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June 6, 2023

Why Real Estate Is An Amazing Inflation Hedge With J. Scott [EP156]

Today we have J Scott on the show! How can you protect your finances in uncertain times? Join real estate investor J Scott as he dives into the topic of why real estate is an amazing inflation hedge! He's completed over 450 single-family flips and shares his transition from flipping to multifamily investing. In addition, J identifies three risks with current multifamily deals.

Table of Contents:

Inflation Hedge Strategies: Unveiling the Power of Real Estate Investments

Inflation Hedge Strategies: Unveiling the Power of Real Estate Investments
Photographer: Daniel Chen | Source: Unsplash

Darin: J lives in Florida with his family. He was in the tech industry before becoming a real estate investor. He started out flipping residential homes and now is an owner in over 1000 multifamily units. J is a highly accomplished author of not one, not two, but five real estate-related books.

So, just a little bit on how we know each other. J and I, this is the first time that we're actually speaking. But I did have his business partner, Ashley Wilson on, Episode 127.

Before we hit record, I was telling J that I was down in on the West Coast of Florida. I was going to attend a meet-up that he was speaking at. But I didn't get a chance to do that, and I had a conflict. So, I'm excited to hear about what he's got going on. And, so, with that, can you share with the listeners how many properties and how many units you're invested in?

J: Yes, so, it's not that important of a number to me, which is funny. But I probably don't even know the exact number. In the multifamily space, we own four properties. I do know that and for a little over 900 units. And then, in the single family space, probably somewhere between 50 and 60 units. A lot of my single family investing is with a partner of mine. And I don't always know when he's buying or selling. So, I don't have an exact count at the moment, but somewhere between 950 and 1000 units in total.

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Real Estate as an Inflation Hedge: Maximizing Returns for Investors

Darin: It's funny that you started out that way. Because, look, I've been in the multifamily world for four or five years and, when I first got involved, I heard everybody talking that lingo. Right? "How many units are you invested in?"

I thought it was kind of funny. Because you could put 50,000 or 100,000 into a syndication that has 50 units or 500 units. It's still a 50,000 or $100,000 investment, but 500 units just sound so much grander. And, so, people talk in those terms. And I fell into that. I was like, "Well if they're going to play that game, I'll just invest in some of the larger property deals." But in any event, that is funny.

J: One of the things that Ashley probably talked about on the show is that we get excited talking about how much we're paying back our investors. And, so, internally, we have metrics, as multifamily syndicators, we have metrics. I know some syndicators out there have metrics on how many units they want to buy. But for us, it really is about how we're treating our investors.

And I don't say that as a pitch or anything. It's just it really is kind of the core value of our business. And, so, our bottom line is basically how much we're returning to our investors and what that looks like, in terms of a percentage of what they've invested with us.

Darin: That's huge. So, with that, how much have you returned to investors, and what is the typical return?

Safeguarding Investor Returns With Real Estate as an Inflation Hedge

J: So, again, I’m not here to pitch anything. But our goal for 2023 is to return $2 million to our investors this year in distributions, in cash flow, on the money they've invested. Which I think turns out somewhere between seven and 9% across, average, across all the deals that we have. So, somewhere in that range, but two million's kind of our goal this year. If we can hit that, I think our investors will be very happy. And we'll feel like we've had a good year.

Darin: Well, in this year especially, because I'm involved, both as an LP and a GP in a lot of different deals. And this year with interest rates going up last year dramatically, cash flow has been impacted. So, a lot of deals have either reduced or cut off distributions. I guess, talk about how you guys positioned yourself to be able to continue to have high cash flow.

J: Yes, so, well, in addition to being a GP, I also invest as a limited partner in about 15 property syndications. I'm also a limited partner in a lot of other types of deals outside of real estate. I certainly get the fact and appreciate the fact that it's been a tough year for a lot of syndicators. For a lot of operators.

And I think we're facing, in the multifamily space, essentially three risks right now. So, you mentioned number one is, with interest rates going up, it's simply impacting cash flow. Anybody that bought a property on what's called a floating-rate loan, meaning the interest rate changes with the Federal Funds Rate or with the SOFR rate or with the 10-Year Treasury.

