\n<\/p>\n
A recession<\/strong><\/a> isn\u2019t off the table for 2024<\/strong>, so you\u2019ll need to know how to prepare for a recession <\/strong>and profit if the economy starts to slide. If your real estate values fall, your tenants stop paying rent, or you lose your job, how will you ensure you keep your properties?<\/strong> Those who can survive the bad times <\/strong>often thrive in the good<\/strong>\u2014so what should you do to prepare?<\/p>\n Today, our expert panel gives four suggestions ANY investor can take to make it through a recession unscathed<\/strong>. All of these suggestions are being put into practice NOW by our panel of experts. They\u2019re not complicated, and acting on even a few of them could save you tens of thousands (or an entire property)<\/strong> if and when a recession finally does hit.<\/p>\n From cutting costs<\/strong><\/a> to keeping cash <\/strong>on hand, investing differently<\/strong>, and building a \u201cbackup\u201d <\/strong>for buying properties, these tactics will enable you to scoop up the deals<\/strong> that inexperienced investors couldn\u2019t hold onto!<\/p>\n Dave: Kathy: James: Dave: James: Dave: Henry: Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: James: Henry: Dave: Henry: Kathy: Dave: Kathy: Dave: Henry: Dave: James: Dave: Henry: Dave: Henry: Kathy: James: Dave: Henry: Dave: Henry: Kathy: Dave: Henry: Dave: Kathy: Dave: James: Henry: Dave: Henry: Kathy: Dave: James: Dave: Kathy: Dave: Kathy: Dave: Henry: Dave: James: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey everyone, welcome to On The Market. I\u2019m your host, Dave Meyer, and today we\u2019re 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\u2019re just going to take the question out of it and pretend that there is going to be, and we\u2019re 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.<\/p>\n
Thank you.<\/p>\n
I\u2019m ready to talk about 2024. I\u2019m done with 2023.<\/p>\n
You look tired, man. You look like 23 has worked a number on you.<\/p>\n
Yeah, the only good 23 is Michael Jordan. That\u2019s about it.<\/p>\n
All right. Time to move on to 24.<\/p>\n
Kobe year.<\/p>\n
Yeah. Wait, was Kobe 24 first or was he eight first?<\/p>\n
He was eight first. Whoa. 2008 was the recession, so maybe Kobe 24 is the next recession. Boom!<\/p>\n
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\u2019s always those octopi that predict the Olympics better? So I think Henry\u2019s random prediction about Kobe\u2019s numbers is probably right. So anyway, the real predictions are something about 20% to 25% of a recession next year. That\u2019s 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\u2019re saying that there\u2019s a 30% chance of a global recession, and so these people at least are not saying it\u2019s 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\u2019t 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\u2019t really know what\u2019s going to happen and if it\u2019s going to happen, but I think the important thing is that there\u2019s risk in the market. There is a chance that there\u2019s 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\u2019re 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?<\/p>\n
Well, I just first want to say that the economy is really pumping right now. It\u2019s going to be a big GDP this quarter, so I\u2019m 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\u2019s going to be one. Why not? Be prepared for that, be prepared for if there\u2019s not going to be one. And the way that I do that is either way, if there\u2019s going to be a recession or not, I like to make sure I have plenty of cash reserves in place. Remember, I\u2019m a buy and hold investor, which means that you buy it and then you have to hold it. There\u2019s two pieces to the puzzle here. Right? And the way that people lose money in buy and hold, there\u2019s several ways of course, but the big way, and certainly in 2008 is they couldn\u2019t hold it. When those loans came due, they weren\u2019t able to afford that payment.
That\u2019s really not what people are facing today in buy and hold for the most part, at least in one to four, they\u2019re 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\u2019ve been living through a recession in certain industries. If you\u2019re in real estate, if you\u2019re a real estate agent or mortgage broker, you\u2019ve been in a recession and there\u2019s lots of them out there and they\u2019re not making the money they used to make, generally.
