 million on the table by selling those 400 houses. Even if we would have only kept a quarter of them, I mean, do the math. So, yeah, my biggest regret, my biggest mistake, my biggest recommendation to anybody out there is hold as much property as you can long term because, one, paying taxes is no fun. Real estate is a great tax shelter and real estate goes up and it cash flows. And I mean, there’s just so many reasons to hold it, and so few reasons to sell it off.
Josh Cantwell: Yeah, fantastic stuff, J. Listen, my audience, this is one of my favorite interviews. J, I love talking economics and levers and numbers. This is one of my favorite interviews I’ve done recently covering today’s market and all the stuff that you cover in your book. So, I just want to say thanks again. I’m so grateful that you jumped on and shared with our audience today.
J Scott: Hey, thank you so much, Josh. This was fun.
Josh Cantwell: Well, guys, there you have it. Listen, that is absolutely one of my most favorite interviews. I love talking economics. I love talking real estate. I love hearing from very smart people like J who have a lot to say around why to invest, why to be bullish on real estate. And we covered a lot of that today, and I think you really enjoyed that. And if you did, don’t forget to subscribe to this episode and all of our future episodes of Accelerated Investor. Don’t forget to pick up J’s newest book, which gets released on October 10th. Also, don’t forget to like and subscribe this podcast and leave us a rating and a review.
And finally, these are the types of things that we cover guys through my coaching and mastermind and partnering program. It’s called the Forever Passive Income Mastermind. We’ve got over 75 members. We’re set to meet again the first week of December of this year. And so, if you’d like to participate in that mastermind, which is going to be held in New Orleans, Louisiana, which we’re going to have a lot of fun in New Orleans, hanging out in Bourbon Street, make sure you apply to be part of that mastermind. Go to JoshCantwellCoaching.com. We’ll see you next time. Take care.