Dave:
Hey everyone, welcome to On The Market. I’m your host, Dave Meyer, and today we’re going to be talking about, God, the thing that we just keep talking about for the last three years straight. Is there going to be recession in 2024? Well, we’re just going to take the question out of it and pretend that there is going to be, and we’re going to give you some advice on how to recession proof your business in the case that there is a recession in 2024.
To help me with this, I have Henry Washington, Kathy Fettke and James Dainard joining me. Thank you three for joining us. I appreciate your time.

Kathy:
Thank you.

James:
I’m ready to talk about 2024. I’m done with 2023.

Dave:
You look tired, man. You look like 23 has worked a number on you.

James:
Yeah, the only good 23 is Michael Jordan. That’s about it.

Dave:
All right. Time to move on to 24.

Henry:
Kobe year.

Dave:
Yeah. Wait, was Kobe 24 first or was he eight first?

Henry:
He was eight first. Whoa. 2008 was the recession, so maybe Kobe 24 is the next recession. Boom!

Dave:
Oh, no. Well, I was just about to say that a bunch of economists have been saying that the chance of a recession in 2024 was less than 50%, but you know how there’s always those octopi that predict the Olympics better? So I think Henry’s random prediction about Kobe’s numbers is probably right. So anyway, the real predictions are something about 20% to 25% of a recession next year. That’s at least according to Treasury Secretary, Lawrence H. Summers, or former Treasury Secretary, or Yardeni Research, which is a real estate research company. They produce some really interesting data. They’re saying that there’s a 30% chance of a global recession, and so these people at least are not saying it’s the most probable outcome, but that is definitely more comfortable than most of us want to be.
And just for everyone to know, we talk about this a lot, but a recession doesn’t have any official meaning. I know a lot of people use the two consecutive quarters of GDP loss as the meaning, but it really is up to a bunch of academics and bureaucrats to decide whether or not a recession happens or not. So we don’t really know what’s going to happen and if it’s going to happen, but I think the important thing is that there’s risk in the market. There is a chance that there’s going to be a downturn in economic activity, and therefore we are going to discuss best practices for your business so that you can hopefully just be conservative and prepare in case something bad does happen. And if everything goes great, then you’re just in a better position anyway. So everyone has one piece of advice. James, Henry, Kathy, and I are each going to offer a piece of advice on how to recession proof your business. And Kathy, you have drawn the short straw and have to go first. So what do you got?

Kathy:
Well, I just first want to say that the economy is really pumping right now. It’s going to be a big GDP this quarter, so I’m not too worried about it happening right away, but there are some economists who think maybe mid next year, maybe in the fall. Either way, I look at my investments as if there’s going to be one. Why not? Be prepared for that, be prepared for if there’s not going to be one. And the way that I do that is either way, if there’s going to be a recession or not, I like to make sure I have plenty of cash reserves in place. Remember, I’m a buy and hold investor, which means that you buy it and then you have to hold it. There’s two pieces to the puzzle here. Right? And the way that people lose money in buy and hold, there’s several ways of course, but the big way, and certainly in 2008 is they couldn’t hold it. When those loans came due, they weren’t able to afford that payment.
That’s really not what people are facing today in buy and hold for the most part, at least in one to four, they’re mostly fixed rate loans. So just making sure you have plenty of cash reserves in case your tenant loses their job. Now, that can happen at any time because we’ve been living through a recession in certain industries. If you’re in real estate, if you’re a real estate agent or mortgage broker, you’ve been in a recession and there’s lots of them out there and they’re not making the money they used to make, generally.
So there’s always a risk that your tenant could lose their job, that they could get sick, that something could happen. And having that six months reserves, and what I mean by that is six months rent overhead. You just want to have that in a bank somewhere, so that that gives you plenty of time if your tenant loses their job and you need to cover the expenses. So that’s what I do anyway, and that makes me feel like I can walk into any economy and feel safe.

Dave:
Kathy, when you’re creating a cash reserve, do you basically just hold back cashflow until you have six months? Or what about people who might not have six months of cash reserves currently? Do you recommend they inject capital into an operating account, or how do they do that tactically?