Mitigating Cash Flow Volatility with Real Estate as an Inflation Hedge

J: It basically goes up and down, as the other interest rates that we commonly look at go up and down. With those rates going up a lot over the last year, what we're seeing is mortgage payments are higher. Therefore, cash flow is lower. There's less money left over at the end of the month, and that means that our investors are getting less money if we have floating-rate loans.

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Number two, we're seeing deals that, for operators that have loans that are shorter than the full amortization period, which, for multifamily, is basically all loans. If we have loans coming due that need to be refinanced, typically, we have two choices in those cases. We refinance the loans, or we sell the property. A lot of times, we expect to refinance a loan within a couple of years of the purchase and then hold it for another three, four, or five years before we sell.

And we do that with the expectation that, when we go to refinance, we've added value to the property. We've increased the value of the property. Then, when we refinance, we can pull out enough money to cover basically the entire original loan amount, plus give some back to our investors.

Unfortunately, with values going down, with cap rates going up over the last year and values going down. A lot of operators who now need to refinance, don't have the ability to refinance the entire cash amount of the loan that they originally took out. So, in order to refinance, they would actually have to come to the table with money.

Real Estate Inflation Hedge: Navigating Refinancing Risks and Rate Caps

Real Estate Inflation Hedge: Navigating Refinancing Risks and Rate Caps
Photographer: Anastasia Petrova | Source: Unsplash

J: They have to bring more money to the table when they close. Which means they either have to come up with that money themselves. Or they need to go back to their investors and say, "We're going to do what's called a capital call. We're going to ask our investors for more money so that we can refinance." So, refinancing is the second risk.

And then the third risk that we're seeing these days, and the third thing that's impacting multifamily operators these days is this thing called rate caps. For anybody that's been in the business for a while, they understand that when you get a floating rate loan. And, again, that's a loan where the interest rate can go up and down. Oftentimes the lender requires you to buy what's called a rate cap. Which is essentially an insurance policy that says if interest rates go too high, the insurance policy is going to start paying any overage.

So, that means that the lender's at less risk and the operators at less risk. If interest rates go up 5%, the operator might be on the hook for one or 2% of that. But then the insurance company would pay the other 3%. And, so, that protects investors. That protects lenders. A lot of times, lenders require these policies, and these policies typically last one, two, or three years.

Well, for any operators that have these insurance policies, and these policies are about to run out, renewing these policies these days is now in the six, even seven-figure range. And, so, it can be really expensive to renew these insurance policies that the lenders are required or requiring.

Rates, Refinancing, and Caps

J: So, three big risks that we're seeing these days, interest rates going up, refinances coming due, and these rate cap insurance policies' prices going through the roof. And so, who gets hit most with these things? Typically, it's those operators who got floating-rate loans that were on the order of two, three, four, or five years in duration. So, for any operators out there that have fixed-rate debt, typically, seven or 10 or 12 years, they're probably in pretty good shape.

For any operators out there that have a floating-rate loan, which is a considerable number of multifamily investors, they're either in a tough situation right now. Or they're going to find themselves in a tough situation in the next couple of years if things don't change. When their loan comes due, or when their rate cap expires.

Darin: Yes, that's a great synopsis of where we're at. There's a lot of operators that fall into that cap, one of those three scenarios. From what I've heard from syndicators on the rate caps, the agencies are requiring them to escrow when they're a year out.

J: Yep, exactly.

Darin: But if it's a non-agency loan, I'm hearing syndicators saying that they're not required to escrow. Are you finding that to be the case?

J: Yes, and so, typically, what that means is, if a lender requires you to escrow a year before your rate cap expires, that means, let's say, and I'll use an example of what we have. Of our properties, we only have one that's a floating-rate loan, and we do have a rate cap on it. When we purchased that property with the rate cap, we got a three-year rate cap and we paid $30,000 per year.

Rate Caps and Escrow in Real Estate Inflation Hedge Strategies

J: And, so, not a lot of money, $2,500 a month, and we had a lot of downside protection, should rates go up. And, so, rates have gone up five points over the last year, or Federal Funds Rate's gone up five points over the last year. And our mortgage payment hasn't gone up much, thanks to that insurance policy. But our insurance policy runs out in October. And, so, last October, our lender said, "You need to start escrowing. You need to start putting money into escrow, in preparation for buying a new rate cap, come this coming October."

