February 24, 2024

SVB’s (Silicon Valley Bank) collapse has more to do with the housing market than you think. With bank runs becoming contagious, Americans in fear of economic turmoil, and a recession now closer on the horizon, assets like real estate could be affected in ways that most everyday Americans don’t realize. But, to understand what could happen to home prices and the US economy, we’ll need to explain the entire situation.

Back on as expert guests, J Scott, multi-decade investor, and Scott Trench, CEO of BiggerPockets, are here to share their takes on the SVB’s meltdown. More importantly, they explain the events leading up to this bank collapse, how the pandemic created fuel for this future fire, and whether SVB’s collapse could cause a chain reaction that leads to more bank failures, harder economic times, and, surprisingly, higher mortgage rates.

J and Scott debate whether or not more small banks are at risk, what could happen to HELOCs (home equity lines of credit), mortgages, and other financing options, and whether or not real estate will go down with the ship as our economic situation goes from bad to worse. And, if you’ve been saving up for your next investment property, stick around as J and Scott walk through how real estate investors should be using their money in troubling times like today.

David:
This is the BiggerPockets podcast.

Scott:
My position is, yes, we either going into a recession or not. That’s profound insight from me. But my point is more specifically, that we’re either going into a recession or you’re seeing rates rise even further in most of the types of borrowing that you do as a real estate investor on the commercial or in even conventional loans by the end of the year. Those are the two.

David:
Welcome, everyone. This is a bonus show we are bringing to you today. I’m David Green and I am your host. And I’ll be joined today with Scott Trench and J Scott, both very smart gentlemen who are going to help me break down what’s going on with the banking industry, and more importantly, how this relates to real estate investors like us. If you’ve been living under a rock and you haven’t heard the news, Silicon Valley Bank was shut down, so was Signature Bank, and possibly more on the way. This is going to have an impact on liquidity in the markets. It’s going to have an impact on confidence in our economy and other things that affect real estate investors. So we are going to be discussing this and its impact on you.
Today’s show is great as we break down why the bank failed, how more banks could be failing, and if we think that the country is going into a recession or if this is an isolated event. If you’ve been concerned about the state of our country, if you’ve been following the GDP, if you don’t like these raising rates, or you’re concerned about inflation, this is a show that you don’t want to miss.
Before we get into today’s show, the quick tip for today, remember that HELOCs and other equity lines of credits are great for short-term financing. They are not great solutions for long-term financing. I’m not a huge fan of taking out an 80% loan at a 30-year fixed rate, and then funding your down payment with the HELOC that you have on another property. That is spreading a lot of debt around when it’s already hard to find deals with strong cash flow. So if you’ve done that, consider paying off your HELOC because it may not be around forever and banks may be calling these due if the market continues to decline.
All right. I hope that you are planning to get smarter than you were before you listen to this show because you’re not going to be able to avoid it. Let’s bring in J and Scott.
Welcome to this bigger news bonus show where we’ve got some pretty interesting news that it’s floating around out there right now, and we want to make sure that we bring in some experts to talk about this information so that you, the BiggerPockets listener, can get a better idea of what to expect. I’m joined today by BiggerPockets CEO, Scott Trench, and BiggerPockets OG. Is that a title? Can I say that, J Scott?

J:
I’ll take it.

David:
Yeah. You’ve written more books than me for the company. They’re surrounding your head back there. Highly decorated like a war general that’s just got metals all over his wall. And one of those books is the book on… Is it Investing? What’s the actual title of your recession book?

J:
Recession Proof Real Estate Investing.

David:
There we go. Thank you for that. And we are going to be talking about what’s going on with our banking system, how that’s going to be affecting investors and, what people should be doing. So thank you guys both for joining me. How are you today?

Scott:
Doing great. Great to be here.

J:
I am thrilled to be here. Just realized this week that it’s like the 10-year anniversary of the first time I was on this show back in 2013.

David:
Yeah. What show number was that your first time?

J:
Number 10.

David:
That’s amazing. I remember before I was ever even interviewed on this show, I wasn’t a blog writer. I definitely wasn’t hosting anything. I was listening to J Scott’s advice as the person that had a handful of rental properties and a dream and trying to figure out how it was going to make it work. So this is pretty cool that we get to talk today with some smart people. And also, I believe the last time the three of us were together was during the coronavirus shutdown, when we had a pandemic going on. No one knew what to expect, and we did a pretty good job giving advice about what people could expect. We’ll see if that’s any different with the challenges the economy is facing today. I’m sure it’ll be different, but there’s always opportunity if you know where to look. So let’s start with you, J Scott. Can you give us a rundown of what happened with Silicon Valley Bank and how that’s affected the economy?

J:
Yeah. The long story short is the bank failed, and it happens. Let’s be clear. We’re getting a lot of press around the bank failing, but it’s not the only bank that’s ever failed. We’ve actually had about 20 banks that have failed going back to 2012. So it happens now and again. What happened with Silicon Valley Bank is they’re a very specialized bank. They take a lot of money from tech companies. So tech companies raise five, 10, 50, $100 million and they need a place to put that check, and a lot of them put it in Silicon Valley Bank. So it’s a lot different, the types of depositors that bank had than a typical bank. You think if Scott or David or I were to go put money in a bank, we’d probably stick our $100,000 or $50,000 of emergency fund there and we basically leave it there. But when a tech company puts money in, they’re spending a lot of money every month, and so, they’re pulling a lot of money out.
And Silicon Valley Bank over 2020, 2021, they got like $100 billion in deposits because the tech sector was so strong and everybody was investing money and they couldn’t loan this money out fast enough. And so, what did the bank do? They said, “We can’t loan it out. We obviously don’t want to keep it in cash because nobody likes to keep cash, especially when we have high inflation.” So what did they do? They said, “We’re going to do something really safe with this money. We’re going to stick it in treasury bonds.” And so, they took about $100 billion, just under $100 billion dollars and stuck it in treasury bonds.
Here we are two years later, and unfortunately, they’re not getting nearly as many deposits from tech companies because tech companies aren’t raising money anymore, but people are still pulling money out of the bank as they need it every month. And so, a couple weeks ago, Silicon Valley Bank realized that people were pulling out more money than they actually had to cover those withdrawals, and they said, “We need to get some cash here.” So what they did is they went and they sold some of those bonds that they bought two years ago.
Now, the way bonds work, and I’m not going to go into a lot of detail here, but the way bonds work is if you sell them before they fully mature, and interest rates have gone up, which they have, those bonds are going to be worth less. So Silicon Valley Bank sold a bunch of these bonds. They lost a bunch of money, and they basically had to tell regulators that they lost a bunch of money. And regulators basically said, “Well, you need to raise money now.” But they weren’t able to raise money.
And long story short, Silicon Valley Bank went and made public the fact that they sold a bunch of these bonds, they lost money on the bonds. They were having a little bit of a liquidity issue, not a big one, but a little bit of one, and then all hell broke loose. Basically, the venture capitalists that were giving hundreds of millions, billions of dollars to these tech companies started telling their tech companies, “Pull money out of Silicon Valley Bank. There’s a risk of losing it.” And so, all of these companies started pulling money out of Silicon Valley Bank. And on Thursday, the day before the bank closed, I think they had $42 billion in withdrawals, and so, they didn’t have enough money to cover any future withdrawals. So Friday morning, California regulators came in and said, “We’re shutting the bank down,” and that was the start of it.
Since then, another bank has failed. Signature Bank has failed. Credit Suisse maybe next on the list. There have been seven other banks that have been downgraded because now everybody’s starting to look at the balance sheets of all these banks to see, was Silicon Valley Bank the only one that had this issue? Turns out they’re not the only one that had this issue. We can talk about that later, but basically, there are other banks that had the same issue. They bought a lot of bonds between 2019, 2021, and now the value of those bonds have gone down.