Kathy:
Personally, what I advise people is have it at the outset. You know you’ve got it. Now, if you are just starting out and you don’t have that capital, then you would just keep all the cashflow, everything that comes in, it just goes into an account and you don’t touch it. And that’s your reserve account because remember, it’s buy an old real estate, people live in your property. If there’re going to be repairs, you need that reserve anyway. So just have it, six months reserves for rents and overhead, general overhead, but also a cushion for repairs. You should know your property well enough to know how old certain items are, have they been replaced? When will they need to be replaced? What’s the CapEx that you’re looking at? And have that set aside too.
Maybe you could put them in a two or three month CD or something, make a little money on it while it’s sitting there. It doesn’t have to sit in a non-interest bearing account, but just it needs to be somewhat accessible, especially if you’re in California or in a state where it’s harder to evict. Where we invest, if somebody loses their job and we have to evict, then it can be just a matter of weeks for that to happen. But in certain non-landlord friendly places like California, it could be six months, it could be a year. So anyway, yeah, if you’re in California, then maybe you want 12 months reserves.

Dave:
That’s a great point. I think it really does depend on the individual property and your individual circumstances. Six months is a rule of thumb, but if you know that your hot water heater’s rusting out and about to pop at any point, you might want that well, or if your tenants have a history of making late payments, you might want to consider that as well.

James:
Yeah, and it depends on what kind of assets that you’re in. I love what Kathy said because that’s that old mindset of that historical kind of metrics of keeping six months aside, and I love that. I think after 2008, I really learned that lesson and really started keeping. I call it my oh, curse word money. It’s got to be sitting over there. The thing is, with how things have moved over the last couple of years and how people have gotten into growth, it’s not just the traditional six months aside. You really got to get into the forecasting of what your businesses are and what they’re doing, and then make adjustments for what’s essential in today’s market. If you’re only looking at performers and P&Ls, it doesn’t tell you where your capital’s getting eroded.
And so you’ve got to spend a lot of time forecasting that cashflow out, putting it aside, making sure you have your reserves and then making your adjustments. Because as we go through transitions, you have to adjust those models.

Henry:
Yeah, I agree. James. One of the things we like to do is to have a set amount per number of doors. So meaning if you’ve got five doors, then maybe we’d like to have somewhere between 10 and 30 grand in an account. The most expensive thing typically from a maintenance perspective or CapEx perspective that we’d have to put on a house is probably a new roof. And so just making sure that if something happens, we’ve got to put a new roof on a property that the money’s there to be able to do that. And then as the portfolio grows, then that amount of savings needs to increase with it. And then as we spend that money, we’ve got to reduce cashflow spending and make sure that cashflow goes back into that account to make sure we just keep those amounts to make it just a little easier to manage. But first and foremost, Dave, if you’ve got a hot water heater that’s about to pop, just go ahead and replace that.

Dave:
Yeah, just replace it.

Henry:
Speaking from experience because I’m buying a house right now that the seller didn’t do that. The whole house flooded and now he’s stuck and then they found asbestos and now his house is down to the studs. So just go ahead and replace [inaudible 00:08:52].

Kathy:
Just get it done.

Dave:
Just go ahead and do it. That’s not cash reserve, that’s just repairs.

Kathy:
I like to buy stuff that is either new as you guys know or is repaired on the outset because then you can gauge your capital expense a little bit better. You know what you’re in for if everything’s fairly new.

Dave:
Henry, I was going to ask you, if you own a bunch of properties, do you have cash reserve on every property level or do you ever just do it as a portfolio level, sort of like the insurance model, the likelihood that you’re going to have an event in every property is low, so you can leave less total reserve as long as you’re thinking about the total portfolio?

Henry:
Yeah, we do it in buckets. So every five properties, we want to have X amount of X money in reserves. So if I have 10 properties and I know that’s X amount of dollars. If I have 11, we still keep it at that number, but once we get to 15, then we increase it again.

Dave:
Is that how you do it too, James?

James:
Yeah. Well, it depends on the business. Typically, with our portfolio, cashflow is pretty heavy right now. And so we don’t take a dollar from our cashflow throughout the year, and then at the end we then reallocate it out. So our portfolio really does pay for itself 3X over, but we had to get there. And so yes, right now we would put money aside and then it’s to cover, if we weren’t at our cash flows, we would have at minimum six months of payments. Plus, we like to have a maintenance account that’s typically going to be about 1% of our net cash flows.

