00;00;00;00 - 00;00;19;23
Unknown
What are you seeing today in the current economic environment, like is today really different? We hear that a lot is today is different. This time is different. I've always hesitated to say this time is different. Because I'm a I'm a big fan of economic history. I've studied economic history. And what you find is that history tends to to repeat itself over and over, or at least it rhymes.
00;00;19;24 - 00;00;43;13
Unknown
It's it's similar over and over. But this time is things are changing a little bit. And I'm willing to, to say at this point that because since 2008, the attitude in Washington is we don't like recessions and we're willing to spend our way out of them. They're doing their best to keep us out of recession, even though recessions are a natural part of the economic cycle.
00;00;43;15 - 00;01;07;05
Unknown
And so given that it's it's one of those things that in, in historic terms, we have a recession in this country. We've had a recession in this country every five years or so. So if you go back 160 years, we've had 36 recessions in this country. So do the math 160 divided by 36, about 4.5. So every 4.5 years in this country we have a recession.
00;01;07;07 - 00;01;27;18
Unknown
We haven't had a real recession since 2008. So what's changed? The government and the Federal Reserve are working really hard to keep us out of recessions by again, printing lots of money and playing around with interest rates.
00;01;27;20 - 00;01;54;07
Unknown
Welcome back to the Seven Finger Flipping Podcast. Man, we got one of my favorite guest I think I've ever had the opportunity to interview on the podcast today. Jay Scott, who is what I would consider one of the OG flippers for the new age of real estate investor and one of the most brilliant minds on, on economics, especially as it relates to the real estate market.
00;01;54;10 - 00;02;14;04
Unknown
And he has a ton of experience flipping houses himself. He buys, a whole bunch of apartments smartly with, Bardon Investments and his team over there. He's just a all around very savvy, very credible, real estate investor in the market. He's amazing. And, Jay, I'm excited to have you on the show. Welcome to the show. Hey, Adam.
00;02;14;04 - 00;02;39;11
Unknown
I'm thrilled to be here. Thanks for having me. And obviously, if, if the audience doesn't know you, which I'd be shocked. You are. You are a bigger pocket's mainstay host. Hosted a variation of shows over there. Well, what show are you host in now? There. Yeah, so I'm actually not hosting anything over at Biggerpockets. My, my wife and I, co-hosted the Biggerpockets business podcast for a few years.
00;02;39;13 - 00;03;06;17
Unknown
Back in, I think 2018 to 2020 up to Covid. And I find myself as a guest on podcasts, probably once or twice a month on the various Biggerpockets podcast, but not not hosting anything right now. And you have, the Drunk Real Estate podcast. Yeah. So, a few friends of mine and I get together once a week, four of us, and, and we drink a little bit, and we talk real estate and investing and economics and politics.
00;03;06;17 - 00;03;31;05
Unknown
Whatever happens to be going on in the the world that week. And, we try and make it educational and also fun. And yeah, it's, it's it is very you guys do such a great job of just illuminating different topics about what's going on in economics, how politics are affecting the market and what's going on in real estate sometimes to really great show you Kyle and AJ, right?
00;03;31;08 - 00;03;53;06
Unknown
Kyle, AJ and Mauricio rolled on Mauricio. That's right. Yeah the the he's a real estate attorney. So yeah great show a show that I frequent myself and would recommend all of our listeners to listen to Jay on there. He knows what he's talking about. Okay. Cool. Jay, for people who have been living under a rock, can you tell them, kind of your background, who you are and what you do?
00;03;53;09 - 00;04;14;21
Unknown
Yeah. So, I'm, I'm a reformed engineer and business guy, so have, an electrical engineering degree, MBA. Spent, a couple decades in the tech world, doing tech stuff, corporate stuff. And then in 2008, my wife and I decided to get married. We were both working ridiculous hours, 80 hours a week. She was traveling three weeks a month.
00;04;14;21 - 00;04;31;22
Unknown
I was traveling a week and a half a month. We never saw each other. We wanted to start a family. And we just knew that, the whole tech lifestyle just wasn't going to cut it for us. So quit our jobs. Moved from Silicon Valley to the east Coast and said, hey, let's figure out what we want to do next.
00;04;31;24 - 00;04;56;21
Unknown
This was summer of 2008, and we had no idea what we wanted to do, but every time we turned on the TV, there was some house flipping TV show and my wife, who's big into design, was like, I'd love to flip a house so we could, like, come up with cool designs for it in the sun. We had literally just bought our first personal residence ever, so I knew nothing about, about renovations or flipping houses or buying real estate or anything.
00;04;56;23 - 00;05;14;21
Unknown
But when the woman you're about to marry decides she wants to do something, you just say, okay, let's do it. So, summer of 2008, we decided to flip a house, and that turned into two, turned into ten, turned into 50. And at this point, I think we're over 500. We've slowed down a good bit since then.
00;05;14;21 - 00;05;34;00
Unknown
Most of our flipping these days is with passive. We're passive with other investors doing the active work. We focus on, buying and syndicating apartment complexes these days, but we still dip our toe in the, in the single family world and are still doing some flips here and there, you know? Well, first off, you jumped in.
00;05;34;00 - 00;06;00;08
Unknown
Carol said, let's go, and you jumped. And what I think is really cool, you have an engineering mind. You're you're kind of data driven person. So my personal opinion is that that bodes actually really well for house flipping, where, you know, a couple of numbers really can decide whether or not you're going to win. Like, like guessing the after repair value and then dialing in a detailed rehab.
00;06;00;11 - 00;06;20;11
Unknown
Yeah. So that's part of it. The other part of it was just the business side. Look, people ask me, like, how I was able to flip 500 houses in, like, the first 6 or 7 years that we did this, especially back in 2008 when the market was just in the toilet. And the reality is it's because I didn't know any better.
00;06;20;13 - 00;06;40;16
Unknown
Like, if I knew back then what I knew now, one I probably wouldn't have started back then, in 2008, even though it was a great decision, I wouldn't have thought it was a great decision if I if I knew then what I know now. And two, I certainly wouldn't have felt like I had the ability to scale that quickly, knowing all the challenges that I was going to face.