David:
Okay. First question, in your opinion, was this mismanagement by a specific bank or do you think this is an indication of greater challenges in the banking industry, in the economy as a whole?

J:
I personally, I know a lot of people think that this was terrible mismanagement. Certainly, it wasn’t a smart decision, at least in hindsight, to go and buy $100 billion in bonds. But let’s think back to 2019 to 2020, and interest rate rates went to zero during COVID, and I think we all thought, and we talked about this when we did our COVID show. We all thought that this was going to be a prolonged recession. We thought that things were going to be really bad for several years. And had that been the case, there was almost zero chance that the Fed was going to raise interest rates. Turns out we were all wrong, and the economy just went crazy nuts and inflation started. And I mean just assets values went through the roof and we started raising interest rates. I don’t think anybody really expected that.
You go out and ask any real estate investors that got a floating rate loan in 2020 or 2021, and there were a lot of them. People made that mistake. They didn’t expect interest rates to go up. Now, that said, they probably bought too many bonds. They probably bought bonds that matured in 10 years. They should’ve bought bonds that matured in three months or a year or two years. So that was certainly a mistake.
The other issue, though, in my opinion, is that Silicon Valley Bank didn’t need to fail. They failed because there was a run on the bank. They failed because literally $42 billion left their bank all in one day because this became a sensationalized crisis. VCs were going nuts. The media was going nuts. Everybody started to panic. Had nobody panicked, Silicon Valley Bank actually had a lot of money in the bank. They actually had really good liquidity.
We talk about this thing called liquidity ratio in banks, and these smaller banks aren’t subject to it, but if you had subjected Silicon Valley Bank to the same liquidity ratios as all the big banks, they actually had a better liquidity ratio than many of the big banks in this country. They were actually in a better position from a liquidity standpoint than most banks in this country. The problem was that there was this panic over their balance sheet. There’s this panic over the $2 billion they lost in bonds. And think about it, $2 billion they lost as opposed to 200 billion in deposits, 1% of their money they lost, but it caused this panic and the panic just rippled. And so, yeah, they could’ve managed things better, they could have made smarter decisions, but at the end of the day, the reason that they failed was because of the widespread panic.

Scott:
Well, I just want to ask a quick question. The size of the deposits at Silicon Valley Bank, these are not… I would imagine much of that, much of the deposits were from venture capital firms or folks who are raising large amounts of money or full companies that then raised the money from those venture capital firms. These are above the FDIC limit, insurance limit of 250,000 per individual per bank. Do you think that that had an impact on this bank run specific to SVB, or are there other banks that are susceptible to that same risk?

J:
Yes and yes. It definitely had an impact. When you have more than $250,000 in the bank, you’re going to be a lot more scared about losing money. If you have $50 million in the bank or $10 million in the bank and that only 250,000 of that is insured, you’re going to be a lot more cautious. And so, the fact that people started pulling their money out of the bank, I don’t blame them. If I had $10 million in the bank, I probably would’ve been doing the same. In fact, I have two friends that had over $35 million in that bank, and they both tried pulling out, and I don’t blame them. You had to do that. So that certainly played a role in why there was such a big run on the bank, and certainly, other banks would not have seen this issue because, again, most depositors, the three of us and most people out there probably don’t keep more than $250,000 in any given bank.
Now, are other banks at risk? I think the answer is yes to an extent, but I don’t think they’re at risk necessarily. Again, it goes back to perception versus reality. I don’t think they’re at risk because they have a balance sheet that shows that they’re losing lots of money or that they can’t cover the standard withdrawals that they would expect. But if any other bank, and we’ve seen a few of them, First Republic is a big name that we’re hearing a lot of these days, if any other bank starts to give the impression that they’re at risk, people are going to start pulling money out and we’re going to see this panic again and we’re going to see runs on the bank. And so, again, just like with a lot of the economy in general, and I’m sure we’ll talk about this a lot today, a lot of it is perception versus reality, and perception is just as important, if not more important, than reality.

David:
That’s a very, very good summary of what happened with Silicon Valley Bank, so thank you for summing that up and even explaining what a bank rent is, which it’s a little scary just inherently that the psychology of the market can turn to where everyone gets scared. And if everybody goes to their bank and they all try to take their money out, the banks don’t keep a 100% of the money that you let them borrow in their bank. It’s usually around 10% or so. Is that right?

J:
Yep, it’s 10 to 15%.

David:
Yeah, because they wouldn’t make any money if they just kept your money in the bank. It’s not a safety deposit box or a… What was that show? Storage Wars, where you just go stick all your stuff in a storage thing. They have to lend that money out. So bringing this full circle, should real estate investors care what’s going on with the bank? Is this going to infect us that own real estate?

J:
Scott, you want to take this one?

Scott:
Yeah, sure. My opinion is, yes, this is a problem. This is a symptom, I think, of the larger economic things that are going on in society right now, starting with the Fed raising interest rates. Right? What’s happening here, J just said, when you raise interest rates bond asset values fall, but so does everything else. Real estate values fall, all else equal when you raise interest rates. Company valuations, every asset. When interest rates rise, it’s harder to borrow money to invest in crypto. So we see crypto valuations fall. So every asset is being impacted by this.
And the one symptom of that is bank balance sheets I think are a lot weaker than people thought they were two or three weeks ago. That has major implications. Again, that’s a symptom of broader economic changes that are going on, but I think that the output of that is going to be, yeah, banks are going to continue to get more conservative lending is going to be, continue to be harder to come by, and I think that impacts real estate investors indirectly. I don’t think this is a direct threat to real estate investors right now, but it can lead to things that could impact real estate investors, like harder access to short-term financing, bridge financing from any type of banking institution, those types of things.