So, they want us, 12 months in advance, to start putting money in a bank account to save up for when we have to renew that policy. Well, the new price of that policy, as of last October, was well over $500,000. So, we went from $30,000 to well over $500,000, which means we had to start taking $500,000 divided by 12 months we had to start putting that into escrow. So, over $40,000 a month was going into escrow, to save up for next year, even though we had a year to see what the price of those policies was going to do.

And it turns out the policies are now half as much as they were in October, but we still have a lot of money sitting in escrow because the lender required it. And here's the interesting thing. This hasn't happened before, where rate caps have gone through the roof the way they have, where interest rates have gone up this quickly. And, so, lenders haven't quite figured out their process for dealing with these escrow accounts.

Real Estate Escrow Conundrum in Unprecedented Rate Cap Situation

J: Are they going to give this money back? Are they going to allow operators to stop escrowing when they've escrowed enough money, based on the new prices, now the prices have gone down? When we buy the rate cap, are they going to make us keep any overage in escrow, to protect against any risk that the lender might have in the future? It's always been not a big deal because the escrow amount is typically about the same as whatever the original amount was because rates don't tend to move as much as they have over the last year.

But this is kind of an unprecedented situation, and so we have a lot of operators who are taking a lot of the cash flow that they're generating, again, $40,000 a month for us. Luckily, that property is generating well over $100,000 in cash flow, so it's not impacting our ability to operate. But we've seen operators who are seeing rate caps of over a million dollars per year, and so they're having to escrow literally nearly six figures every month.

And that can eat into your cash flow pretty quickly. That can make it difficult to operate the deal without risk. It can even put your deal at risk of going into foreclosure if you don't have enough money to both pay your expenses and your rate cap escrow.

Darin: Yes. And it's confusing, I think, to the passive investors that aren't heavily involved and don't really understand it. So, from the listener's perspective, escrows, you probably have had it on one of your mortgages, on your residential house. You've had property taxes and insurance maybe, that are escrowed by the lender.

Managing Real Estate Inflation Hedge through Escrow and Lender Collaboration

Managing Real Estate Inflation Hedge through Escrow and Lender Collaboration
Photographer: Cytonn Photography | Source: Unsplash

Darin: So, you make one payment to the lender, and then the lender will then use the escrow funds to pay off the property taxes at the end of the year or the insurance. And this is something similar. And to J's point, it's unknown what's going to happen. When that year comes up, the cash flow, some investors have called me and said, "Darin, man, The monthly payments have gone from $35,000 to $100,000. It's just crazy."And they don't understand that it's not necessarily all going to interest expense now.

There is higher debt service, but some of that is going into an escrow account, that may or may not be paid out. So, there's a number of things that can happen before that year ends. One is, you could refinance, if you can. Two is, you could sell the property. Everything that's in that escrow account would come back to the investors. One thing you didn't talk about in these three is the lenders could extend. Right? The existing lenders could extend their duration.

J: And we're actually seeing that right now.

Darin: You are?

J: So, the brokers that we're talking to, the other owners in the markets that we're in, I don't want to speak across all markets, the whole country. But the markets that we're in, the brokers are telling us that lenders have been very nice. I guess, for lack of a better word, and have been willing to work with operators in the multifamily space.

Preserving Property Value With Real Estate Inflation Hedge

J: My take on that is that lenders know that there's a lot of risky loans coming due or a lot of loans that are at high risk coming due in the near future in the commercial space. In other parts of the commercial space, so, specifically, office, some parts of retail. And anytime a lender has to take back a property, that's going to hurt their balance sheet.

Darin: Right.

J: And, so, I think a lot of lenders recognize that, in the multifamily space, things will work themselves out in the next year or two or three. So, I mean the population is still growing. We're still under-supplied on housing. So, once interest rates start to stabilize and come down, once everybody gets through their refinances and their rate cap expirations. At that point, multifamily, for the most part, I think is going to be in pretty good shape. So, lenders don't have this great incentive to take back properties now to protect themselves because there's not a lot of risk for lenders in the multifamily space, in my opinion.

Where they do have risk is in the office market, in certain parts of retail. And my take is that lenders are going to be focusing on that over the next several months. And, so, they're going to be protecting their balance sheet as much as possible, not taking back properties that will ultimately work themselves out. Because they're going to end up having a lot of properties that they have to take back that just can't be saved at this point. And again, that'll be outside of multifamily.