So there\u2019s 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\u2019s what I do anyway, and that makes me feel like I can walk into any economy and feel safe.<\/p>\n
Kathy, when you\u2019re 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?<\/p>\n
Personally, what I advise people is have it at the outset. You know you\u2019ve got it. Now, if you are just starting out and you don\u2019t have that capital, then you would just keep all the cashflow, everything that comes in, it just goes into an account and you don\u2019t touch it. And that\u2019s your reserve account because remember, it\u2019s buy an old real estate, people live in your property. If there\u2019re 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\u2019s the CapEx that you\u2019re 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\u2019s sitting there. It doesn\u2019t have to sit in a non-interest bearing account, but just it needs to be somewhat accessible, especially if you\u2019re in California or in a state where it\u2019s 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\u2019re in California, then maybe you want 12 months reserves.<\/p>\n
That\u2019s 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\u2019s 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.<\/p>\n
Yeah, and it depends on what kind of assets that you\u2019re in. I love what Kathy said because that\u2019s 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\u2019s 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\u2019s not just the traditional six months aside. You really got to get into the forecasting of what your businesses are and what they\u2019re doing, and then make adjustments for what\u2019s essential in today\u2019s market. If you\u2019re only looking at performers and P&Ls, it doesn\u2019t tell you where your capital\u2019s getting eroded.
And so you\u2019ve 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.<\/p>\n
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\u2019ve got five doors, then maybe we\u2019d 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\u2019d have to put on a house is probably a new roof. And so just making sure that if something happens, we\u2019ve got to put a new roof on a property that the money\u2019s 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\u2019ve 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\u2019ve got a hot water heater that\u2019s about to pop, just go ahead and replace that.<\/p>\n
Yeah, just replace it.<\/p>\n
Speaking from experience because I\u2019m buying a house right now that the seller didn\u2019t do that. The whole house flooded and now he\u2019s 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].<\/p>\n
Just get it done.<\/p>\n
Just go ahead and do it. That\u2019s not cash reserve, that\u2019s just repairs.<\/p>\n
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\u2019re in for if everything\u2019s fairly new.<\/p>\n
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\u2019re going to have an event in every property is low, so you can leave less total reserve as long as you\u2019re thinking about the total portfolio?<\/p>\n
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\u2019s 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.<\/p>\n
Is that how you do it too, James?<\/p>\n
Yeah. Well, it depends on the business. Typically, with our portfolio, cashflow is pretty heavy right now. And so we don\u2019t 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\u2019s to cover, if we weren\u2019t at our cash flows, we would have at minimum six months of payments. Plus, we like to have a maintenance account that\u2019s typically going to be about 1% of our net cash flows.<\/p>\n
Well, Kathy, thank you. Very, very good advice just as reminders to build a cash reserve and really safeguard that cashflow. Henry, what\u2019s your advice for recession proofing your business next year?<\/p>\n
So this is what helps people start to build that cash reserve, but I think we need to pay attention to what\u2019s it costing us to operate our business? And this one is the hidden killer because these costs sometimes feel like they\u2019re coming out of nowhere because you\u2019re getting so many little onesie, twosie things that happen in your business that in the moment don\u2019t seem like it\u2019s a big deal. And then you look back at the end of the year or at the end of the month when you\u2019re doing your bookkeeping and you\u2019re like, \u201cHoly crap, how much did I spend on X, Y, Z maintenance?\u201d 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.<\/p>\n
It\u2019s like subscriptions.<\/p>\n
Yeah, subscriptions. But it\u2019s like I\u2019ve got a tool for this social media thing and I got a tool for this part of my business where we\u2019re looking at offers and there\u2019s all these little tools and subscriptions and you forget sometimes that you sign up for them and it\u2019s just like people with their cable bills and all that. You\u2019re looking at them, but you need to do that in your business too because as we\u2019ve been growing, we find these tools, we use these tools and some of them are great, but now we\u2019ve been spending a lot\u2026 I\u2019ve 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\u2019ve probably saved myself five grand a month just in the cost of some of these tools that we\u2019re using elsewhere in our business.