Dave:
Well, Kathy, thank you. Very, very good advice just as reminders to build a cash reserve and really safeguard that cashflow. Henry, what’s your advice for recession proofing your business next year?

Henry:
So this is what helps people start to build that cash reserve, but I think we need to pay attention to what’s it costing us to operate our business? And this one is the hidden killer because these costs sometimes feel like they’re coming out of nowhere because you’re getting so many little onesie, twosie things that happen in your business that in the moment don’t seem like it’s a big deal. And then you look back at the end of the year or at the end of the month when you’re doing your bookkeeping and you’re like, “Holy crap, how much did I spend on X, Y, Z maintenance?” For me right now, I was getting eaten up by all of these little pieces of software that we need in different parts of our business.

Dave:
It’s like subscriptions.

Henry:
Yeah, subscriptions. But it’s like I’ve got a tool for this social media thing and I got a tool for this part of my business where we’re looking at offers and there’s all these little tools and subscriptions and you forget sometimes that you sign up for them and it’s just like people with their cable bills and all that. You’re looking at them, but you need to do that in your business too because as we’ve been growing, we find these tools, we use these tools and some of them are great, but now we’ve been spending a lot… I’ve been spending a lot of time looking at them, scaling them back and then consolidating them into one singular tool that does everything. And I’ve probably saved myself five grand a month just in the cost of some of these tools that we’re using elsewhere in our business.
So it’s about tracking your expenses and being more diligent about tracking expenses and understanding where you’re spending the money and do you need to continue spending that money? Can you consolidate some of these services? Can you hire someone to eliminate some of these things? A lot of the times it’s just… I guess the goal is you want to take a look at what are your expenses in your business? What are you truly spending money on every month? And making sure A, that you truly need to be spending that money or B, can you make a decision to bring somebody on or bring on a tool that eliminates you having to spend that money? Sometimes you can find a lot of your savings to help you save up for that cash reserve Kathy was talking about right now in what you’re currently spending in your business.

Kathy:
Oh my gosh, I agree so much. When times are good and when times are great like they have been the past 10 years, people are going hard, they’re going fast, they’re making a lot of money, they’re not really paying attention to expenses. A lot of times they’re just going and at times like this, you get to slow down and look at operations and really cut back because I think a lot of excess happens during the good years and it’s fun.
Anyway, so I know that with our team, it’s like everybody goes through, looks at the extra expenses that we maybe took on but don’t actually need. And sometimes, unfortunately, that can be personnel as well. If you had to hire extra people during the good times, they maybe have to go during the slower times, but this is the time to really just slow down and look at overall expenses and what’s truly needed and what could be cut.

James:
Yeah, it was funny. I was just talking to my wife the other day. I’m like, “Hey, we’re going to do a credit card, debit card purge. We’re going to cancel every debit card and credit card and then we’ll see what bills come in and go, ‘Hey, you need to renew or update your payment.’ If we don’t want it, we’re just going to cancel it right then because once it pings for the auto-renewal…” But yeah, these little costs can really erode your business and something else to think about that we’ve been really looking at is operational costs. For us as investors, I look at money as inventory for us. It’s inventory that we use to grow our business and our portfolio and buy new things and we have money sitting there, we want to deploy it and we want to get into the next deal.
But then sometimes as deal junkies and investors, you’re not thinking about, “Okay, well now I got to really secure this property. I got the dead time. I got insurance costs. I got these little creeping bills that don’t seem like much when you’re just racking deals,” but if you’ve got to pay four more insurance premiums, why it’s sitting and being turned, or you got to pay four more superintendents to manage your properties, why it’s being turned, those are the costs that are really eroding.
And so you have to work that all into that and go, “How do I reduce that and change that up in times when cash flows are lower?” Like for us, we got rid of some of our project managers because that’s a dead salary of a hundred grand a year. And it was not a dead salary, it’s to operate, but we have to pay for that. And we started structuring deals differently and bringing in partners and slicing in the deal to erode our monthly payment on that, and we’re still getting the projects done.
So it’s about looking at the business and go, “How do I reduce my costs?” And whether it’s through partnerships, cutting the cost, cutting waste, but we all have to do that right now. Cut the cost one way, shape or form and restructure it.