Market Adaptation With Real Estate Inflation Hedge

Darin: That is a great point. So, I was thinking that lenders, because lenders, in general, don't really want to take over a property because they don't want to maintain it, and they don't want to run it. And, so, I was thinking that was more of the reasoning, but I think that you have a really good point. That there's other asset classes that are in much more dire shape. I mean, when you have occupancy in some of these office buildings of 50% and don't see the light at the end of the tunnel that they're going to be able to fill them. Then they can see that that's going to be a problem child for them.

J: Yes, lenders remember 2008, and they remember having to take back, or not having to. But choosing to take back all those properties, having all that bad debt on their balance sheet. And then their balance sheets looking really bad and having regulators come in and basically say, "Hey, you need to figure out your balance sheet or we're going to have to take some drastic actions."

I think lenders are going to do their best to avoid that repeat of 2008, for as long as they possibly can. And, again, multifamily I don't think is a big risk to them, so there's no reason for them to put themselves in a bad situation with multifamily will eventually work itself out.

Darin: That's a great point. I'm sure you've heard the term, there's the saying that's going around, "Survive until '25," right, in the multifamily space, people are not worried so much in the medium to long term. It's just like, "Can we get through this next year, year-and-a-half?"

Inflation-Proof Your Investments: Unveiling the Power of Real Estate Inflation Hedge

J: Yes, I think that'll be the case.

Darin: Talk about why if, hopefully, you do believe this, that multifamily or real estate in general, is a good inflation hedge. So, if we have higher inflation, which we've had, whether it continues on or whether it comes back down, who knows? But why is real estate a good inflation hedge, rather than just keeping your money in the bank?

J: I mean, there are a number of reasons. Number one, the single, best inflation hedge on the planet is long-term fixed-rate debt. And reason for that is, just to use an example, imagine I bought a house today, and I take out a loan for 100,000, 200,000, whatever it is, and my monthly payment is $1,000 per month. I'm getting my salary, maybe I'm making $100,000 a year. I'm taking that, paying my expenses, then paying my mortgage of $1,000 a month. Over the next 30 years, I'm going to keep paying $1,000 a month on my mortgage, but we have inflation. And with inflation, that means that my income over the next 30 years is going to increase. My wages are going to increase. My salary is going to increase.

If I'm a consultant, my hourly's going to increase, whatever it is. Over the next 30 years, I'm going to be making more money. If you look back to 1970, the average salary was what? 20,000, $25,000. Now, we're somewhere north of $60,000. Wages go up with inflation. But I've locked in an interest rate, I've locked in a mortgage, I've locked in a payment for 30 years.

Achieving Financial Security With Real Estate Inflation Hedge

Achieving Financial Security With Real Estate Inflation Hedge
Photographer: Braňo | Source: Unsplash

J: And, so, if I'm making $100,000 a year now, and I'm paying $1,000 a month, that's 1% of my salary per month I'm paying. If, in 30 years, I'm making $300,000 at the same job because of inflation, I'm now paying one-third of a percent of my salary every month. So, basically, I'm paying off that loan with future inflated dollars.

And, so, literally, the single best hedge on the planet against inflation is long-term fixed-rate debt because you're borrowing money now. And you're paying it off with cheaper dollars later. Real estate is one of the few traditional asset classes that give us the ability to lock in that long-term fixed-rate debt. So, that's the first reason why real estate tends to be a great hedge against inflation.

The other reason is, most real estate, and I'm not talking about flipping houses here, is transactional type real estate. But real investing involves buy-and-hold, holding long-term, and generating cash flow on a monthly or quarterly basis. And typically speaking, with inflation, rents go up, tenant charges, if you're in self-storage or if you're in mobile home parks, whatever asset class you're in. Typically, the cost for tenants or customers to use that real estate is going to go up with inflation.

And, so, every month my tenants are going to be paying more. Every year, my tenants are going to be paying more. So, the higher inflation, the higher rents are going to go, and the higher units are going to go for self-storage units. And, so, a lot of the inflation is now offset by the extra income that we're generating with our assets.

Leveraging Inflation With Real Estate Inflation Hedge

J: And, so, given the fact that our cash flow and the income we generate is directly related to inflation. Inflation doesn't necessarily hurt us, or at least it hurts us a lot less than other traditional asset classes.

Darin: So, you bring up that long-term fixed-rate debt. One of the things I think about is, with everybody locking in 3%, sub-3% on residential homes, I don't see them going anywhere.