David:
Perhaps higher rates at savings and loans institutions or credit unions, those types of things that investors have typically been able to go into form a relationship with them, get a loan to fund their flip or even to get their property. Do you think that we might see that those could be harder to find? Yeah,

Scott:
Yeah. And I also think that… Again, one of the biggest risks, and this is getting really archaic and out there a little abstract, is the 10-year treasury. So investors are fleeing into the 10-year treasury or have been for the last couple of last year or so, driving that rate… Well, the rate’s been going up because the Fed’s been raising rates, but the yield curve has been inverted because folks are fleeing to what they think is a safer investment. But if rates continue to rise, that continues to decrease the value of that, and you may see interest rates actually continue to rise, especially anything that’s got to spread against these supposedly safe bond investments.

David:
J, what do you think about that?

J:
Yeah, well, here’s the ironic thing, and this goes back to the reality versus perception idea. Next week, the Federal Reserve is meeting to decide if they’re going to hike interest rates again. And if you would’ve asked anybody three weeks ago, before this whole Silicon Valley bank thing, the consensus was almost certainly we were going to see a rate hike and that rate hike was going to be a half point. Some people thought maybe a quarter point, but the consensus was we were going to see a half point Federal Reserve interest rate hike next week, the 21st.
Then the Silicon Valley Bank thing happened, and basically, when that happened, everybody started freaking out about interest rates. Everybody started to think, okay, interest rates are breaking, the world. Interest rates basically caused the Silicon Valley Bank collapse. I don’t believe that, but a lot of people think that raising interest rates are what led to the bank’s collapse. So people got really scared, and there’s been a lot of pressure on the Fed the last couple weeks not to raise interest rates. And the Fed does a really good job of trying to assuage the fears of the general public. I’m sure there’s political pressure behind the scenes unfortunately as well. But the Fed isn’t just making policy based on the science, the math, the data. They’re also taking public perception into account. And now if you look at the… Online, you can see basically what the chances are of the Fed raising rates at any given time. If you look at the data right now, it’s that there is a 60% chance that we see no rate hike next week. There’s a 40% chance that we see a quarter point rate hike next week.
So, basically, since the Silicon Valley Bank thing, and basically nothing else, although we did see higher inflation data this past week, so that would actually lead to the belief that we should see a higher interest rate hike. Based on nothing else, just based on the fear that’s been created because of this banking situation, it’s very likely that the Fed is going to reverse course, and instead of raising rates a half point, they’re either going to raise rates a quarter point, or most likely they’re not going to raise rates at all. And then if you also look at the forward-looking data, it looks like a lot of people believe that rates at the end of the year now are going to be lower than what people thought rates were going to be at the end of the year, just two or three weeks ago.
So it’s very possible that what we saw or what we’re going to see from this whole banking situation is that rates actually don’t go up as much as we originally thought, and that at the end of the year rates could even be down a little bit from where they are this spring.

David:
That would certainly affect real estate investing.

J:
100%.

David:
Scott Trench, you have a theory of looking at this. I don’t know if it contradicts J’s, but J’s may have more to do in the short-term during this year, and I think you have a little bit more of a long-term perspective. What’s your thoughts on where mortgages are likely headed based off of a historical interpretation of the rates?

Scott:
Yeah. Yes, I agree that the odds have changed because of the Silicon Valley Bank collapse, but I do want to acknowledge that when J says, “Hey, the odds are 60% or 40%,” these are more or less Vegas betting odds, that the analysts from around the country that are not usually typically part of the Fed are putting together, like Goldman Sachs. So we don’t really know what’s going to happen at the meeting next week. We’ll find out when that happens. But the Fed has been signaling very clearly that they can intend to continue to raise rates over the course of the year.
I am less optimistic that… Look, I think that this is going to have an impact. Maybe it brings it down from 50 to a quarter, but I think that J Powell and the Fed have been very clear that they want to continue raising rates to beat inflation. There’s questions about how far they’ll go to actually get it to 2% versus if they can get it to three, three and a half percent, whether they’ll keep be beating the drum there. But I take them at their word at the highest level, and I think that they’ve been waiting and watching and maybe wondering why this hasn’t happened sooner, why there hasn’t been a little bit more breakage like this in the economy so far.
We still have people debating, perhaps even along political lines, about whether we’re in a recession right now or not. So I think that that’s… You got to be scratching your head if you’re in J Powell’s seat saying, well, I’ve just raised rates by the fastest rate or biggest percentage or hikes in history. Nothing’s really happened. I’m seeing some layoffs here and there, but I still got close to full employment. Inflation’s still high. I’m going to keep going. So I think there’s going to be a little bit more caution in Federal Reserve policy, but I’m not sure if they’re going to completely stop or even slow down that much based on this event. This is, again, a symptom of what they, they’d expect to happen here.
What my worry is, is that later this… To answer your direct question directly, David, one of two things is going to happen this year, in my opinion. One, we’re going to get the soft landing that the Federal Reserve wants. They’re going to beat inflation by raising rates, and they’re going to get a semi-soft landing with some breakage in the economy. That was what I think a lot of people were expecting to happen two or three weeks ago. The other is we’re going to have a deep recession that we can all agree as clearly a recession this year. Neither of those things is good news for people who own any type of asset, bonds, real estate stocks, small business, whatever. Each of those situations has impacts on valuations of assets, and here’s why. A deep recession, lots of liquidity crunch, hard to get capital, hard to invest in things, asset values tend to fall. It can be different for different asset classes, but that’ll be the tendency.
In the event that we get our soft landing, what’s going to happen then is the yield curve is going to normalize, and I don’t think people have really thought this through. The 10-year treasury was at 4%, two or three weeks ago. It’s now at 3.7% because people are now afraid, even more afraid of a recession two or three weeks later than they were before the Silicon Valley Bank collapse. Well, the one-month treasury is at four and a half, and a typical spread as 150 basis points against that. So that puts your 10-year, if things were to normalize by the end of the year, at 6%.
Now, all the commercial real estate investors that are listening to this are going, “Wait, wait, wait. Let me think about that because my Freddie Mac mortgage rate is tied to that, about 100, 150 basis points past that. That means my Freddie Mac mortgage, my Freddie Mac loan is going to be seven and a half, 8%?” Yeah, I think that that’s actually a legitimate possibility if we get our soft landing, is that rates will start going that high for certain assets. And the 30-year mortgage for single family homeowners would also tick up a little bit from this point.
So look, I agree with J’s analysis overall that the odds are… I mean, it’s clear. The odds are definitely more in favor of the Fed’s slowing rates or not raising rates at the next meeting, but I think that they’re still high and they’re still pretty reasonable probability that they do proceed with the rate increase even in late of this news. That’s where I’m at. It’s not great news.

David:
That’s great, great insight. No, not great news, but a great explanation. Let me see if I can sum this up and you guys tell me if I missed anything here. In general, when inflation is increasing or prices are increasing, I should say, that the standard response is conventional wisdom is that you raise interest rates because that slows down how much people spend money, which stops prices from going up. And when you’re in a recession or prices may be going down on assets, you lower interest rates so that you can make things speed up and get better. This is how the Fed has typically approached the prices versus interest rates debate, I guess you could say. Maybe debate’s not the right word there, but the… What’s the word I’m looking for that starts with a D that has two things happening at the same time? I completely [inaudible 00:23:45] about that.