00;06;40;16 - 00;07;03;02
Unknown
But luckily I didn't have those limitations, those those, mental limitations, because I didn't know anybody else that was doing this. And so I didn't know that flipping 20 or 30 houses a year wasn't a common thing. I mean, I just assume that if you're flipping houses, you're doing a bunch of houses. But here's the biggest thing that I think helped us, and that's what we knew absolutely nothing about real estate.
00;07;03;04 - 00;07;21;29
Unknown
I found that people that come in as, they were real estate agents or their contractors or their something else in the industry where they have some knowledge, they feel like they've got a leg up and they feel like when they jump in and start flipping houses, they can be really hands on, especially people that have contracting backgrounds.
00;07;21;29 - 00;07;41;26
Unknown
They're like, why would I hire a painter when I can paint this for for like a third of the price myself? Why would I hire a plumber when I know how to do plumbing? And so what they end up doing is they they end up focusing on all the tactical stuff, as opposed to the strategic side of the business building the business, hiring the right people, putting the right systems and processes in place.
00;07;41;29 - 00;07;58;29
Unknown
I couldn't do that. I'm an electrical engineer who my wife would say, can't even change a light bulb. And so from the day we started, I never tried to do any renovations myself. We never tried to to be the real estate agents and buy or sell the houses ourselves. Never tried to be a mortgage broker and try and don't deal with the loans ourselves.
00;07;58;29 - 00;08;16;05
Unknown
We always brought people in who knew what they were doing, and we built a team around us, just like the big companies we had worked for previously. And we said, look, we don't know what we're doing, but we're going to surround ourselves with people who do, and that's what's really allowed us to to build and grow and to scale our business.
00;08;16;08 - 00;08;36;19
Unknown
That attitude of let's treat it like a real business, as opposed to treating it like a hobby, where we're doing everything ourselves. Yeah, that's that's something we, we see a lot is, house flippers join our community. They come from a construction background. I have two to, community members recently. One guy, older guy in Michigan.
00;08;36;19 - 00;08;55;00
Unknown
His name is Tom Bell. Wonderful human. Gets his very first house flip and does the work himself. Ends up making ten grand on his first deal, all his while didn't lose money. Obviously. We all know that's a huge win. And the whole time we're going, Tom, you got to hire this stuff out. If you're in that house, you're not saving money.
00;08;55;03 - 00;09;11;20
Unknown
And when you do the math, it took him four times as long as he thought it would take him doing it himself. And then when he ran the numbers on holding cost, he could have just hired the people to do it, and probably done 2 or 3 more in that same doc. Here's the way to look at here's the way I've always looked at it.
00;09;11;20 - 00;09;28;21
Unknown
If you're let's say you go in and you paint a house yourself, and let's say by doing that, you don't have to hire a painter at $25 an hour. How much are you earning per hour flipping that house? You're earning $25 an hour. The money that you're saving by not hiring a painter and doing it yourself is $25 an hour.
00;09;28;21 - 00;09;48;22
Unknown
That's what you're earning. I don't know about you, but I didn't get into being an entrepreneur or real estate investor of House flipper to make $25 an hour. I got into this business to make $100 an hour, $500 an hour, $1,000 an hour. And I can't make that money by spending my time doing a $25 an hour job.
00;09;49;00 - 00;10;13;03
Unknown
I need to be focused on the 500 and $1,000 an hour jobs, and I need to hire out the $25 an hour jobs. Yeah, absolutely. I, talk about this ad nauseum with our community and on this podcast. Let me let let's let's get right to the good stuff. I don't want to save this for the end. You wrote the book on Flipping Houses, one of the best books Biggerpockets has ever published, in my opinion.
00;10;13;11 - 00;10;39;27
Unknown
I appreciate and with all that experience. Right. So you started at a time where people probably thought you were insane. You obviously didn't know any better, turned out to be good, and you did 500 house flips and you're still involved. Like, what is the absolute best piece of advice you could give to a house flipper today, whether they're just starting or they're midway into their business?
00;10;39;29 - 00;10;59;19
Unknown
So the best piece of advice is for those who have never done a deal. And so I like to say that I meet two people, two types of people in this business, and I meet a lot of people, and they always fit into one of two groups. Either they've never done a deal, and that's probably 90, 95% of the people I meet or they've done ten, 20, 50, 100 deals.
00;10;59;19 - 00;11;17;23
Unknown
And that's the other 1 to 5% of people. I mean, there's one type of person I never, ever meet in this business, and that's somebody who's done one deal. Nobody in this business does one deal. And the reason for that is if you can get to that first deal and getting the first deal is hard. I mean, it can take a lot of time, a lot of effort, a lot of stress.
00;11;17;28 - 00;11;49;03
Unknown
But you get that first deal and everything kind of clicks. And that second deal is so much easier. And the third deal is so much easier after that. And by the time you get to ten, 20, 30, 50 deals, it's a no brainer. Basically, you're on autopilot with you, hopefully with your systems and processes. So my biggest piece of advice to anybody out there, if you haven't done that first deal and you feel like I just I don't know if I can make it in this business, just make a promise to yourself that you're not going to stop until you get number one.
00;11;49;05 - 00;12;07;17
Unknown
Because if you get number one, you're going to get two, five, ten, 20, 50. Yeah, that that is it's a belief change. I think for a lot of people like they can't they know they hear us on the podcast. They they see the people and they're like, I really want that. They start it. They realize, hey, there's some challenges.
00;12;07;17 - 00;12;27;25
Unknown
It's not the easiest thing in the world, but you do get better over time. It does feel easier. Your skill goes up. But when they do that first deal to just to just watch people, their their belief system, their mindset, like they're, they surprise themselves even though they know they're going to do it right. Like they, they're like, oh my gosh, I did it.
00;12;27;28 - 00;12;49;19
Unknown
I made some money. This is crazy now. So it's really it's really cool. I mean, I'm so grateful and fortunate to be a part of a lot of people's businesses in our world where I get to watch that evolution and, and you're exactly right. We talk about this all the time. Like, I can teach you how to make all kinds of money in real estate, but like I would I really would be the best coach for is to help you.