J: No.

Darin: So, that is going to keep supply low, in my mind, for single family because, just to your point. I mean, if they were to go and buy a house down the street, they're going to be paying more than double. One, prices have gone up, and then interest rates have doubled.

J: Yes, we look at 2008, and we say, "What's different?" The big difference is, typically, heading into a recession, you have higher interest rates because of inflation, and the government, to kind of quelch inflation, will raise interest rates. And then, heading into a recession, interest rates will go down. The government will lower interest rates to spur on the economy and get us out of the recession.

And, so, a lot of times, heading into a recession, you're kind of hit on both ends. You've got a higher rate on your current residence, and you have the ability to get a lower rate if you were to sell and buy a new residence. So, there's some incentive to sell because you're probably going to get a lower price and a lower rate.

Exploring the Benefits of Real Estate Inflation Hedge During Uncertain Times

J: Well, here we are in this situation, where people locked in like you said, two, three, 4% interest rates, we may not be back there. Even if we head into a recession, and the Fed decided to lower rates, we may not be back to two, three, or 4% mortgage rates anytime soon, if ever. And, so, there's really not going to be much incentive to buy something new because the rates are going to be higher.

And prices, and values have gone up so much over the last couple of years since COVID, that even if we see a 10, 20, or even a 30% drop as we did in 2008 across the country. we're still going to see values higher than when people locked in and bought two or three years ago.

So, yes, I agree with you. I think that there are certainly always going to be people that have to sell, people that get jobs in different places or die or get divorced or whatever it is. But I think, for the most part, people are going to be very, very hesitant to sell, and they're only going to do so if they're put in a situation where they absolutely have to.

Darin: Yes. It's going to be interesting. When people start saying that this time is different, you always have to wonder, but there are a lot of different circumstances. So trying to figure out how it's going to play out is interesting. So, talk about, you've been investing since, I think you said, what? Late 2008 or something?

J: 2008, in real estate.

Lessons Learned from Flipping Houses and Long-Term Investments

Darin: So, what are some of the learning lessons that you've learned? What was your background before, and then why'd you get involved in real estate, and then what are kind of some of the learning lessons?

J: So, I was an engineer. I am an engineer by education. I have an electrical engineering degree and an MBA. And I spent most of my career before real estate in the tech world, spent most of my career at Microsoft, and did business stuff and tech engineering stuff. And when I started buying real estate in 2008, I had literally never purchased real estate before. I bought my first personal residence in 2008. It was the year I bought my first flip property and my second flip property and my fifth flip property.

And, so, we kind of hit the ground running, flipping houses in 2008, and did that for about a decade. I'd say the biggest lesson that I learned was actually about flipping houses. And it was the fact that I regret every property I've ever sold.

Looking back, we flipped about 450 houses. And, looking back, obviously, I wouldn't have had the ability, financially, to have kept every one of those 450 houses. But I think back, if I had simply, for every four houses I bought, I sold three and kept one. So I ended up with 100 of those houses that I had bought between 2008 and 2015, which would've added a good 20, 30, $40 million to my net worth.

Darin: Yes.

The Power of Buying and Holding for Long-Term Wealth

J: And, so, people say, "Yes, that's true. But who knows? We may never see a 2008-type event again." But the reality is like you were saying earlier, we have inflation. And typically, over any 10-year period, the value of real estate, residential real estate's, going to go up. If you look back to pre-1900, over any 10-year period, we've seen real estate go up in value. And typically, it does it at the rate of inflation, a little bit higher, three, three-and-quarter percent per year, compounded.

So, buying and holding is always going to be a better decision than buying and selling, especially when you factor in the taxes. Anytime you sell, you're going to take a big tax hit. I know a lot of people that start flipping houses. And after they flip their first or second or third, they kind of realize that flipping houses, they hear all the tax benefits of real estate. But they don't realize that you don't get any of those from flipping houses.

And, if anything, flipping houses is actually worse than working a full-time job, because not only are you going to pay ordinary income taxes. But you're also going to pay self-employment taxes. So, you take a big tax hit when you flip houses. And, so, my biggest learning is that I wish I would've just held a lot more properties a lot sooner.

Darin: Yes, that's interesting. So, for the young guns out there, my son just graduated from Texas A&M, just a few days ago. And I've counseled him that, I heard it on another podcast, so it wasn't like I came up with the idea myself.