Scott:
Dichotomy.

David:
Yes, thank you, dichotomy. There you go. Thank you for that. Well, when we went into the coronavirus concerns, they started printing money and lowering rates, doing suing everything that they could to try to keep the economy from plunging into a problem. And now that it has come out of that, we actually have the opposite problem where now everything’s getting too expensive, it’s getting too hot. So now they’re trying to slow that down. It’s just happening so dramatically that the markets are having a hard time adjusting to this. Real estate works based off comparable values. If you paid $400,000 for a property, you’re not that concerned if it goes to 410, if it goes to 500, that’s a little weird. And if rates go up, it would be normal that maybe it went from 400 to 390, but if it drops to 300 or 250, it becomes very hard to get more financing. If you have to sell it, you can’t. It causes a lot of disruption in our space.
So in the Fed’s attempts to try to stop the economy from going crazy where eggs are really expensive, and gas is really expensive, and real estate is really expensive, they’ve also created unwittingly, probably, issues for real estate investors specifically that were just now starting to see rearing their ugly heads. And what happened with Silicon Valley Bank, although they’re not pure real estate investors, they did come across the problem of getting too much money. They had all these deposits, they had to figure out a place to go put it. They put it into bonds. When rates went up faster than they normally ever would, the bonds that they bought become worthless and they found themselves upside down, so to speak, which led to them collapsing, which could, in principle, happen to real estate investors, especially like you mentioned, Scott, commercial real estate investors. Is that a decent summary of what you both have said so far? And did I miss anything?

Scott:
I tend to agree with everything you just said.

J:
100%.

David:
Okay, so next question here, are more small banks at risk? I’m going to throw this one to you, J Scott. Do you think that that’s going to affect real estate investing and specifically financing for real estate, or do you feel like the banks that have done a bad job could be at risk, but the banking system in general should be safe?

J:
I think the banking system in general is safe. Let me put this into perspective just in terms of everybody’s talking about banks like having all these bonds, losing all of this money potentially. Just to put that into perspective, if you took all the banks in this country, and there are about 4,000 banks in this country, and you add up the total amount of unrealized losses, meaning the amount of money that the banks have lost on paper by buying these bonds, but not yet selling these bonds, but interest rates going up, we’re looking at about 620 billion. That number was as of the end of 2022, about $620 billion. So let’s say we had literally the worst case scenario where every bank got into a situation where they were forced to sell every bond they had. We’re talking about a loss of about $620 billion.
Now, I think the likelihood of that scenario is zero. Every bank being in a situation where they have to sell every bond, but let’s think about that, $620 billion. That is about half of the military budget in this country per year. That’s about 20% of the total annual budget in this country. It’s about 2% of the total value of the economy in the US. So I’m not saying $620 billion isn’t a huge number. It’s a huge number. But in the relative scheme of things, compared to the amount of QE, the amount of money we printed between 2008 and now, between the amount of money we lose just by running a deficit in this country every year, by the amount of money that we’ve spent on bailing out banks back in 2008, ’09, and ’10, that $620 billion is relatively small. So in the absolute, absolute, absolute worst case scenario for banks, we’re still in a situation where it’s not going to destroy the system.
So let’s start with that. Now, will it impact things? Absolutely. But again, this goes back to perception versus reality. There are a lot of people right now that may not trust banks as much, so they’re not going to deposit as much money in banks. They may not be as confident that the economy is moving forward smoothly because now there’s all this fear that things are starting to break. So people thinking, “Oh no, we’re heading towards a recession more quickly or a steeper recession, a deeper recession.” And so, they may decide they’re not going to borrow money as much, or they’re not going to buy new cars, or they’re not going to try and buy a new house. And all of those things are going to impact the economy more generally. And when the economy gets impacted, when things start to slow down, when we head into a recession, banks start to act differently.
So I don’t believe that the stuff that’s happened over the last couple weeks is going to directly impact how the banks treat their customers. It might to a small extent, but I think the bigger risk is just that what’s happened over the last couple weeks exacerbates the issues in the economy, drives us towards a recession more quickly, maybe a deeper recession than we were expecting. And recessions in general are going to impact how banks act and react, and it’s going to cause difficulties and more complexities for real estate investors.

David:
Scott Trench, what do you see regarding potential HELOCs being closed off for people that have open lines of credit with real estate or investors that were planning on opening a HELOC? If banks do get cold feet, do you see that being something that was a tool available to investors that may be closed off at a lot of banks?

Scott:
To be clear, a HELOC, a home equity line of credit against your primary residence, if that is in good standing, then no, I don’t see that being a major ripple effect of this throughout the economy. Even if the FDIC basically takes over a bank, fires their management, wipes out equity holders, I don’t think that they’re going to start shutting down every loan that that bank has out that’s in good standing. That’s not how I would imagine that they would operate. I think that the risk for HELOCs is more of a general one. When your home equity value declines, the bank can then require you to reduce the balance in your HELOC to put it back in good standing and meet the covenants of that, such a general risk to be aware of whenever you have a HELOC open.
And I think, also, again, and I’ve said this like a number of times on the BiggerPockets Money podcast, but I think investors really need to be thinking about HELOCs as short-term loans. These are a great source of financing for a fix and flip project, a burr, they’re great alternative to hard money lending or other high interest, really high interest loans like that that can bridge things. They’re great alternative to credit cards if you need to purchase something, again, but this is something I think you should think about as a one or two, maybe three-year loan product at most, not a down payment on a rental property that will be paid back over five, 10, 15 years. You’re just putting yourself at risk there because of the adjustable rate and the nature of the HELOC.

David:
That is a great point. We see that coming up a lot. I’m getting that question on Seeing Green, should I take out a HELOC to buy my investment property? Where I notice it’s already hard enough to get something that cash flows anything reasonable in today’s market. Now you’re making it even harder on yourself that not only is that the cash flow on its own, it has the cash flow enough to cover the debt that you’re taking out to use for the down payment. J, what do you think? Are you concerned about HELOCs? Are there other types of loans and investors are getting that you think people should be concerned about?