So it\u2019s about tracking your expenses and being more diligent about tracking expenses and understanding where you\u2019re 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\u2019s just\u2026 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\u2019re currently spending in your business.<\/p>\n
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\u2019re going fast, they\u2019re making a lot of money, they\u2019re not really paying attention to expenses. A lot of times they\u2019re 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\u2019s fun.
Anyway, so I know that with our team, it\u2019s like everybody goes through, looks at the extra expenses that we maybe took on but don\u2019t 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\u2019s truly needed and what could be cut.<\/p>\n
Yeah, it was funny. I was just talking to my wife the other day. I\u2019m like, \u201cHey, we\u2019re going to do a credit card, debit card purge. We\u2019re going to cancel every debit card and credit card and then we\u2019ll see what bills come in and go, \u2018Hey, you need to renew or update your payment.\u2019 If we don\u2019t want it, we\u2019re just going to cancel it right then because once it pings for the auto-renewal\u2026\u201d But yeah, these little costs can really erode your business and something else to think about that we\u2019ve been really looking at is operational costs. For us as investors, I look at money as inventory for us. It\u2019s 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\u2019re not thinking about, \u201cOkay, 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\u2019t seem like much when you\u2019re just racking deals,\u201d but if you\u2019ve got to pay four more insurance premiums, why it\u2019s sitting and being turned, or you got to pay four more superintendents to manage your properties, why it\u2019s being turned, those are the costs that are really eroding.
And so you have to work that all into that and go, \u201cHow do I reduce that and change that up in times when cash flows are lower?\u201d Like for us, we got rid of some of our project managers because that\u2019s a dead salary of a hundred grand a year. And it was not a dead salary, it\u2019s 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\u2019re still getting the projects done.
So it\u2019s about looking at the business and go, \u201cHow do I reduce my costs?\u201d And whether it\u2019s 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.<\/p>\n
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\u2019t need?<\/p>\n
Yes, absolutely. In order to figure out how not to pay for stuff, you should go pay for something.<\/p>\n
You know there is actually a tool that you pay for that stops your subscription? It\u2019s a subscription to stop your subscription.<\/p>\n
Yes.<\/p>\n
It works. You sign up for things you forgot.<\/p>\n
That\u2019s a good idea actually.<\/p>\n
First of all, within your business, you should be doing bookkeeping. And if you\u2019re doing bookkeeping, you should already have an accounting of what you\u2019re spending every month and on what those things are for. So really, it\u2019s 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, \u201cDo I need to be spending this money on this thing right now or is this something that I can do either on my own?\u201d Maybe it\u2019s that you take a set of services that you\u2019re 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\u2019s tons of ways you can look at it, but I\u2019d start with your bookkeeping. If you don\u2019t 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\u2019ve gone out of business, but there\u2019s a few free tools that you can use.<\/p>\n
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\u2019s not perfect. It\u2019s not the same as having a bookkeeper, but even just for most rental properties, I don\u2019t know about you guys, but for an individual rental properties, there aren\u2019t that many expenses. It doesn\u2019t take that long to go through, especially the recurring ones, unless you\u2019re doing a rehab or anything. The recurring ones, go see what\u2019s on there. It\u2019s not that hard to just even eyeball it.<\/p>\n
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\u2019t completely dialed in, then you\u2019re either leaving money on the table, you\u2019re just spending too much. It\u2019s like that is the job of a business owner is to know your numbers inside and out.<\/p>\n
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\u2019s your advice?<\/p>\n
It\u2019s all about having access to capital. As we\u2019ve gone into a transitionary market, what\u2019s happened is a lot of investors, including ourselves, you perform at a deal, the debt has changed and you\u2019ve 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\u2019ve had to do is we\u2019ve had to really get comfortable with securing other types of backup slush fund credit, and that\u2019s by working with banks and getting access to capital and working with banks to help you with these cashflow issues. Every deal that we\u2019re looking at right now, we are talking to our lenders and going, \u201cHey, how do we get a 12 to 18 month interest reserve put in this deal?