Dave:
Do you have Henry, any advice on how to go about doing this? Should you perhaps buy some new software subscription that will help you figure out what software subscriptions you don’t need?

Henry:
Yes, absolutely. In order to figure out how not to pay for stuff, you should go pay for something.

Dave:
You know there is actually a tool that you pay for that stops your subscription? It’s a subscription to stop your subscription.

Henry:
Yes.

Kathy:
It works. You sign up for things you forgot.

Dave:
That’s a good idea actually.

Henry:
First of all, within your business, you should be doing bookkeeping. And if you’re doing bookkeeping, you should already have an accounting of what you’re spending every month and on what those things are for. So really, it’s just diving into your monthly bookkeeping and seeing where your money is going and then get to that kind of micro level and then make decisions on, “Do I need to be spending this money on this thing right now or is this something that I can do either on my own?” Maybe it’s that you take a set of services that you’re paying for and then you hire a VA to take care of doing those tasks. And sometimes that VA cost will be a lot cheaper and more efficient than you paying for multiple different pieces of software that take care of those things.
So there’s tons of ways you can look at it, but I’d start with your bookkeeping. If you don’t have a bookkeeper, then A, you probably either need to go hire one or B, get one of these free tools that will categorize your expenses for you like I think Mint, but I think they just might’ve gone out of business, but there’s a few free tools that you can use.

Dave:
Yeah, yeah, there totally are. I think a lot of banks actually do it. I know Chase does it, and even if you do your bookkeeping yourself, like QuickBooks Online for example, they have some auto categorization features that you can use that are actually really helpful. It’s not perfect. It’s not the same as having a bookkeeper, but even just for most rental properties, I don’t know about you guys, but for an individual rental properties, there aren’t that many expenses. It doesn’t take that long to go through, especially the recurring ones, unless you’re doing a rehab or anything. The recurring ones, go see what’s on there. It’s not that hard to just even eyeball it.

Kathy:
You got to know your numbers, you got to know your numbers, especially at times like this and be looking at expenses every week at least, at least. What am I spending money on? Where is it coming from? Where is it going? And if you aren’t completely dialed in, then you’re either leaving money on the table, you’re just spending too much. It’s like that is the job of a business owner is to know your numbers inside and out.

Dave:
Well said. All right, James, for our third piece of advice for recession proofing your business, as a reminder, Kathy said to build cash reserve, safeguard your cashflow. Henry said to reduce and evaluate operating costs. James, what’s your advice?

James:
It’s all about having access to capital. As we’ve gone into a transitionary market, what’s happened is a lot of investors, including ourselves, you perform at a deal, the debt has changed and you’ve had to service that debt cost. And some of these projects that can take six, 12 months, 18 months, when your rate jumps from 9% to 11% or even 8% to 11%, it erodes your capital back. And so what we’ve had to do is we’ve had to really get comfortable with securing other types of backup slush fund credit, and that’s by working with banks and getting access to capital and working with banks to help you with these cashflow issues. Every deal that we’re looking at right now, we are talking to our lenders and going, “Hey, how do we get a 12 to 18 month interest reserve put in this deal?” And an interest reserve is where they finance in all of your carry costs so you can really function off the now and not worry about the debt cost creeping up on you on a 12 to 18 month period.
And so what we found is we wanted to build better relationships with banks so we can structure deals a little bit better. By us moving over deposits to a bank, they’re paying us a 4.5% return, which is great. It’s not what we make us as investors, but we’re moving our money over, which then by moving the money over, we’re making a 4.5% return. We’re borrowing the money then on a deal at 9%, 10%, but then they’ll factor in all of our cashflow needs, which is going to be those interest reserves that carry costs and stuff that you need to push through a flatter market.
And so by really working with banks and getting these lines together, it gives you these levers that you need to push you through a hump. Every time an investor buys a deal, it takes up capital. You got to put your down payment down, you got to service the debt, you got to service the people to facilitate the transaction, and that’s where you can get in trouble. And as investors, the thing with us, as soon as money comes back in our bank account, what do we want to do? We want to go do the next deal.
And so you get these wins, you race into the next deal, but then you’re not forecasting that hard six to 12 month cashflow. So by having your banks and your slush sum reserves, that’s what’s really going to push you through the humps. And that’s about getting personal line of credits. Having access to credit card debt, even though I don’t really believe in it, it’s way too expensive. I don’t think you should be doing deals if you’re going on credit cards right now, personally, but that’s just for me.
And then also moving your money to smaller portfolio banks that will look at you as far as a business, not just a client in the bank. When you meet with these portfolio banks, they look at your forecasting in your businesses and they’re going to structure your debt around that. They look at our performance, they look at our assets, they look how we’re going to stabilize things. If I go to one of the big banks, all it is, “How many deposits do you have? What’s your monthly expenses? We’re going to give you that leverage on that.” So by moving around to small business banks, it’s really helped give us access to debt, but they also understand the business for better terms.