00;12;49;20 - 00;13;09;24
Unknown
I believe in these people sometimes more than they do because I've seen, you know, very average people like me be able to do extraordinary things. And I'm like, you're more talented than I am. Like, once you do that first one, it's going to be game over. So I love that. I absolutely love that. Hey, so you you I'm, I'm following you every day.
00;13;09;27 - 00;13;33;18
Unknown
There's a lot of stuff going on in the economy. There's a lot of data out there. We're questioning the data. Like certain indicators. That would typically mean something would happen. It's not happening and we don't know why. And all this uncertainty is out there in the marketplace. And we talk about what the investors is, hey, there are market cycles and people make money in every cycle.
00;13;33;18 - 00;13;54;11
Unknown
Some are more constrained and more challenging. Some you have tailwinds. At the end of the day, there's there is opportunity in every market cycle, like people are still making money. What what are you seeing today in the current economic environment, like, is today really different? We hear that a lot is today is different. This time is different.
00;13;54;11 - 00;14;19;23
Unknown
Is today different. What do we see in I mean, certainly there are things that are different about today's economy and kind of the the economic cycle than in the past, simply because, the government, the Federal Reserve, our monetary system is behaving a little bit differently than they have in the past. I, I've always hesitated to say this time is different.
00;14;19;26 - 00;14;45;27
Unknown
Because I'm a, I'm a big fan of, of economic history. I've studied economic history. And what you find is that history tends to, to repeat itself over and over, or at least it rhymes. It's it's similar over and over. But this time is things are changing a little bit and I'm willing to, to say at this point that because since 2008, the attitude in Washington is we don't like recessions and we're willing to spend our way out of them.
00;14;46;02 - 00;15;08;10
Unknown
We're willing to print ridiculous amounts of money. We're willing to do crazy things with interest rates, anything to stay out of a recession. And it's not a this is not a Partizan political thing. We've seen this across the last three administrations, three presidents, three different presidents, four administrations, two different sides of the aisle. They're both doing the same thing.
00;15;08;17 - 00;15;31;07
Unknown
They're doing their best to keep us out of recession. Even though recessions are a natural part of the economic cycle. And so given that it's it's one of those things that in, in historic terms, we have a recession in this country. We've had a recession in this country every five years or so. So if you go back 160 years, we've had 36 recessions in this country.
00;15;31;07 - 00;15;50;25
Unknown
So do the math 160 divided by 36. That's about 4.5. So every 4.5 years in this country we have a recession. We haven't had a real recession since 2008. So what's changed? The government and the Federal Reserve are working really hard to keep us out of recessions by again, printing lots of money and playing around with interest rates.
00;15;50;27 - 00;16;16;24
Unknown
And so prior to 2008, going through a recession wasn't a big deal. It happened all the time. Now it doesn't happen very often, and so people aren't accustomed to it. People hear the word recession and what they think is 2008, because most of the people that are in real estate today, or they're in their 20s or their 30s, if you're in your 20s or your 30s, the only recession you really remember, let's ignore 2020 because I was a weird one.
00;16;16;26 - 00;16;37;07
Unknown
But the only recession you probably remember is 2008. And so when you hear the word recession, you think, oh my God, the sky is falling, the world's collapsing, economic collapse. Everybody's losing their jobs. Everybody's losing their house. The real estate values are getting cut by 20, 30%. But the reality is that was a one time event in 2008 or a two time event.
00;16;37;07 - 00;16;57;13
Unknown
It happened back in the Great Depression, back in the 1930s. But I said there have been 36 recessions in this country in the last hundred and 60 years. Those were literally the only two times that real estate took a big hit. The other 34 recessions, real estate either flattened out, kept going up at a small clip, were maybe dropped, half percent.
00;16;57;13 - 00;17;29;24
Unknown
1%, 1.5%. But we never other than 2008, in the 1930s, we never saw recessions impact real estate to a large degree. And so when you hear the term recession, sure, you can't rule out that the next one might be like 2008 or 1929. But the reality is it's more likely to be like the other 34 recessions where things aren't good, people are losing their jobs, and there's some inflation and and eventually there's deflation and there's some foreclosures and there's some bankruptcies.
00;17;29;24 - 00;17;49;07
Unknown
But at the end of the day, the real estate market just kind of keeps chugging along. And so what I tell people is don't fall into that, that, that, that doom and gloom mindset that even if you think there is a recession coming and I think there probably is one coming, it doesn't mean real estate's going to collapse like it did in 2008.
00;17;49;09 - 00;18;08;23
Unknown
That's a that's a great point, Jay. I interestingly like when I, you know, we we got a couple hundred house flippers who are on the ground Dan stay and they list a house on the market. It starts sitting longer than they're used to. They start clenching up and the chatter starts and I I'm like, I'm a data guy.
00;18;08;23 - 00;18;27;01
Unknown
I'm not. I'm not an engineer like you and Bill, but I'm still a data guy. I like data, I like to I like sacks, right? So I'm like, okay, well, cool. We're in the business of risk acceptance. So everything we do, we accept some level of risk. And our job is to mitigate that to the best way we possibly can.
00;18;27;01 - 00;18;47;14
Unknown
So I said, let me go back and look at what has happened negatively in the housing market, like you said, 1929, which is a whole different economic world, by the way, which I know you know that. And then 2008 are the biggest drops in real estate prices. I'm like, cool, how much is real estate drop? Like, if I had to adjust for the worst case scenario, what would it be?
00;18;47;16 - 00;19;17;26
Unknown
So then I look at 2008 nationwide 25% drop. Some reports say some markets locally 40%. If you look at Nevada and Miami, 4,060% big drops there. But I kind of even an out and I go, okay, but here's the thing. They drop over time a period of time, Tony, 2008 to 2012, it didn't happen next month. And you think about the cycle of a house flipper, which you well know is 6 to 12 months weren't an asset for 6 to 12 months.
00;19;17;26 - 00;19;34;19
Unknown
And we're turning out of it. Okay. Cool. So I got a plan for that. So what is a reasonable worst case scenario? I say my opinion 1% a month. So I'm gonna buy a house today. And I think I'm holding that for nine months, just not 9% off of the after repair value. And it would be really hard to lose still.