Real Estate Inflation Hedge for First-Time Buyers

Photographer: Towfiqu barbhuiya | Source: Unsplash

Darin: But somebody said, "You're only a first-time home buyer once, and so use your FHA loan, 3.5% down payment versus 20%, and buy yourself a duplex or triplex or fourplex." So, he wants to buy a fourplex, and you can use the income from the other three tenants, to help qualify you for that loan. And I think to myself, I'm like, "I don't know if he'll be successful doing it or not, if he'll be motivated to find the right deal or not. But if he does, man, he's 22 years old. He'll be set up if he can just buy it and hold and just take the cash flow." Yes, I completely agree.

I was in Florida, I mentioned to you, and I lived in Florida before living in Dallas now. And we sold our house, in 2009, 2010. I don't know, we sold it for 400 and some-odd thousand. I saw, we met up with some neighbors the other day, well, in January, and they said, "Darin, you know how much your house is worth now?" And I said, "No." And they said, "It's a million bucks." Then I think to myself, "If I had just rented it and just positive cash flow and just held on, that's another five, 600,000." I mean that's a lot of money off one house.

J: Yes. So, we did the same thing. We moved down to Florida in 2019. We didn't have a lot of time to find our perfect house, so we bought basically the first thing we found that was in the neighborhood that we really wanted and that would suit our family.

Wealth-Building Strategies Using Real Estate Inflation Hedge

J: And from 2019 to 2020, we lived in that property, and then COVID hit. And my wife said, "We really need more room. We're both working from home now, full-time. And we have two kids, and we have a dog, and we need more room."

So, we moved literally down the street, same neighborhood, but we bought a bigger house. And we debated, "Do we keep our old house as a rental or do we sell it and buy the new one?" We decided to sell it and buy the new one, as opposed to keeping it and buying the new one. That house that we sold went from $400,000 when we sold it in 2020, to nearly $900,000 today. So, half-million dollars in two or three years.

And it would've been a simple rental property because it was right down the street, could have managed it ourselves. So, you live and you learn. And I knew 10 years ago that I should be holding more properties and was already regretting selling stuff, and I still made the mistake. So, we all make mistakes. Can't kick yourself, but learn from them.

Darin: Yes, absolutely. So, I'm glad you brought that up. That's great. So, you wrote five books. So, are they all on real estate, and what are they focused on?

J: Yes, so they're all real estate. So, when I write a book, I try and achieve one of two goals. I either want to write a book that hasn't been written before or write a book that I think I can do better than anybody has done before. And if I can't do one of those two things, it's not worth the time.

The Know-Hows on Flipping Houses

J: But my first two books were, the first book was How to Flip Houses. When I first started, I think I read everything that was out there. And what I found was, they were all great motivational material, but they weren't really tactical. They weren't how-to. They didn't provide a lot of specifics. Again, I have an engineering background. I'm not good at writing motivational material, but I'm really good at writing textbook-type books.

So, I wrote a book called The Book On Flipping Houses, which was really, in 20 steps, how to flip your first house. One of those chapters was on estimating rehab costs, and it ended up being a 350-page chapter. So, I said, "Okay, I'll just release that as its own book."

Darin: Separate book.

J: Yep. And, so, on the same day, I released my first two books. Then my wife and I decided to write a book on negotiating real estate because we couldn't find any good books on negotiating real estate.

And then, my fourth book was all about economic cycles and how the economy works. How it impacts real estate and real estate investors, called Recession-Proof Real Estate Investing.

And then, my fifth book, which was just released about six months ago, was called Real Estate By The Numbers. And it's basically all the math and finance that goes into being a successful real estate investor.

Darin: That's awesome. So, what's the why, for you, in writing these books? Do you make a ton of money off the books?

J: I make some money off the books. I'm not sure I would keep doing it if I didn't make any money off the books.

Sharing the Potentials of Real Estate Inflation Hedge

J: But I love to teach. And, so, when I started in 2008, I guess this is the etymology of the first book or the first two books. In 2008, I decided to start flipping houses. And I was like, "If I'm going to do this, I might as well document it, so other people can learn from it."

