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In this episode, we're joined by J Scott, entrepreneur, real estate investor, and co-host of the BiggerPockets Business Podcast. He has also written several books on investing, including information about recession-proofing.
On today's show, we discuss what J is doing to prepare his business for the months ahead, where he believes the economy is heading as a result of the COVID-19 crisis, upcoming opportunities for investors and entrepreneurs, and much more.
J Scott's last appearance on The Real Estate CPA Podcast was episode 38. At that time, we were at the peak, the top of the market. Now, with the Coronavirus and a recession looming, J is looking at the unemployment numbers. Though increasing at record rates, the fact that this crisis is due to external factors implies that high unemployment numbers are not here to stay. Nobody thinks we will maintain these unemployment numbers even after the COVID-19 crisis is resolved. Prior to the Coronavirus, the economy did have some minor issues, but the rebound for GDP and unemployment looks like it will be huge.
Where Are We Headed?
In J's opinion, he's thinking we will settle out somewhere in the range of 6%-9% unemployment and relatively flat GDP growth. Demand and spending may remain lower and constrained for longer, and there are certainly some supply chain issues with the Coronavirus and transportation concerns. All in all, by the summer, J believes we will be in a typical, traditional recession.
What Has J Done to Insulate?
Last year, J and his team analyzed their investments at the top of the market after seeing some declining or softening indicators in the economy. Any assets that they didn't want to hold for 5 years or more, they sold. They stuck with the cash as cash is king. In downturns, when lending is tight, cash is very powerful. In addition, other assets that were coming due within 3-5 years were either paid-off or refinanced. J and his team didn't want anything coming due during a potential recession.
After these preventative measures were taken, J moved to an opportunistic mindset. Flips were reduced and only the best deals were closed. This slowed down investing and lending considerably. In the midst of the Coronavirus crisis, J is maintaining the opportunistic mindset. The only deals J is buying are properties where the numbers are so good that they can easily handle vacancies or other issues.
Right now, we don't have an efficient market. There are supply constraints and there are demand constraints. People are not acting rationally. When you don't have an efficient market, you can't really look at prices and say they are realistic values.
How Stable is Real Estate?
Typically real estate is a lagging indicator in general, meaning typically the economy moves and real estate follows. In 2008, there were legitimate foundational issues in the economy. This is a very rare occurrence, recessions are generally driven by other factors. Usually the influence on real estate is delayed a few months as income dries up and unemployment rises. Therefore, it's not necessarily surprising that real estate hasn't been hit by the Coronavirus because, at the time of this recording, a full quarter has not passed since the Coronavirus.
Buying assets is a way to protect against inflation. If the crisis continues and the government must continue to pump money into the economy, we could experience a period of inflation. As the value of the currency decreases, generally tangible assets are the safest bet, such as real estate, gold, and silver. If you think there may be inflation, loans are also a way to protect against this. If inflation hits, all prices rise. Your expenses will rise and your income will likely rise. During this period, the loan will not change, so paying off loans becomes easier. Ultimately, real estate won't grow your money during periods of inflation, but it will certainly protect your money.
Even in 2008 there were opportunities. From an investor standpoint, there are opportunities when there is struggle. In 2008, the opportunity was in buying real estate. Those that bought real estate in 2008 made great returns. In 2020, what does that opportunity look like? In the next several years, there is opportunity for small businesses. Many small business won't survive or recover, and owners may throw in the towel. With many small business never reopening, the opportunity for hiring talent and filling the gap in supply could be huge. If you're willing to make the investment and take the risk with some highly motivated sellers, acquisitions in small business may advantageous during this time.
How to Identify Opportunities?
Business investing is similar to real estate, including analyzing the deals. There are listed and unlisted businesses, business brokers, and public sources of deals. The other way is with off-market deals. This is similar to direct mail, cold-calling, or dropping in the business during operating hours. Networking in general is probably the best way to expose yourself to these opportunities by building relationships with other small business owners.
Learn more about J and his work: http://www.123flip.com/