00;19;34;25 - 00;20;01;15
Unknown
Yeah, but and here's the way I look at it. So you said 25%, I think, across the country in, in 2008, the numbers I read or somewhere in the 21 to 22%. So, yeah. Low 20s. What's the average margin, profit margin for a house flip? In my experience, it's somewhere around 15% if you're at scale, if you're doing kind of one off deals, smaller or fewer deals than it might be 20, 25%.
00;20;01;17 - 00;20;25;20
Unknown
But even at scale, you're probably at somewhere around 15% margins. So in an absolute worst case situation, you buy the house like the day before the drop starts. Then you have a 2008 type event where the market drops 2021, 22%, and then you sell the house the next day. After that, you hit the bottom. Your 15% margin now reverses.
00;20;25;20 - 00;20;44;19
Unknown
By 2021 22%, you've lost 5%. That's an absolute worst case scenario. I'm not going to say that's it's the worst case scenario because it like you said, there are some markets, that that did worse. And certainly if you make bad decisions you spend too much, you're holding costs or too much, etc., etc. you can still lose a lot more money.
00;20;44;21 - 00;21;07;05
Unknown
But a good house flipper who's following the rules, who's doing the right thing, who's being conservative in their numbers, even in the most unlucky scenario, given economic factors, you're probably not going to lose more than 5 or 10%. And it would be difficult in most economic situations for the market to to turn a 15% profit into a loss.
00;21;07;05 - 00;21;31;25
Unknown
So. So what I like to tell house flippers is you have to learn, you have to study, you have to you have to put best practices into play. But if you put the best practices into play in your business and you do things right, and you underwrite well and you make good decisions and you're conservative in your assumptions, then you're what you're pretty much doing is you're mitigating almost all the risk from a 2008 type event.
00;21;31;27 - 00;21;51;21
Unknown
Yeah. And it's it's, I think like that when we get that data in front of some of these really good house flippers, I think it gives them, a little more confidence. Anytime we see somebody struggle, it's honestly user error. They bought too high. They sat on it too long. The rehab, scope was, was, underestimated.
00;21;51;21 - 00;22;17;29
Unknown
They found more things. It's it's always it's always something that we did or probably the worst thing that I see today is overpricing houses in an environment where we have an affordability issue, which is what I'd like. I'd like to just kind of go into that a little bit because, you know, we look at the history and the real estate market has done what it's done, which gives us a lot of confidence.
00;22;17;29 - 00;22;42;14
Unknown
But have we ever seen a market that has this kind of an affordability issue? And maybe that's the big concern going forward? We haven't. And so affordability is is at an all time low right now. Housing prices are I'm going to use the term in a bubble. I, I hate that term because the, the assumption is when you use the term bubble, that there must be a situation where that bubble pops up.
00;22;42;18 - 00;23;18;00
Unknown
So and I don't think that's necessarily the case. But the reality is that that home prices, historically adjusted are over inflated. And so when we talk about what is over inflated mean, like what should they be priced at? Do we have a benchmark. And the reality is we do. So if you look at 1900 through 2004 and you track home value increases over that 104 years, what you'll find is value increases almost exactly tracked inflation over the same period of time from 1900 to 2004.
00;23;18;05 - 00;23;50;16
Unknown
Then 2004, a weird thing happened. We saw housing prices kind of diverge from from the trend line, that inflation trend line, and things got really expensive. 2008 910 come around and values came crashing back down. And by 2013 we were back where housing prices over 113 years, 1920 13 basically were aligned with that inflation trend line. Basically over 113 years, housing prices went up at the rate of inflation about 33. 1%.
00;23;50;19 - 00;24;13;03
Unknown
20 1415 we started to see that divergence again. And now here we are ten years later and housing prices are well above the inflation trend line. So the question is does that mean that housing prices need to come crashing back down to the inflation trend line again? Well I think that's one possibility. It's possible that we'll see a 2008 type event or not so bad or worse.
00;24;13;03 - 00;24;40;11
Unknown
Who knows where housing prices come crashing back down. And we, we kind of re converge on that inflation trend line. But I think a more likely outcome is that housing prices for the next five, six, seven years will be relatively flat, while inflation catches up. And those two trend lines will intersect again about 5 or 6 years down the road without real estate coming crashing down.
00;24;40;13 - 00;25;01;17
Unknown
And the reason I think that's more likely is because the biggest driver, like I just said of, of home prices is inflation. And if you think we're going to continue to see inflation for the next three, four, five, six, seven years, it's very likely that home values are going to continue to be propped up. And so are we going to see inflation for the next several years?
00;25;01;17 - 00;25;25;08
Unknown
I think we are. It feels like we're in an inflationary environment. There are a lot of economic factors that are converging that are kind of driving inflation up. We're printing a lot of money. We've got some weird trade policy these days. We're seeing, high demand on the investor side. There's something like $300 billion in investor money sitting on the sidelines looking for a home in real estate.
00;25;25;10 - 00;25;44;15
Unknown
A lot of people want to buy a house, but they're just been priced out. And so as wages start going up over the next couple of years, they'll be priced back in. If interest rates start to come down, they'll be priced back in. So there's a lot of reasons to think that, real estate is going to be propped up for the next couple of years and we're not going to see this 2008 type crash.
00;25;44;18 - 00;26;10;06
Unknown
And then at some point, again, 5 or 6 years from now, the data looks like those two trend lines, real estate values and, and inflation will kind of converge again. And in 5 or 6 years, I suspect we're going to say real estate prices are now back to where they should be without that big crash. That's that's, I just really appreciate that kind of pragmatic look at that.
00;26;10;06 - 00;26;29;23
Unknown
Based on data. So when we talk about affordability so we have, you know, wage and wage growth. So how much money people make and that determines what they can afford to buy. You know, if you, you know, you listen to any financial person, they they'd like to see you keep your housing costs under 30% of your income. Yep.
00;26;29;25 - 00;26;48;18
Unknown
Just as a rule of thumb. And, obviously real estate values go up, but wages don't grow. Yeah. What are we seeing in the the current environment? Is there a is there a, a world a scenario where we see a bigger wage growth, maybe housing stagnates but wage growth comes up. And how do you see that affecting businesses.