\u201d 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\u2019re paying us a 4.5% return, which is great. It\u2019s not what we make us as investors, but we\u2019re moving our money over, which then by moving the money over, we\u2019re making a 4.5% return. We\u2019re borrowing the money then on a deal at 9%, 10%, but then they\u2019ll 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\u2019s 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\u2019re not forecasting that hard six to 12 month cashflow. So by having your banks and your slush sum reserves, that\u2019s what\u2019s really going to push you through the humps. And that\u2019s about getting personal line of credits. Having access to credit card debt, even though I don\u2019t really believe in it, it\u2019s way too expensive. I don\u2019t think you should be doing deals if you\u2019re going on credit cards right now, personally, but that\u2019s 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\u2019re going to structure your debt around that. They look at our performance, they look at our assets, they look how we\u2019re going to stabilize things. If I go to one of the big banks, all it is, \u201cHow many deposits do you have? What\u2019s your monthly expenses? We\u2019re going to give you that leverage on that.\u201d So by moving around to small business banks, it\u2019s really helped give us access to debt, but they also understand the business for better terms.<\/p>\n
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\u2019t want to miss out on an amazing opportunity because you haven\u2019t prepared yourself on the front side to have access to capital to be able to jump on it. And so we\u2019re not saying go rack up a bunch of debt for no reason. We\u2019re saying prepare yourself, have access to capital and then use it strategically. And so being able to do something like\u2026 Everybody has a bank account. And so if you\u2019ve got a bank account, even if it\u2019s not at a small local bank, you can probably call your bank and see if they\u2019ll just give you access to an unsecured line of credit. That\u2019s 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\u2019s not secured by any asset. So secured lines of credit are things we\u2019re all used to, like a home equity line of credit, that\u2019s a line of credit that\u2019s 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\u2019re going to get a line of credit secured by a piece of property or you\u2019re going to get a line of credit secured by your credit worthiness. And that\u2019s all an unsecured line of credit is. It\u2019s them saying, \u201cWe like you, we like your credit score. Here\u2019s some money that we\u2019ll allow you to use.\u201d<\/p>\n
And if you\u2019re unfamiliar with a line of credit in general, it\u2019s basically just money that you can use but you don\u2019t have to use. It\u2019s similar to a credit card basically. It\u2019s 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\u2019re not paying on the full amount of your credit limit.<\/p>\n
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, \u201cWhat would you give me an unsecured line of credit for?\u201d 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\u2019t 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, \u201cHey, if a good deal comes my way, I just got 20 grand on an unsecured line of credit with this bank.\u201d And you don\u2019t have to use the money. And if you don\u2019t use the money, then you\u2019re not paying any interest on it. So there\u2019s lots of good little things you can do like that to be better prepared, better capitalized for opportunities coming your way through a recession.<\/p>\n
Yeah, it\u2019s 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\u2019s harder to get money, but at the same time, that\u2019s when the deals are there. So you\u2019ve 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\u2019ll be less competition, which means there\u2019ll be more deals and you\u2019re the one who gets those deals if you can find the money. And there\u2019s so many ways to do it. It doesn\u2019t have to be just through a bank.<\/p>\n
Yeah, this makes so much sense right now. It always makes sense, but we\u2019re in this weird scenario where prices might fall a little bit. We are seeing some downward pressure, but it\u2019s also still very competitive to buy, which is just this confounding dynamic that doesn\u2019t actually make any sense, but it\u2019s 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\u2019re going to go really quickly. It\u2019s 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\u2019re 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.<\/p>\n
And I think that\u2019s why it\u2019s 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\u2019re 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\u2019s where the quicksand starts.<\/p>\n
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\u2019ll 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\u2019s not even necessarily trying to get into multiple different types of assets, but it\u2019s 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\u2019re unfamiliar with this term, liquidity is basically how quickly you can turn an asset, which is anything that has value, into cash, and it\u2019s relative what you mean. I generally think it\u2019s can you turn something to cash into a week, in two weeks, in three weeks? And so there\u2019s this big spectrum. Cash is obviously the most valuable because you can use it and it\u2019s the most liquid. On the far end of the spectrum, it\u2019s like fine wines and art. And real estate is on the further end of that spectrum where it\u2019s 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\u2019s really important to balance your portfolio and your investments to make sure that you always have access to\u2026 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\u2019s just how I think about things. It\u2019s 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\u2019t, 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\u2019s 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\u2019s doing best then, whereas some of the longer term holds aren\u2019t necessarily as good for that.