J:
I think Scott’s spot on, and you look back to 2008, and I know we’re 15 years out from 2008, and you hear lots of horror stories and old wives tales and myths. And one of the big ones is, hey, back in 2008, all these HELOCs were getting closed and just unmasked like banks were shutting down millions of HELOCs, blah, blah, blah, blah. The reality was, and I’m an old guy, so I remember 2008 pretty well. The reality was, as I remember it, that for the most part, HELOCs that were getting shut down were exactly what Scott said, which were the HELOCs that had negative equity.
So, basically, you have a house that’s worth $200,000, you take out a HELOC for 80% of that $160,000, and then the value of your house drops 25% and now you have a HELOC for 160,000, but your house is only worth 150,000. The bank’s either going to close that HELIC or they’re going to tell you, you need to now get back to your 80%, so it’s 80% of the 150,000, so you have to bring $30,000 to the table. And most people can’t do that. And so, those people will complain or not complain, they’ll say, “Hey, my HELOC got shut down.” In reality, it didn’t get shut down. They just lowered the amount that they’re willing to lend you because the value of your house went down.
And so, that is absolutely a risk, but I don’t think it’s the risk that a lot of people are concerned about, which is just that willy-nilly banks are going to get scared and start calling everybody’s loans loans. So if we start seeing house values drop, that’s a risk. Until then, I don’t think that’s much of a risk.
In terms of other loans getting called. There aren’t too many other types of loan products out there that are at the whim of the banks. Typically, we sign long-term contracts with banks that say the banks can’t call loans unless you’re in default. So as long as you’re paying your loan every month the way you’re supposed to, I don’t think there’s a lot of risk. Obviously, there’s still risks around floating rate loans. So interest rate risks, if interest rates go up, the rates on these loans go up and you have to be able to pay more in monthly interest. But in terms of banks literally just calling loans due because the economy’s going down or because they just want to call loans due because they’re scared, I don’t think that’s much of a risk.

David:
Okay. What about the secondary lending market? So you get a loan from your bank or from a mortgage broker to buy your property, they’re then going to go sell that loan to someone else that’s going to collect it as a pool, turn it into a mortgage backed security, then they’re going to sell that in the stock market. Have either of you heard or seen anything that would concern you that there’s less of an appetite to be buying those mortgages that might dry up the liquidity than investors rely on for their standard 30-year fixed rate loans?

Scott:
Well, I have not heard anything specific to this, but I think it goes back to, what is the value of a bond When interest rates rise, the equity value of those bonds declines to match? Right now, if I want to go and earn 7% virtually risk-free, in my opinion, I can lend to somebody with an 800 credit score and a 30-year mortgage, and I’m going to earn 7% on that note. So the pool of mortgages for people with 800 credit scores that have interest rates at three and a half percent is now much lower than the actual balance outstanding on those loans, assuming they’re in there. And that’s why I think some of these banks are… Why we’re seeing the pressure in many of these banks is because that wasn’t under the valuation of these bonds. Hadn’t factored that in on the balance sheet. The markets hadn’t really come to terms with that until they did all at once last week.
So I think that’s a risk, but I think the secondary market should be pricing that in as what they’re supposed to be efficient at doing. There may be inefficiencies in the near term. I don’t know if, J, you have any other thoughts on that.

J:
I’m actually seeing the opposite in some of my experiences more in the commercial multifamily space, but I know that Fannie Mae and Freddie Mac last year lent a whole lot less money than they wanted to. They have targets on how much they’re going to lend or ensure every quarter. And heading into Q3, which was the last data I saw, they were far, far behind where they wanted to be, where they needed to be to hit their internal targets. And so, they started doing things to make it easier for investors to borrow money.
Freddie Mac, a good example was a big risk back in Q3 as interest rates were going up, was that a lot of commercial investors were hesitant to lock in or were hesitant to take fixed rate debt because you would start the loan process, let’s say on October 1st, but you wouldn’t get to the point where you were actually ready to lock in a rate until November 1st, so a month later. And interest rates were going up over that month. And then investors were getting to the point where they were like, “Well, I can’t afford the property anymore because by the time I went to lock my rate, interest rates had gone up.” And Freddie Mac basically started a program where they said, “Hey, we’re going to let you lock your rate on the day you apply. You have to pay a little bit extra, but we’re going to let you lock the rate as of today so you don’t have that risk of interest rates going up” because they knew that would spur demand for their product. So I saw them doing stuff like that.
Just a couple days ago, my business partner and I were talking about this today, a couple days ago, Fannie Mae announced that they are thinking about changing their underwriting guidelines to allow homeowners, single-family homeowners to buy property without title insurance. How nuts is that? Fannie Mae is literally saying, “We’re going to allow homeowners to forego title insurance to make it cheaper for them to buy properties, presumably because they want to lend more, they want to lend to more homeowners, they want more people to buy.” And so, we’re seeing crazy stuff that leads me to believe that at least Fannie Mae and Freddie Mac, and I’m not saying all the other secondary lenders and insurers because there are a lot of them out there, but at least those big conventional reinsurers or insurers are trying to do things to loan more money at this point. Now, will that be the case in two months or six months or 12 months? I don’t know. And if we start to see more cracks in the economy, if we start to see a recession, then I suspect things will start to tighten. But as of today, I think these lenders are looking to lend money.

David:
So, J, for the brand new investor, the person looking to get their first and second property, that information you just shared, can you explain how that’s relevant to them?

J:
Yeah, basically, a lot of people buying their first or second property, they should be thinking about getting a conventional loan. So basically going into a big bank or talking to a broker that works with big banks that give these loans that are backed by Fannie Mae or Freddie Mac, their 30-year fixed rate loans. Investors are allowed to have up to four loans or 10 loans, depending on the bank. And so, these are the pinnacle products, these are the products that new investors should really be going after that just offer great terms. And it looks like the banks that are offering these products are still very much willing to lend. So I suspect that these conventional loans that new investors really should be looking into are still going to be readily available, at least for the foreseeable future.

David:
And then, briefly, can you explain what title insurance is and why that’s important for the home buyer to have?

J:
Yeah, absolutely. Title insurance, basically, it’s an insurance policy as the name implies, that basically says when you buy the property, you don’t know everything that’s happened to that property over the last 50, 100, however many years that property has existed. Maybe somebody thought they sold the property years ago, but they never recorded the title. Maybe somebody got a survey and recorded the wrong survey, so the property lines aren’t where we really think they are. Well, homeowners shouldn’t have to take that risk of buying a property and knowing the entire history of the property and everything that might have gone wrong in every purchase and sale before them. So what they do is they buy this insurance policy that says, if somebody screwed up before you, if some title company screwed up or a lender screwed up or somebody did something illegal or unethical that messes up the purchase of your property and somebody sues you to try and take your property from you, we’re going to cover that.
And so, typically, you pay anywhere from 500 to a couple thousand dollars for a single family home for that insurance policy. And now Fannie Mae is saying, we may to allow homeowners to avoid that thousand or $2,000 cost. We may allow them to forego title insurance, which I think is a really bad idea because it’s not common for people to have to use their title insurance to cover them in case of a lawsuit or something that happens to their house. But when it does happen, it’s typically a 10 or $100,000 cost, or it may cost you your entire house. So it’s one of those catastrophic insurance mitigating things. That’s really, really important. So nobody should forego title insurance, and it blows my mind that one of the biggest title insurers in the country or loan insurers in the country is willing to actually tell people that they should do that.

David:
Okay, here’s the million-dollar question. I’m going to have each of you answer it. Are we in a recession right now? And if not, will we be in one before the year’s over? I’ll start with you, Scott Trench.