00;26;48;20 - 00;27;11;24
Unknown
Yeah. So I think certainly we're going to see wage growth. And it looks like wage growth is a little bit above inflation. Inflation these days according to government numbers. Whether you want to believe them or not is somewhere around 3%. Wage. Yeah. Wait. Wage growth is somewhere around 4%. So in theory, we're making more money in inflation adjusted terms, real terms every year.
00;27;11;26 - 00;27;32;19
Unknown
And again, housing prices I don't expect are going to go up anywhere near that 3 or 4% rate. So I do expect over the next few years that we're going to see wage growth in salary, total income approach a number that's a lot more reasonable for where real estate is currently priced. It might take a couple of years.
00;27;32;22 - 00;27;54;02
Unknown
But in the meantime, the nice thing is, again, there's a lot of demand out there. There are a lot of people who want to buy houses. There are a lot of, investors who want to buy houses. And then there are a whole lot of people who own houses, who bought houses back in 2018, 19, 2021, and interest rates in the two three 4% range.
00;27;54;05 - 00;28;12;29
Unknown
If we start to see interest rates come down in the next couple of years, and I don't think it's going to happen quickly, we can talk about that separately. But when we start to see interest rates start to come down a bit, I think a lot of those people who are holding off selling because they've got a great interest rate are going to be willing, more willing, to sell and move into a new property.
00;28;13;04 - 00;28;32;28
Unknown
And so I think that'll, that'll drive some it'll drive supply because there'll be more people selling. But it will also, drive some additional demand. Yeah. I think, we should talk about interest rate. I wasn't going to go there, but I feel like that's the like that's the the consumer metric that everybody has kind of zeroed in on.
00;28;32;28 - 00;28;58;15
Unknown
Although we know it's kind of just one of the metrics. But like, I mean, they're coming down low sixes. It's starting to flirt with that five range. Very interesting to see that happening. You got, Jerome Powell I think in his most recent stuff. You know, they dropped a quarter quarter basis point. So. Well, like, what's the significance of the interest rate today?
00;28;58;15 - 00;29;19;00
Unknown
And, you know, can you demystify maybe some of the people who are correlating the fed funds rate with mortgage rates? And I know you've done a lot on that, that particular topic. But if you could just touch on that, where you think interest rates are going and why would be great. Yeah. So and unfortunately, this isn't necessarily great news.
00;29;19;02 - 00;29;40;12
Unknown
But the same thing that tends to drive real estate values going up. Inflation is the thing that tends to drive mortgage rates to go up. And so without going into all the detail, like you pointed out, when the fed decides to cut their interest rate, they control one one particular interest rate that doesn't necessarily impact mortgage rates.
00;29;40;17 - 00;30;03;25
Unknown
What impacts mortgage rates is this thing called the bond market, the US Treasury bond. So when the government needs more more money to spend, they issue debt in the form of bond investors buy those bonds and they demand a certain return on that investment. And so let's say I want to buy a ten year Treasury bond. Basically it's the government saying we need to raise, let's say buy $100 Treasury bond.
00;30;04;01 - 00;30;23;23
Unknown
Government says I need to raise $100. I say, I'll lend you $100. And I want you to pay me interest for the next ten years on that $100 investment by buying that bond. And the government says, great. So how much do I need an interest over the next ten years? Well, if inflation is low, let's say inflation, I think inflation is going to be 3%.
00;30;24;00 - 00;30;42;07
Unknown
I might be happy with 3.5% because I know I'm buying the bond just to preserve my money. It's wealth preservation. I'm not looking to get rich off the bond. I'm just looking for a place, a safe place to put my money. So if inflation's at 3%, I might be happy to accept 3.2, 3.3, 3.5% return on that bond.
00;30;42;09 - 00;31;00;22
Unknown
But let's say inflation's at 4%. Am I going to accept a 3.5% return on the bond? No, because I lose money over ten years, inflation's at 4%. I'm only getting 3.5%. So now I'm going to demand a higher yield on that bond. I'm going to need at least 4%. And if inflation is 4.5% I'm going to need at least 4.5% return on the bond.
00;31;00;24 - 00;31;23;12
Unknown
And so the higher inflation is, the higher the yield I'm going to require on that bond. And then at the end of the day, that bond ten year Treasury bonds, whatever they're paying, whatever yield or interest rate they're paying, is ultimately what drives mortgage rates. And so as inflation goes up, investors demand higher interest rates on these bonds as they demand higher interest rates on these bonds.
00;31;23;17 - 00;31;46;07
Unknown
Mortgage rates go up. So inflation drives mortgage rates. And again the same thing that's that's helping our real estate. We like high inflation because it means rents are going up. It means that housing values are going up. But it's the same thing that drives mortgage rates. Yeah. Thanks for thanks for touching on that. The I'd like to kind of bring it back to the house flipper.
00;31;46;07 - 00;32;15;03
Unknown
So, you know, people are people. Get it? Things are happening. It just is. The circumstances we live in, they're still flipping houses. They're doing it smartly. They're making money. It's it's it's good in their sense. Things change. And the the real big thing is you don't want to get caught holding the bag. Yeah. So what should what should house flippers today like what metrics or data are the most important ones for them to keep their eyes on as they're continuing with their business?
00;32;15;06 - 00;32;45;21
Unknown
Just to make sure that they're ahead of the curve and they don't get caught holding the bag. Yeah. So, there are a few things. Number one, you always want to be cognizant of the supply in your market. So we have we have this thing called months of demand. When we sell houses or buy houses, and it basically tells us, given all the houses that are currently listed on the market right now in a certain area, and given how quickly houses in that area are selling, how long would it take for all the houses currently listed to sell?
00;32;45;24 - 00;33;04;01
Unknown
And that is measured in months. So historically, six months is about the average of how long it would take for all the houses that are currently listed based on how fast houses in the market are selling, six months is about how long it would take to sell all the houses, and we refer to that as six months supply.