Henry:
Yeah, I think this is fantastic because this is something I wholeheartedly agree with. I think what you want is access to capital in the event that you need it, right? Yes, recessions are difficult times, but recessions also create opportunities for investors and opportunities to buy, and access to money is just harder right now. And so you don’t want to miss out on an amazing opportunity because you haven’t prepared yourself on the front side to have access to capital to be able to jump on it. And so we’re not saying go rack up a bunch of debt for no reason. We’re saying prepare yourself, have access to capital and then use it strategically. And so being able to do something like… Everybody has a bank account. And so if you’ve got a bank account, even if it’s not at a small local bank, you can probably call your bank and see if they’ll just give you access to an unsecured line of credit. That’s kind of a cheat code nobody knows about.
So an unsecured line of credit is essentially a line of credit. So the bank will extend you a line of credit just based on they like you. It’s not secured by any asset. So secured lines of credit are things we’re all used to, like a home equity line of credit, that’s a line of credit that’s secured by a piece of property. You can secure loans with all types of collateral depending on how cool that bank wants to be with what they want to consider collateral. But mostly, you’re going to get a line of credit secured by a piece of property or you’re going to get a line of credit secured by your credit worthiness. And that’s all an unsecured line of credit is. It’s them saying, “We like you, we like your credit score. Here’s some money that we’ll allow you to use.”

Dave:
And if you’re unfamiliar with a line of credit in general, it’s basically just money that you can use but you don’t have to use. It’s similar to a credit card basically. It’s available to you. The bank issues you a credit limit and you can take out part of it, all of it. So if you had $100,000 as your line of credit, you could take out $10,000 and just pay on the $10,000. You’re not paying on the full amount of your credit limit.

Henry:
They already bank with you that you already got money in there in deposits. They have a relationship with you. You can call down there and say, “What would you give me an unsecured line of credit for?” And they may just turn around and give you access to some money that you can use for a down payment for the next good deal that comes your way. Now, you don’t want to over-leverage yourself and spend that on a bad deal, but just having that as a backup plan to be able to know, “Hey, if a good deal comes my way, I just got 20 grand on an unsecured line of credit with this bank.” And you don’t have to use the money. And if you don’t use the money, then you’re not paying any interest on it. So there’s lots of good little things you can do like that to be better prepared, better capitalized for opportunities coming your way through a recession.

Kathy:
Yeah, it’s a conundrum, right? At times like this, as the Federal Reserve is trying to pull money out of the system, they flooded the system with money over COVID. And the many years prior to that, it was easy to get access to money. And the process over the last 18 months is to pull that money back out. And during times like that, it’s harder to get money, but at the same time, that’s when the deals are there. So you’ve got to get good at finding money in any kind of market, but definitely in the coming market because it is harder to get, which means there’ll be less competition, which means there’ll be more deals and you’re the one who gets those deals if you can find the money. And there’s so many ways to do it. It doesn’t have to be just through a bank.

Dave:
Yeah, this makes so much sense right now. It always makes sense, but we’re in this weird scenario where prices might fall a little bit. We are seeing some downward pressure, but it’s also still very competitive to buy, which is just this confounding dynamic that doesn’t actually make any sense, but it’s reality. And so like Henry said, and like everyone said, you have to just be ready to jump on these opportunities because there are going to be ones, but they’re going to go really quickly. It’s not going to be the kind of recession, at least in my mind, where deals are sitting on the market for 180 days and you’re going to have your time. Things will come up and opportunities will arise, but people are going to be waiting and you should be one of them.