Scott:
I think that we might define this as a mild recession, what we’re currently in at this point. And again, I think that whether there will be a deep recession that everyone agrees on in the moment, I think that’s a coin flip between now and the end of the year. Maybe if I was 55, that it was going to be a soft landing, 45, it’ll be a deep recession a few weeks ago. Maybe I’m 55, 45 the other way because of the Silicon Valley Bank collapse, but it hasn’t fundamentally changed the coin flip nature of what I think is going to happen this year. So that’s my take.

David:
Okay. J?

J:
I hate this question because this idea of a recession is so… It’s so hard to define what a recession is. Here’s one way to think about it. Remember last summer when we saw two negative quarters of GDP and everybody was screaming, we’re in a recession? And I remember coming out then saying, that’s a horrible metric to be using. You don’t just look at GDP. Just because we’re negative two quarters of GDP, doesn’t mean we’re in a recession. I didn’t think we were in a recession. And everybody was telling me I was an idiot, that the government was changing the definition, that that is by definition of recession. Well, here we are. We’ve now had two quarters of positive GDP. So if you’re one of those people out there that was yelling, we were definitely in a recession last summer because we saw two negative quarters of GDP. You’ve got to be thinking that we’re no longer in a recession because we now have two positive quarters of GDP. I think that’s ridiculous. I think things are worse now than they were last summer.
And so, last summer, I did not think we were in a recession. As of right now, again, I don’t know exactly what that means. I think there’s enough data that if you want to cherry-pick, you can say things are still looking pretty decent, especially around jobs, especially around spending. I mean, there’s a lot of reasons to think the economy is still reasonably strong in some areas. If you want to cherry-pick other data, you can say things are really bad right now. Inflation is through the roof and savings rate is down, and we’ve got $17 trillion in consumer debt, which is an absolutely ridiculous amount. And so, you can find lots of data that says we’re in a recession. So I think things are really mixed, and I’m hesitant to say one way or another whether where we are today would constitute a recession or not.
That said, I think that we’re closer to a recession than we were six months ago, and I think six months from now, things are going to be worse than they are today. I think we are going to go into a situation where it’s very clear that we’re in a recession. Now, let me disclaim that a little bit. I know a lot of people that listen to this show are probably young, younger than I am at least. And if you’re under 30 years old, your idea of a recession is one thing. It was what we had in 2008. Because if you’re under 30 years old, you probably don’t remember 2001. You certainly don’t remember the early ’90s or the late ’80s. And so, your idea of a recession is 2008.
I just want to clarify that most recessions that we see, pretty much all recessions that we see are not 2008 type events. We’ve had 35 recessions in this country in the last 160 years. And with the exception of the Great Depression in the 1930s and the Great Recession in 2008, none of them have been anywhere close to that.
So while I do think we’re headed towards a recession, I don’t think we’re headed towards a 2008 type event. I don’t think we’re headed towards anything that’s going to be close to a 2008 type event. And so, yes, I think we will be in a recession in a few months. I think it’s going to be painful. I think we’re going to see unemployment rise. I think we’re going to see people losing their jobs. I think we’re going to see people losing their houses, all the things that we typically see during a recession. But I don’t think we’re going to see the stuff we saw in 2008 where we see bank collapses. Although, I guess, obviously we’ve already seen some bank collapses. We’re not going to see some JP Morgan type bank collapses. We’re not going to see things that we consider to be potential depression type events. So there’s my high level prediction.

Scott:
I just want to add a couple things into that. I completely agree with everything that J just said. And I’ve heard the term white collar recession used to describe what’s going on. And I think that’s pretty reasonable. What’s happening here, what happened for the last 10 years is interest rates are really low, and we saw inequality and asset values just balloon in that context. And with rapidly rising interest rates, that’s reversing. With rising rates, it makes all the underwriting on a real estate deal, a business, a bond, all of that much harder to pencil out. And so, that’s reducing asset values, but we’re not seeing that impact wages and employment at the highest level anywhere near that degree. We’re seeing a handful of layoffs in the tech space in a relative sense. We’re seeing continued near full employment.
The Fed has a dual mandate, keep inflation at 2% and maintain full employment, or as close to it as they can get there. It’s going to be really hard for us to see unemployment rise in the next couple of years, even if they keep cranking interest rates because the minimum wage in real dollars is as low as it’s been since the 1940s or ’50s. And we have 10,000 baby boomers retiring every single day for the foreseeable future, and there’s not enough millennials or Gen Z workers entering the workforce. So you’re going to see long-term, positive pressure on wages in spite of the actions that the Fed is taking here, which is another reason why I’m a little more skeptical that we’re going to see rates come down or stop rising over the course of the year, even with the events from Silicon Valley Bank. The Federal Reserve is trying to factor out noise like food and oil prices, other volatile price metrics, and get to the things that are really the true lead indicators of inflation, which they believe are wages.
And so, I think they’re going to continue that fight for a long time. That’s bad news for the people who own assets. And it’s really good news for the people who have labor to supply in this country, that we are real estate investors and we’re attempting to become financially free. We got to be really creative and thoughtful about how we want to manage this because this is not good news for the people who own capital assets and put capital to work. It’s very good news for the laborers. It may, however, be the hard medicine that the country needs.

J:
I actually think, and along those lines, is that the bigger risk moving forward over the next year or two or three isn’t necessarily a financial recession, a downturn from a financial standpoint. I think we’ll see that. I think a bigger risk is potentially civil unrest. And I don’t say that from a conspiracy, like I think we’re going to see a civil war sort of thing. I say it from a… We have historical precedent for this that a lot of times, during recessions, during downturns, a lot of people see it as an opportunity to come together and push their agenda. And you think back to like 2009, ’10, ’11, ’12, on one side of the political aisle, we saw the Tea Party movement, on the other side of the political aisle, we saw the Occupy Wall Street movement, and they both came from the position of, depending on your economic situation, you felt like you weren’t being treated fairly. And we saw that both from the rich and we saw that from the poor.
And so, what’s happened since 2010, ’11, ’12, is we’ve now decimated the middle class even more, and we’ve seen even more people headed in one direction, and in the other direction, we have more rich, we have more poor, we have a lot fewer in the middle class. And so, if we start to see this type of civil unrest that we’ve seen in the past, we’ve got a whole lot more people on each end of the spectrum that could potentially participate and be disenfranchised or feel like they’re disenfranchised. And so, I think that’s actually a bigger risk because, again, in 2008, ’09, ’10, ’11, there was a lot of middle class that were just like, “I don’t have to deal with the Occupy Wall Street. I don’t have to deal with the Tea Party movement because that’s not me.” Well, there are a whole lot fewer people in the middle now that are thinking, that’s not me. People are falling on one side or the other.

David:
All right, Scott Trench, we may be going to recession. We may not be. I thought that was some really good insight into the fact that those that own assets are going to be feeling to squeeze much more than people that just don’t have anything and they’re going to work every day. Do you have something you want to say on that?