00;33;04;03 - 00;33;22;23
Unknown
And we tend to think that anything less than six months. So if we could sell off all those houses faster than six months, then that's a seller's market, because sellers are in a better position because houses are selling faster than average. Anything longer than six months is a buyer's market. Things aren't selling quickly, so buyers can demand lower prices.
00;33;22;23 - 00;33;42;27
Unknown
They can they can ask for concessions. They can ask for for price reductions, whatever it is. And so we tend to want to see markets that are less than six months in supply, because again, that's a seller's market these days. We're still seeing a lot of markets that are three four months of supply. And so that's good.
00;33;42;29 - 00;34;01;25
Unknown
I mean, it may not feel as good as it did a couple years ago when we were at a month supply, two months supply, literally houses were flying off the shelves. But things are still pretty good in most markets. We're still seeing under six months of supply, but we're creeping up. So the first thing I would tell people is pay attention to how much supply is in your market.
00;34;01;25 - 00;34;19;03
Unknown
Talk to a local real estate agent or a local broker or a local appraiser, other investors, but be cognizant of that number. And if today we have three months of supply and next month we have four months of supply, that means that things are slowing down. It's still a seller's market, but it's not as good of a seller's market.
00;34;19;03 - 00;34;37;17
Unknown
Once we hit that six month mark of supply, that's when we move into a buyer's market and brokers and real estate agents start telling their buyer buyers, we're over six months now is when we start asking for lots of stuff. So that's the first thing to be cognizant of what that that's that that total supply number is in months and how close we are.
00;34;37;17 - 00;35;02;12
Unknown
2 to 6. Number two, is really be cognizant of what's going on with the inventory in your market in terms of condition. This has been the biggest eye opener for me, both in the single family and the multifamily world. And that's that. We buy a house and we expect to renovate it to a certain level because we're looking at comps.
00;35;02;12 - 00;35;26;11
Unknown
We're seeing other things that are selling in this area. Have new countertops and new cabinets and new rooms, and I need to renovate to a certain standard to get a certain price. But as we get into a worse market, if we're heading into a softening market, what you're going to find is prices are might come down a little bit in some markets, but at the same time, the condition of the houses that are hitting the market are coming down.
00;35;26;14 - 00;35;49;20
Unknown
Because we have more foreclosures, we have more, distressed sellers selling their properties, not fixing them up before they sell. And so your competition is coming down. So it's possible that, yeah, maybe you're in your market, you can sell you can only sell for 5000 less than you could a month ago, but at the same time, maybe most of the houses that you're competing against now don't have new roofs where they, as they did a month ago.
00;35;49;24 - 00;36;18;26
Unknown
So you can save 15 or $20,000 by not putting on a new roof. So you lost 5000 sale value, but you save 15,000 in repair value because none of your competition now is putting on a new roof. They don't have the money or their foreclosures. And so even if we see a situation where values might start to come down, that could be an opportunity for us to to change our rehab strategy, still compete with the houses that are out there, still be better than the houses that are out there, but spend less money.
00;36;18;26 - 00;36;43;20
Unknown
And so that's a big thing to watch, too. We always assume that, like the comp study we did when we bought the house is the same six months ago as it is today. That may not be true. It may be that a lot of houses that are hitting the market right now are a whole lot more distressed than they were six months ago, so you don't need to do as much of a renovation to compete that that's such a that's such a good point on the ground today we have a member, James Daniel Paws.
00;36;43;20 - 00;37;08;06
Unknown
He's out in Nevada and Vegas area. Yep. And great. He's a he's an agent, a broker. He's a house flipper. He's I mean, he's just engulfed into that market. He's he's a really savvy, savvy guy. He actually shifted his strategy this year to what we now call a hotel. Basically, we buy it. We do, you know, minimal stuff to it, listed and sell it.
00;37;08;08 - 00;37;32;18
Unknown
And his business is doing way better because that's what that market is allowing 100%. And so I, I think I talked about this in the book. But when I underwrite a flip, what I do is I create multiple exit strategies, I create multiple renovation and exit strategies, and I assign numbers to each. So for every flip I do, the first thing I say is, what's the hole?
00;37;32;22 - 00;37;52;03
Unknown
One of the wholesale numbers looked like I buy it for X. I put $0 into it. What can I sell it for tomorrow? And maybe I'm getting a house at $80,000 that I can turn around, sell for 110,000, make $30,000 without doing anything because I got a great deal on it. So that's the first scenario. Second is that hotel scenario.
00;37;52;03 - 00;38;17;00
Unknown
And by hotel, in my definition, people have different definitions. My definition is you go in and you do the the big ticket stuff. So maybe there's a hole in the roof that's, that's water's leaking in. So you go, you fix the roof, you fix the drywall, you fix any mold that's in there, the house, you don't fix up, you don't do a full renovation, but you fix that big issue that would keep somebody from being able to get a mortgage because it might not be insurable.
00;38;17;03 - 00;38;39;05
Unknown
Or it might keep, an investor, a new investor scared from buying that house. A lot of investors don't want to buy a house with mold and a hole in the roof, but they don't mind once you fix the roof in the mold and the drywall, they don't mind coming in and doing the cosmetic renovation. So you're basically fixing up the house just enough that you're going to create a new set of demand, a new buyer demand pool for that property.
00;38;39;07 - 00;39;00;08
Unknown
And so you might, in that case, buy that same $80,000 property, you put $20,000 into it, and you sell it for 160,000. So now you're making 50,000 minus you're you're all you're holding costs. So that's better than the the wholesale scenario. Then you do the next scenario. What if I go in and I just make this house nice enough to be a rental?
00;39;00;10 - 00;39;19;22
Unknown
I don't replace the the flooring, I don't replace the cabinets, I don't replace the, the the Hvac or the roof. I just clean it up and I make it as a nice rental. Now I open up a buyer demand for, for landlords and maybe I can I can put $40,000 into it to make it really nice for as, as a, as a rental.
00;39;19;22 - 00;39;35;12
Unknown
And I can sell for $200,000 to a landlord. And now my margin has gone up more. Then I do another scenario and I say, well, I want to do a full rent rehab. I want to go in, I want to do a full cosmetic. I want to replace all the mechanicals, I want to replace the roof. I want to do a bunch of nice landscaping.