So, I started this website called 123flip.com, and I started posting every day exactly what we were doing, pictures of our projects, and the financials of our projects. Literally down to the penny, all the good stuff, all the bad stuff. Nobody was doing this at the time. Nobody was posting the detailed financials down to the penny. Basically, all the flip shows out there were, "You buy a house for 100. You sell it for 200. You just made $100,000."

But anybody in the business knows that's not true. You've got all your holding costs. You've got your rehab costs, your selling costs, all those things. So, you're making a lot less, but nobody was talking about that.

So, I created this website, and put literally all the details of my projects, down to the penny. The website became really popular, and I started getting a lot of requests for, "Hey, can I take you to lunch? Hey, can I do a phone call? Can I take you to coffee? Hey, can you come to speak at this conference?"

And I'm an introvert, again, very much an engineer personality. And, so, the thought of having to have lunch with different people every day or have coffee with people or talk on the phone was just horrendous. But at the same time, I wanted to be able to help people.

Achieving Abundance and Success With Real Estate

Achieving Abundance and Success With Real Estate
Photographer: Razvan Chisu | Source: Unsplash

J: So, my wife said, "You've got all this information on your blog, why don't you just organize it into a book, and then tell people to buy the book?" And, so, that's basically where the first two books came from. It was just a way to avoid having to talk to people. And, so, I took all the articles I wrote on the blog. I organized it into the book. I ended up rewriting it all, but that's where the book came from.

And, so, for me, it's just I love teaching. I love providing information. Again, if I can do it in a way that nobody's done before or information that nobody's provided before. I love doing it.

Darin: That's awesome. I love that. I love to teach. In my experience, the people that have created a ton of success, I speak more with real estate folks that have, but even just business owners that I've met that have had tremendous success. They want to help the next guy. I'm not saying that every single person wants to, but it just seems like it's in their DNA. Yes, it's financial, but then there's also a piece of giving back and helping the next guy out.

J: Yes, there's this concept of abundance mentality versus a scarcity mentality. People who believe that there's enough money and enough success and enough stuff out there that everybody can be successful. It's not a zero-sum game. Doesn't have to be losers to have winners. And then, there are people out there that really believe in the zero-sum game.

Giving Back With Real Estate Inflation Hedge

J: They believe that for every winner, there's got to be a loser, and there's no way to create money out of thin air or success out of thin air. And what I've noticed is, those who have the abundance mentality tend to do a lot better, long-term, in business than those who have the scarcity mentality. And along with that abundance mentality, is this desire to help others and to teach. So, typically, those who are the most successful also have that drive and that willingness to help others and teach others and prop others up.

Darin: And what I would say to the new investor, the one that's looking to get into their first deal. Right now, you're just thinking about yourself and providing for your family, and building wealth for you. But it's amazing what happens after you start becoming successful, then your network starts asking you, "Hey, how'd you do it?" And all of a sudden, you start giving back. You didn't start out that way, but it just kind of transitions that way for a lot of people. And, so, there's a ripple effect to that.

So, talking about new people, let's talk about both new passive investors and new active investors. New passive investors that get involved with any of your deals, what are their typical concerns and how do you educate them, to help them kind of get over the hump? Because I know, for me, my first passive deal, I was nervous man, wiring 50K or 75K, even though I had done a lot of due diligence, I still was nervous doing it.

Operator-Centric Real Estate Inflation Hedge

J: Yes. So, when I look at due diligence, and, again, I do a lot of passive investing in other people's deals as well, the areas that I look at are the operator, the deal. So, what is the property? What is the business plan for the deal? The location, the returns, and the risks. Those are the five things that I care about.

But one of those things I care about ten times as much as the other four combined. And that's the operator. I know that if I can find a great operator if I can find somebody who is ethical, who is intelligent, who is conservative, who is going to make the right decisions. I don't need to worry about those other four things nearly as much because I know the operator's going to be thinking about those things. And they're going to ensure that all those things are taken care of.

I have a lot of investors who invest with me, and it's a weird thing because I can't say this to them, and I hesitate even saying it on a podcast because it sounds so horrible. But it's the reality. I have a lot of investors who come, and they want to sit down with me and work through the underwriting. And they want to see the numbers, and they want to validate and verify that all of my assumptions are 100% accurate. And what I will actually say to them, but again, it's a weird conversation is, "Look, I could be lying to you about the numbers, and you would never know."