Scott:
Yeah. My position is, yes, we’re either going into a recession or not. That’s profound insight from me, and J, right? We both have. But no, my point is more specifically that we’re either going into a recession or you’re seeing rates rise even further in most of the types of borrowing that you do as a real estate investor on the commercial or in even conventional loans by the end of the year. Those are the two.

David:
Okay. So then, if we’re acknowledging that we are likely going into a recession and rates are probably going to be up going up, is this a bad time for someone to jump into real estate investing?

Scott:
Well, it depends. If you’re buying property with a conventional mortgage and you’re buying today versus a year ago, you need to be buying at a significantly lower price point to have the same cash flow, for example, on a rental property deal. If you’re able to assume a mortgage, for example, as a house hacker, or you’re able to otherwise do something creative with the seller, then buying at a lower price today, it’s a better time to buy. So it depends, and it really going to change your strategy. You have to change your strategy to reflect the realities of the current economic environment.

David:
Really good. J, what’s your advice on that?

J:
Do I have time to give a little bit of a history lesson that I think might help people understand where we might be heading?

David:
My friend, if we didn’t, I wouldn’t have asked you.

J:
Fair enough. Okay, so let’s look at 1900 to 1998. If you go back and you look at the data between 1900 and 1998, what we saw is that the value of real estate in real dollars, meaning index to inflation, adjusted for inflation was about zero. So for the first 100 years that we’re tracking this data, real estate values went up at pretty much exactly the same rate of inflation. Some years was a little higher, some years was a little bit lower, but over that 98 years or so, we saw that that real estate just went up at the rate of inflation. From 1998 to 2006-ish, we saw a big deviation from that. So, obviously, real estate values went through the roof and were much higher than the rate of inflation. But then, from 2007 to 2012, we saw the value of housing drop considerably.
And if you look at the entire time period from 1900 to 2012, what you see is, if you take into account the up and the down in 2008, where once again at the point where the real value of housing over that 112 years was basically the rate of inflation, there was no real growth above inflation for that 112 years. Now, since 2013, 2014, we’ve then see that big trajectory upwards again, where housing has far outpaced inflation. Well, unless you believe that that first 112 years was some sort of anomaly, it’s probably reasonable to assume that long term housing is going to track inflation, which means that if in the past eight years we’ve gotten well above inflation, that it’s probably reasonable to assume that we’re going to see a return of housing values to that long-term trend of tracking inflation, which means in real dollars, it’s almost certain, in my opinion, that we’re going to see a drop in housing values over the next couple years.
Now, before you panic, keep in mind there’s two ways that we see a drop in housing values back to that long-term trend of inflation. One, if we see values drop over the next year or two, if we get back to that long-term trend of inflation in the next year or two, we’re going to have to see large nominal drops, meaning we’re going to have to see prices come down considerably. So one way we get back to that historical trend is in the next year or two or three, we see big drops. The other way we get back to that trend is over the next five or 10 years, we basically see nominal pricing, meaning the actual price that we see, list prices stay the same for the next five, six, seven, eight, nine, 10 years while inflation continues to go up. So, basically, housing doesn’t increase over the next five, or six, or seven, or eight, or nine, 10 years while inflation continues to go up.
I don’t know which one of those two we’re going to see. I don’t know if it’s going to be a 2008 type event where we see a big drop in housing values over the next couple years or whether we just see a flat line for the next five or 10 years. I suspect, given that we have high inflation, given that we’ve printed a ton of money over the last few years, given a whole number of other things that we’re seeing in the economy, that it’s much more likely that we’re going to see the second, not the first, that we’re going to see, over the next five or 10 years that real estate values tend to stay pretty flat. I’m not going to say they’re not going to go down a little or up a little, but it’s not going to be 50% drops or even 30% drops. I think it’s likely that we see value stay relatively steady, maybe drop a little over the next five, six, 10 years and then everything starts over again.

Scott:
J, do you think that’s true across all real estate asset classes or are you talking specifically about one class or single-family?

J:
Sorry, I’m talking about single-family houses. I haven’t looked at the data on other asset classes. I’m not sure we have as rich data or as long-term data on other asset classes. So I’m specifically talking about single-family housing, and I’m also talking generalized across the entire country. Certainly, you’re going to find places like LA or Boston or New York or San Francisco where housing has well outpaced inflation. You’re probably going to find other places like Detroit and other markets where it’s probably underperformed inflation. But across the country in general, single-family housing has tracked inflation between 1900 and 2012, and I think we’re going to return to that trend line pretty soon.

Scott:
David, what do you think?

David:
I think that… Man, there’s so much I think about this. I’ll try to sum this up. I think that housing prices should, all things being equal already have been coming down because rates went up and they’re not, which makes me believe that we have, in many markets, a shortage of inventory. So sellers just pull their houses off the market if they don’t get the price that they want and they don’t move or they don’t sell to an investor. So I noticed we’re in this bit of a stalemate where rates are too high for properties to cash flow, but inventory is too low for sellers to have to drop their price. So what happens is people like us that listen to this podcast that want to buy real estate, we get squeezed out. But if you just need a place to live, you’re probably not listening to this information. You’re not watching what’s happening with banks. You don’t care. You’re having a kid, you got a promotion, you’re getting married, you want to buy a house instead of rent. In a lot of those markets, people are buying houses because they have to, or they’re leaving California, New York. They’re moving to Florida, Texas, Tennessee, and they’re buying real estate there.
So from an investment standpoint, we, I’m preparing that it’s going to be very difficult for investors to make this work until rates go down. I don’t think that’s going to make prices collapse because there’s still someone who’s going to buy that house. And that doesn’t mean they won’t drop. I think prices have come down. We’re talking about a collapse like what we saw in 2010 that people have been saying is happening. It would take a lot more before that would go down. You’d have to see massive concerns rippling through the banking system, liquidity drying up. If you go back to 2010, it was very difficult to get a loan. And a lot of the people that wanted to buy real estate couldn’t because they just went through a foreclosure three years ago and they weren’t able to get the money to buy the real estate. It took a while before buyers could come back.
We’ll probably continue to see the market in general not rise as fast as it wants to. Like J said, they tend to keep pace with inflation. We could see inflation continue to come across even with rates going up, and I think we’re going to continue to see that until the government intervenes. I don’t know that they will. I’m not saying they should. They just tend to do that. Every time we’ve had one of these issues where we think, okay, a recession’s coming, they print more money, they lower rates. And they have room to lower rates if they have to. If we fall into a legit depression or severe recession, they could say rates are coming back down, and they could spur velocity money that way.
I still think it’s a great time to house hack. It’s the most boring real estate strategy, but just like your vegetables, it’s always a good idea to eat them. I’ve been preaching this to everyone that I know. You can get a primary residence loan every year. You could put less money down. You can keep more money in reserves. You can cut out your biggest housing expense, or your biggest budget, which is your housing expense. You can learn to be a landlord with relatively low risk. There’s hardly a situation out there where house hacking doesn’t make sense unless you’re incredibly wealthy.
And I think other asset classes like short-term rentals and commercial real estate, we might see more of the bloodbath that people have been looking for. I think the supply demand ratio has gotten screwed up with short-term rentals in a lot of markets. There’s too much supply. There’s not enough demand, especially in a recession, people don’t travel. So that asset class can get hurt.
And I think the commercial space in general, which has been almost untouchable to get into, do you want to buy multifamily property? It’s been so frothy, so hard to get into. Cap rates have compressed so much that a lot of people just couldn’t get into it at all. I see opportunity coming there in the next couple years because interest rates are going to reset. And when your balloon payment is due and the deal made sense for you at three and a quarter and now you’re looking at seven and a half, that property isn’t going to debt service to be able to refinance it at all. So you might see a lot of inventory hitting the market as syndications turnover, and there’s some opportunity there.
Again, we don’t know for sure. Things change so quickly that what you think is going to happen often isn’t what happens because someone intervenes or something happens differently, but I definitely think right now is a time to be more cautious than before. I think, before, it was like throw your buoy in the water and that rising tide of inflation was making real estate go up really well, and they’ve raised rates so fast that a lot of people just got caught. It’s sticking out there in the wind. So more or less, that’s what I think. You guys see anything different than that yourselves?