00;39;35;12 - 00;39;56;01
Unknown
I want to put a fence in all of these things. Now, maybe I'm spending $70,000, but now maybe I can sell it for 250. So that's another scenario. And then I say, well, let's think of the final like extreme scenario. Maybe I go in and I knock the house down and I build something new. And most of the time in that scenario, you can't make money.
00;39;56;01 - 00;40;16;29
Unknown
It's going to cost you more to buy it, knock it down, rebuild it than what you can sell it for. But there are some scenarios where that's actually the best scenario and so I have each of those five scenarios. Or maybe I have ten scenarios or four scenarios, whatever. I create a whole bunch of scenarios, and then I look at the numbers and I say, this one generates me this much profit with this much work, this one generates me this much profit with this much work.
00;40;17;05 - 00;40;43;07
Unknown
And generally one of those scenarios is going to stand out as this is the obvious right choice I put in this amount of work, I get this much profit. That's a much better scenario than all of the others. And then that's how I decide how much renovation I'm going to do on that property. Yeah. That's, you know, that I think that's the skill level in which, you know, you're going to have a really strong business when you have multiple options this year.
00;40;43;07 - 00;41;04;12
Unknown
Jay, we've bought, we've done a lot of foreclosure houses. We've been able to purchase. Believe it or not, it's our it's our best, campaign in terms of us marketing to people. And we I mean, we've already done a million bucks and gross profits on just that, that one, strategy in Tennessee and Georgia specifically, non non-judicial states.
00;41;04;12 - 00;41;23;21
Unknown
So, and then that's what we do. We look at all the different exits on it. And it's, it's not just margin because I might make 80 grand on a deal, but it could take me 12 months because it's a big old rehab or I might only make 40 grand, but I'm going to do it in three months.
00;41;23;28 - 00;41;49;00
Unknown
Yeah, or you might make ten grand and you do it overnight by by just wholesaling it to another one. That's true. And never even stepping foot in the house for sure. Yep. And I think some of that, you know, there's, there's a factual number that makes sense, but there's also like, considering your business, the cash flow in your business, the capacity of your team, how many rehabs you have going on.
00;41;49;03 - 00;42;12;16
Unknown
And, and I think some we've got some really, really savvy, impressive investors. And I'll tell you, like, the best ones have multiple exit strategies, period. Like their businesses are strong because they can do multiple things with that asset class. Yeah. So that so I can go ahead. Now I was just going to say and the other thing to keep in mind, you made a really good point about the capacity of your, your contractors.
00;42;12;18 - 00;42;30;29
Unknown
In my mind, I've always treated this business again, I've done more scale than, than a lot of people, although I'm sure a lot of your folks, are at scale. If you're doing a flip a year or two flips a year, this isn't as applicable to you. But if you're looking to get to scale, the key is you need to turn over inventory quickly.
00;42;31;06 - 00;43;10;15
Unknown
It reduces your risk. It increases your profits. And it also allows you to, to build, economies of scale with your materials, with your labor, because you're giving them more work, you're buying more materials, you're using your labor more. And so turning houses over more quickly is really important. And so what I used to find when I was doing higher scale, higher volume than I am now, was if I needed to make a decision, if I had two strategies that were kind of equal, one involved a month worth of work making X dollars and one two volved six months of work making maybe 3 or 4 x, and otherwise they
00;43;10;15 - 00;43;39;07
Unknown
seem like pretty comparable scenarios in terms of time and effort and money. I would always go with the shorter one, because at the end of the day, I would rather do more deals than do bigger deals if if, if it's going to end up the same at the end, especially in a market where things could change, especially in a market where we could see some softening because you much rather get out of a house in a month, then take the risk of holding it for six months.
00;43;39;10 - 00;43;58;26
Unknown
If there's a risk that the market's going to soften and values are going to stagnate or go down. And so generally speaking, I like the faster action strategies, all other things being equal. But you you need to to look at your business in real time and say, how many contractors do I have, access to? What's the price of materials right now?
00;43;58;29 - 00;44;17;12
Unknown
What are all these other factors that are going on and kind of make a good game time decision? I think that's the best folks in this business are the ones they can look at every deal, and make a really good decision for that particular deal based on the conditions today, not just, a set of heuristics that they apply in every situation.
00;44;17;15 - 00;44;37;06
Unknown
That's that that's fun. And time is time is a critical factor. Like the moral that story is time is the critical factor for an investor. And, and, you know, even as you look at I invest in stocks, well, guess what, 30 years in the market's going to do pretty good for your time's a critical factor. If you're moving inventory shorter time is better.
00;44;37;06 - 00;44;53;25
Unknown
And that's what we're doing and how slumping we're moving inventory. And of course I love the markets that have that had the rental exit because that's like to me, that's just such a good safeguard. I know you were in, the North Carolina market where they had a good rentals for a while. I believe you were.
00;44;53;28 - 00;45;15;16
Unknown
I was actually in Atlanta. That's where we started. Okay. Atlanta. Yeah. Which which Atlanta has grown in prices, but that's again a great rental market for many years and population growth and all those things. So, yeah, time is a critical factor. Multiple exit strategies also a critical factor. Okay. Just my my last, my last my last one for today.
00;45;15;16 - 00;45;38;17
Unknown
Jay. What do you see? Because we talk about, risk and opportunities. So over maybe just the short term, 12 to 18 months, what do you see as a major risk to house flippers? And what do you see as the major opportunities to house flippers? Yeah. So the biggest risk is obviously the the market. We don't know what's going to happen there.
00;45;38;18 - 00;45;57;19
Unknown
There's no doubt going to be some markets, where we're still seeing a good bit of population movement in this country. Everybody knows that back during Covid, there was big, big shifts in population from certain states to other states. And a lot of that is kind of reversing over the last year or two, a lot of people going back to work.
00;45;57;25 - 00;46;16;14
Unknown
So that means they have to go back to, to where they, where their jobs were. A lot of people getting new jobs. So they have to go to where their new jobs are. A lot of people who just, I know I live in Southwest Florida, I live in Sarasota. This was the fastest growing city in the country for a few months back in 2020, 2021.