James:
And I think that’s why it’s so important to have your cashflow forecasted out in a six to 12 month period because you can get blinded by the good deal and just go get it, but then all of a sudden you’re in quicksand because you have to keep up with that debt. And so really forecast that cashflow out and know even if you have a good deal, sometimes the best deal you ever do is passing on that deal. And so forecast and make sure that you can keep up with it and have your slush fund because that’s where the quicksand starts.

Dave:
All right. So far, we have three excellent pieces of advice, which is to build your cash reserve, reduce and evaluate operating costs and secure financing before you need it. The last one I’ll bring, which I can feel you guys rolling your eyes already, which is to diversify your investments. I know none of the three of you diversify outside of real estates, but I do. I like to keep at least some of my net worth in stocks and bonds and bonds and money market accounts are doing pretty well right now. You can earn about 5%, 5.5%. And I think the real thing that I focus on in these types of markets is actually just trying to balance liquidity. It’s not even necessarily trying to get into multiple different types of assets, but it’s making sure that if I need a big amount of money that I can get it.
And real estate has many benefits. Liquidity is not necessarily one of them. If you’re unfamiliar with this term, liquidity is basically how quickly you can turn an asset, which is anything that has value, into cash, and it’s relative what you mean. I generally think it’s can you turn something to cash into a week, in two weeks, in three weeks? And so there’s this big spectrum. Cash is obviously the most valuable because you can use it and it’s the most liquid. On the far end of the spectrum, it’s like fine wines and art. And real estate is on the further end of that spectrum where it’s relatively illiquid, which is fine because most of us buy and hold for long periods of time. But during periods where there is a lot of volatility, particularly if your job or your income is volatile, I think it’s really important to balance your portfolio and your investments to make sure that you always have access to… You could sell something, you could sell your stocks, you can sell your bonds in case you needed to cover something in your real estate portfolio.
So generally, that’s just how I think about things. It’s just basically trying to make sure that I always have options to liquidate some part of my investment portfolio if an emergency occurs. Now, I choose to do that across different asset classes. I know you all don’t, but you can also diversify within real estate as well. So in addition to owning rental properties, for example, which typically have a very long hold period, you could also flip houses or you can wholesale or you can hotel because that you just have your money into those investments for less time. And so you have more frequent opportunities to reallocate your capital in these changing market conditions. What happens three or six months from now might be very different from what’s happening today. And so if you do a flip and you get your money out in six months, you have that chance to take advantage of whatever’s doing best then, whereas some of the longer term holds aren’t necessarily as good for that.
So that’s generally my advice is to try and make sure that you have liquidity across your entire portfolio. Now Kathy, I know you have almost all your money in real estate and you’re mostly a buy and hold investor. So how do you think about this? Do you have any more liquid assets in your portfolio?

Kathy:
Yeah, we invest in gold. Rich does play a little bit in the stock market mostly for fun and to learn it and cash. So yes, I’ll call that diversification.

Dave:
So mostly cash. Cash is the most liquid thing there is. It doesn’t take any time to turn cash to cash.

Kathy:
Yeah.

Dave:
Okay. So I like it. Okay. So Henry, I know you mostly invest in real estate and that’s totally fine. So within real estate, how do you think about how you allocate your money? Do you think that, “Oh, I’m going to do some long-term investments, some short-term investments,” or how do you manage your equity and your capital in a way to mitigate risk?

Henry:
Yeah, no, that’s a great question. So for me, obviously my main strategy is buy and hold. And so that is where obviously the bulk of the net worth comes in. But I like doing flips as a way to generate capital. And I will also look at my portfolio as a whole, as my rental portfolio as a whole and determine which of these rental properties can I monetize sooner than later when it’s financially beneficial to do so? Because markets are cyclical. So I may have properties that I bought as a buy and hold, but maybe that property is way more capital intensive because of the… Maybe it’s way more maintenance intensive than I was expecting or that I underwrote that deal for. And if the market is up, I can probably get paid a hefty premium for selling that property, eliminating the maintenance expense, which was eating away at the cashflow, and then make so much profit that it would’ve taken me a decade or two decades to generate that kind of cash from just the cashflow month over month, especially because the maintenance was eating away at it.
So I try to look at, A, evaluate my portfolio as a whole and see how I can monetize things differently in order to increase cash in my business. But yeah, I’m always looking at how can I generate capital on a short-term and then how can I offset those gains when you’re flipping through holding the real estate.