Scott:
Yeah. Personally, what I’m doing this year is, first, financial fundamentals that have been consistent for the last 10 years. I spend a lot less than I earn. I maintain my emergency reserve, and I think that’s really important. That baseline cash flow is what keeps you investing. So you have something to be able to put to work and can do so from a responsible position.
Second, I’m house hacking. I’m actually moving into one of my rental properties with our family here. It’s a nice big duplex, and we’re going to live in one side of that. And that’s, I think, always a good strategy for folks who want to build wealth to earn income from your primary residence.
Third, I mentioned this earlier, but I’m going to do some private lending, two fix and flip investors. These are properties that are nearby, that I can go to, drive past, would take over, would be happy to foreclose on at today’s prices. I view it as the same as purchasing that property for cash for the amount that I’m lending on, and I feel like that’s a pretty defensive position and allows me to earn double-digit returns fairly safely.
And then third, I’m going to keep an eye out for… I guess fourth. The fourth one is I’m going to keep an eye out for really good opportunities to buy. I think that this year you’re going to see a big pendulum swing in terms of transaction volume. Every time rates dip down a little bit, you’re going to see a flood of mortgage applications. And then, every time they rise, you’re going to see mortgage applications dry up. We see 28 year low. We see all of a sudden, bidding wars popping up here in Denver, and it has to do with this cyclical mortgage phenomenon. Even as they’re trending up those peaks and valleys, I think we’ll hit transaction volume.
So I think there’s going to be a few periods in this year where I’m going to be able to be one of the few buyers in the market here in Denver on a couple of potentially really good deals.

David:
J, how about you? Are you investing in real estate still or have you abandoned that and gone all in on Ethereum and NFTs?

J:
Yeah, all my money is in Bitcoin these days. No. Okay. Yeah, I’m definitely still investing in real estate. As Scott said, I think real estate’s the best asset class on the planet. You look at a typical rental property, and even if it only appreciates at the rate of inflation, that’s 3%. Then you get a few more percent in cash flow. Hopefully you’re getting four, five, 6% even these days, three, four, five. Let’s say 5%. There’s another 5%. Then you’re paying down your loan every month and you’re basically gaining two or 3% equity on your loan every month. You add those three things up and you’re in double-digit returns on real estate, and that doesn’t take into account the tax savings. That doesn’t take into account maybe you’re getting higher than average inflation or appreciation, whatever. So I like real estate better than any other asset class on the planet.
Here’s what I’m not doing today, though. I’m not investing in transactional type deals. I’m not investing in deals where I’m putting my money in today with the expectation that I’m going to need to get my money back a month from now, three months from now, or even 12 months from now. So I’m not flipping houses, and I’m a big fan of flipping houses. I wrote a book on the topic.

David:
Yes, you did.

J:
But right now, I’m telling people, especially new investors, now is not the right time to be doing anything transactional like flipping houses because we don’t know where the market’s going to go in three or six or 12 months. And a lot of times, when you flip houses, your margins are in the 10 to 15 to 20% range. Well, we could see a 10 or 15 or 20% drop in housing over the next year or two, which could wipe out all your gains. And so, I’m staying away from transactional deals.
What I am focused on is anything that I’m willing and able to hold for at least five years or seven years or 10 years because I’m confident that whatever we’re about to see, whether it’s a mild recession or a big recession, whatever it is, it’s going to be over with in the next three, four, five years. And so, whatever I buy today, I can cash flow and I can make my mortgage payments and I can hold for five years. On the other end of that, I’m going to be making a lot of money.
And so, what I recommend for anybody out there that that’s looking to start today, stay away from transactional focus on the longer term buy and hold. And what I would say to anybody that’s still nervous about doing either of those today, now is an amazing time to be focused on learning, to be focused on education because even if you’re not doing anything today or six months from now or 12 months from now, I have a feeling there’s going to be a really good opportunity coming up in the near future. And if you’re prepared, if you’re educated, if you have a business plan, if you have good credit, if you have partners with money, whatever you need to actually hit the ground running, when that comes six or 12 or 24 months from now, you’re going to be more prepared than everybody else and you’re going to have greater opportunity than other people.

David:
All right. That is fantastic. Scott Trench, if people want to find out more about you, where’s the best place for them to go?

Scott:
You can find me on BiggerPockets. Just type in Scott Trench or Instagram at Scott_Trech.

David:
J Scott, same question.

J:
Yeah. Anybody that wants to get in touch with me, www.connectwithjscott.com and that’ll link you out to everything.

David:
That is wonderful. Thank you for that.
Now, I know one thing is for sure, we don’t know what the economy’s going to do. We don’t know what the market’s going to do. We do know that things are changing faster than they ever have before and information is coming out quicker than it ever has before. So now is the time to stay abreast of what’s going on in the market like you never needed to before. Make sure you’re educating yourself. Make sure you’re listening to podcasts like this one. You can also check out Scott Trench at the BiggerPockets Money Show, and J Scott all over BiggerPockets. Check out any of his 19,000 books or any of the BiggerPockets business podcasts. BiggerPockets.
Also has an entire YouTube channel where you can see videos of all three of us talking about real estate. But if you’re like me, you’re listening to this stuff nonstop because you want to stay ahead of changes that are coming, I’m David Green, and you could find me at DavidGreen24.com or at DavidGreen24 on social media. And we thank you for joining us today. We will be sure to do this again if more information comes out, more banks fail or more changes happen in the industry.
This is David Green for Scott does his best work in the trenches, and Prof J Scott signing off.

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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