00;46;16;16 - 00;46;35;05
Unknown
Because it was and I know you're not too far from here. Everybody came down here because it was inexpensive and it was beautiful, and unfortunately, it's still beautiful, but it's not inexpensive anymore. And so we have a lot of people who came down in 2020, 2021, who are now like, I can't afford to live here anymore.
00;46;35;05 - 00;46;56;16
Unknown
So they're going back to where they were. And so we have lots of population movement, and that's causing prices to kind of do weird things in different markets. Markets prices are going up because people are moving in other markets, like here where I am in Southwest Florida, values are dropping because people are moving out. And so I think the biggest risk is, is going to be a market risk.
00;46;56;18 - 00;47;15;21
Unknown
We're not on, the back in 2020 like on a national level. Everything went up back in 2008 on a national level, everything went down. We're in a situation where I think we're going to see, very disparate markets across the country. Some are going to do well, so we're going to do bad. So make sure you have a good handle on your market and the fundamentals.
00;47;15;25 - 00;47;39;12
Unknown
Population growth, employment growth, wage growth, employment diversity. These are the things that you should look for. So that's the biggest risk in terms of opportunity I think the biggest opportunity is that there's still relatively little competition. Given where we were 6 or 7 years ago, a lot of people are still terrified to flip houses. They don't understand it.
00;47;39;12 - 00;48;05;07
Unknown
And I have a good barometer. It's funny, I wrote the book on flipping houses back in 2013, and what I found is I can correlate, book sales to how much competition I'm seeing in the market and competition for deals. And so I'm seeing a lull in book sales over the last two years that I believe is is correlating directly to, less competition in the market.
00;48;05;07 - 00;48;29;20
Unknown
Obviously houses you're you're spot you're spot on, by the way. Like, I mean, we send out we do lots of marketing director sellers so we know like 2021 into early 22, like we're competing against 30 people talking to the same salary. I can't even tell you how many books I sold back in 2020 and 2021. It was crazy.
00;48;29;22 - 00;48;48;20
Unknown
And so yeah. So, yeah. So I'm seeing that correlation. And so I think there's a lot of opportunity just in terms of lack of competition. Everybody's waiting for the perfect time to jump in. People don't realize that when it comes to house flipping, there's no perfect time. Everybody, I mean, half the people. See, I started in 2008.
00;48;48;20 - 00;49;06;02
Unknown
Like, I wish I would have started in 2008. You could buy any house. I mean, literally, I could put the MLS up on a dartboard, throw a dart, whatever, whatever property it hit, whatever address it hit and go out and buy that property. And I'd probably make a lot of money. But here's the thing people don't realize it was really hard to sell a house back then.
00;49;06;02 - 00;49;26;14
Unknown
People couldn't get mortgages. People couldn't qualify for mortgages. If they could qualify for mortgages, they, they half of them lost their job between the time they qualified and they actually closed on the house. Fannie Mae, or FHA had a whole bunch of rules. I don't know if they're still there around reselling houses that were purchased as foreclosures.
00;49;26;14 - 00;49;42;03
Unknown
There was a whole bunch more rules around short sales. I mean, it was a really hard to sell houses back then. And so in any given market, it's either going to be hard to sell or hard to buy. It's never going to be a perfect time where it's easy to buy and easy to sell. And so a lot of people don't realize that.
00;49;42;06 - 00;50;03;26
Unknown
And so there are a lot of people sitting on the sideline. And so I think now's a great time to to be over the next, I think year or two will continue to be a good time to get in without tremendous amount of competition. So I think that's the biggest opportunity. I love that day. One interesting thing is I went back a while ago and I did a study on media, like, what was the fear mongering over the years?
00;50;03;26 - 00;50;26;11
Unknown
Right. Like, every year you go into the news and you look up from 2008 for some reason that the market is crashing, everything's bad. What's really fascinating, and I'll kind of just, I'll end on this. But what's really fascinating is in 2008, when you were buying houses, people were like, the news, I gotta imagine, was like, do not touch real estate.
00;50;26;13 - 00;50;43;23
Unknown
It's the scariest. It's the worst thing ever. It's never coming back up. And so like, if people and people are seeing that today, let's say they want to get into it and they're like, oh, but the news is saying this news flash. It's always saying that. It's always saying that they're they're trying to sell. And they do that through fear.
00;50;43;26 - 00;51;01;29
Unknown
And so don't don't buy and delay. But the other thing to keep in mind is if the people that are doing the news, if they were experts in real estate, they wouldn't be doing the news. That's right. So everybody thinks they're an expert. But the reality is that, the conventional wisdom is is often wrong, especially when it comes to investing.
00;51;02;02 - 00;51;18;18
Unknown
Yeah, for sure. Jay. And the such a, immense amount of gratitude. Love you and your family. Love what you do for the real estate industry, man. Really excited to see you in November in Clearwater Beach. It's going to be great to get you in a room with a bunch of house flippers, I think.
00;51;18;20 - 00;51;33;29
Unknown
I think you'll be excited. So I'm looking forward to it. Can't wait to see everybody there. So anybody that's listening to this, make sure you, you come see me in in November. I'm looking forward to it. Awesome, brother. Awesome. And for people who want to get plugged in, I know you have a great newsletter. You have the podcast.
00;51;33;29 - 00;51;59;21
Unknown
How can they find you? Yeah. So J scott.com letter J scott.com. That'll link you up to everything. Cool. And we'll put that in the show notes. Of course. And I really encourage people to get plugged in to Jay's newsletter. I appreciate you I appreciate your community and look forward to see everybody out there. Hey, if you love today's guest, we're doing an event November 5th through eighth in Clearwater Beach, Florida.
00;51;59;23 - 00;52;20;13
Unknown
It's members only. It's very exclusive, no selling. It's just going to be an amazing event for real estate investors, house flippers and entrepreneurs you can apply to. Come now. You'll have to pay for your spot, but you could get in the room with some of the best house flippers in the United States. I highly recommend you apply. Click the link below.
00;52;20;15 - 00;52;28;02
Unknown
Apply to come to the event. If we select you, I'll see you in November November 5th through a Clearwater Beach, Florida. See you there!