Dave:
Thank you. Yeah, that makes a ton of sense. Just trying to mix the different types of investments and the different kinds of wins. James, you talked a little bit about forecasting your cash flow. Is this something that you do as well, doing as many flips? How do you make sure that you’re scheduling your deals so that you get regular injections of capital back and you’re not having too much of your capital invested into long-term things?

James:
Yeah, and I love this topic. It’s funny, a lot of times people will talk to me and they say, “Hey, you’re not diversified, you’re only in real estate.” But I look at my portfolio as being a pie chart with diversification that we’re moving around at all given times. In today’s market, we know access to capital is essential. And so I have really allocated probably 50% of my cash into private lending where they’re on three to six nine month notes that pay me a much higher yield than when I have to pay for my bank financing all my other deals for. So I know that the cashflow for my private money lending is going to pay for any debt that I’m securing on any kind of short-term investment engine or rental property that’s on a negative to offset that. So I look at every market that I expand the pie charts.
Two years ago when rates were really low, I would say I had 50% of my capital in short-term high yield investments, which was fix and flip and development. And so as the market gets riskier and things get flatter, we just move things around. Like right now, I don’t want to trap any money in a deal that’s going to pay me an average return, even if it’s a great rental property. If I can structure it right with leverage to where I don’t have to leave much in, then I’ll look at that deal. But I don’t want to go leave 20% in to get a growth factor over a five to 10 year period because what we’ve referenced on the show is there is some amazing deals that pop up right now.
And so I like to have my cash in a high yield investment that I have access to liquidity for. I can make a move, buy that deal if I need to, but I’m going to be heavier on that passive income streams with access to capital. And I think that’s just important to move things around as you grow, but it also depends on where you’re at in your investing career. When I was newer in 2008, 2009 and 2010, we did not do that. It was about pushing through and growing. And so depending on where you want to be, you want to look at where’s the portfolio, what are my goals? And then set your pie chart.
It’s no different than those financial planners. I have a pie chart for my liquidity and my investments, where’s it going to allocate? And based on my goals, it’s going to tell me what to do in my pie chart. So I’m not in as high growth factors as I used to be, so I’m going to be a little bit lower returns with more cash accessible. If I’m making 12% of my money with private money, that’s making about one third of what I would make flipping a house on a return basis, but it gives me access to capital, it pays for other debts and it allows things to move things around. So we’re constantly, every year I’m reshaping my pie chart, but this year I moved a lot into private. I wanted high yield cash accessible investments.

Dave:
That makes a lot of sense. And yeah, I just think this whole concept of what James is talking about, like reallocating capital within your portfolio is something not talked about enough in real estate. I think there’s some mantras where it’s like just buy and hold on forever, but even if you’re a buy and hold investor, you should still be thinking about selling properties and buying new buy and hold properties just and optimizing, as you said James, your pie chart based on current market conditions and what else you can get out there. So in addition to diversification, just thinking about reallocating your capital to maybe safer investments is another… Maybe that’s the bonus tip for recession proofing your business right now is consider reallocating some capital into something safer.
All right, well, thank you guys so much. This was great help. I also want to recommend that if anyone wants additional advice on top of what James, Henry, Kathy, and I said today, BiggerPockets has a great book. It is called Recession-Proof Real Estate Investing. It’s written by J. Scott, my co-author of one of the books I wrote, and just a great real estate investor in general. It is full of really helpful practical tips on how to navigate any type of recession or economic downturn as a real estate investor. It’s really actually quite easy to read. I’ve read it like three, four different times and you can get through it in like two or three hours. Highly recommend.
All right, well, that’s it. Well, Kathy, James, Henry, thank you for joining us and thank you all for listening. We’ll see you for the next episode of On The Market. On The Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.