So that\u2019s 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\u2019re mostly a buy and hold investor. So how do you think about this? Do you have any more liquid assets in your portfolio?<\/p>\n
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\u2019ll call that diversification.<\/p>\n
So mostly cash. Cash is the most liquid thing there is. It doesn\u2019t take any time to turn cash to cash.<\/p>\n
Yeah.<\/p>\n
Okay. So I like it. Okay. So Henry, I know you mostly invest in real estate and that\u2019s totally fine. So within real estate, how do you think about how you allocate your money? Do you think that, \u201cOh, I\u2019m going to do some long-term investments, some short-term investments,\u201d or how do you manage your equity and your capital in a way to mitigate risk?<\/p>\n
Yeah, no, that\u2019s 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\u2019s 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\u2026 Maybe it\u2019s 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\u2019ve 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\u2019m always looking at how can I generate capital on a short-term and then how can I offset those gains when you\u2019re flipping through holding the real estate.<\/p>\n
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\u2019re scheduling your deals so that you get regular injections of capital back and you\u2019re not having too much of your capital invested into long-term things?<\/p>\n
Yeah, and I love this topic. It\u2019s funny, a lot of times people will talk to me and they say, \u201cHey, you\u2019re not diversified, you\u2019re only in real estate.\u201d But I look at my portfolio as being a pie chart with diversification that we\u2019re moving around at all given times. In today\u2019s market, we know access to capital is essential. And so I have really allocated probably 50% of my cash into private lending where they\u2019re 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\u2019m securing on any kind of short-term investment engine or rental property that\u2019s 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\u2019t want to trap any money in a deal that\u2019s going to pay me an average return, even if it\u2019s a great rental property. If I can structure it right with leverage to where I don\u2019t have to leave much in, then I\u2019ll look at that deal. But I don\u2019t want to go leave 20% in to get a growth factor over a five to 10 year period because what we\u2019ve 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\u2019m going to be heavier on that passive income streams with access to capital. And I think that\u2019s just important to move things around as you grow, but it also depends on where you\u2019re 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\u2019s the portfolio, what are my goals? And then set your pie chart.
It\u2019s no different than those financial planners. I have a pie chart for my liquidity and my investments, where\u2019s it going to allocate? And based on my goals, it\u2019s going to tell me what to do in my pie chart. So I\u2019m not in as high growth factors as I used to be, so I\u2019m going to be a little bit lower returns with more cash accessible. If I\u2019m making 12% of my money with private money, that\u2019s 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\u2019re constantly, every year I\u2019m reshaping my pie chart, but this year I moved a lot into private. I wanted high yield cash accessible investments.<\/p>\n
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\u2019s some mantras where it\u2019s like just buy and hold on forever, but even if you\u2019re 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\u2026 Maybe that\u2019s 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\u2019s 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\u2019s really actually quite easy to read. I\u2019ve 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\u2019s it. Well, Kathy, James, Henry, thank you for joining us and thank you all for listening. We\u2019ll 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.<\/p>\n