Exploring Complex Real Estate Inflation Hedge Investments

J: And that's the thing. These deals are complex enough, and even if it's something as simple as different locations, like one street over. Could be a better location than one street in the other direction, if you don't know the location really well. You're never going to be able to evaluate a deal as well as I can if I do know the location. If you don't know things like absorption rate, so number of units out there, compared to the number of units in your property. The types of units and how the demographic is going to demand those types of units, versus different types of other types of units, whatever.

The reality is when I invest in other people's deals, as smart as I think I am, as good as I might be at underwriting. If I invest with another really smart operator, if that operator wanted to obfuscate the deal, if he wanted to hide the numbers from me, if there are bad things in the deal that he wanted to keep from me, I would never know. And I'm pretty good at this business.

And, so, the reality is, I don't ask any operators, I'll ask to see their underwriting. I might ask to see their P&L. I may ask a few little questions, just to make sure they didn't miss anything big. But if they're trying to keep something from me, if they're smart, they probably could. And if I wanted to keep something from my investors, I could probably keep them from figuring it out.

Venturing Into Real Estate Inflation Hedge with Reliable Operators

Venturing Into Real Estate Inflation Hedge with Reliable Operators
Photographer: Christina @ wocintechchat.com | Source: Unsplash

J: And, so, that's why it's so important to find operators that you trust and you know. And that you have some relationship with and are willing to have a long-term relationship with. Because, at the end of the day, the operator has to do the right thing. And you want operators who are willing and able to do the right thing. So, I guess that's just a long way of saying, of those five things I do due diligence on the operator, him or herself, is, by far, number one.

And I will always make sure that I'm investing with people that I know. People that I trust, and that I know other people that have been investing with them for a long time and have never had a bad experience. And when I say bad experience, I don't mean nothing's ever gone wrong, because that's the other thing, I want to see deals. I want to see operators that have had things that have gone wrong because there's always going to be things that have gone wrong.

And if nothing's ever gone wrong in one of your deals, it's just a matter of time. And I want to know what's gone wrong and how did that operator deal with it. Because at the end of the day, that's my biggest concern, that something's going to go wrong, and the operator needs to deal with it.

So, for me, when I do due diligence, a lot of it is going to the operator and saying, "Hey, can you give me five references? Can you give me five people on your deals?" If it's not somebody I know well, "Can you give me five people that I can talk to?"

Uncovering Trustworthy Operators in Real Estate's Inflation Hedge

J: And then, I'll go back, and I'll say, "Thank you. I don't actually want to talk to those five. Can you give me another five?" And then, I'll go back a third time and say, "Will you give me another five?" Because I know the first five, we all have five people that are our raving fans. We probably have 10 or 50 people that are our raving fans. I want the people who are invested in the deal but aren't necessarily the raving fans. That aren't necessarily the person that's going to invest in every deal or that knows the operator really well. And then I want to ask a second question.

So, give me that first five, second five, third five, and then I'll start calling people on the third list. And then, the other question I'll ask the operator is, "Give me the name of somebody that's dealt with one of your deals that didn't go perfectly, that didn't go well. I don't care that it didn't go well. I want to hear about how you dealt with it." And I'll call those investors, and I'll basically say, "What happened and how did they deal with it?" Because that's the important thing.

Darin: No, those are great questions. Great questions. And you're right. I mean, everybody's going to have their top guys that will stand up for them, So, getting down that list. That's Interesting. The other thing is, so I love the fact that you said that, if something hasn't gone wrong, it will eventually. I remember I was pretty early in, maybe only a year or two in, year in, probably.

The Dog Deal

Darin: And I had people saying, "Hey Darin, you're invested in a lot of deals. Tell me your good operators and your bad." And I was like, "I'm not throwing anybody under the bus. You got to go do your own due diligence." But I had in my head, "All right, I got this one deal, that it's like my dog deal. I just don't think it's just going well." And then about a year later, I saw a whole bunch of transactions that were around that deal. And I'm like, "Holy cow, that deal's going to be one of my best." They had turned it around.

So, there are times when you talk to a person, they could be going through a struggling time. And if you badmouth them at that point in time, and then six months later, they turned it around, you never see the reprint of that article. You just remember that one statement. So, be careful on badmouthing your operators because I'm sure that there's some operators that are just out there for the most part, ones I've met, they're trying to maximize value for each of their investors.

J: I'm in two deals as a passive investor right now, that have basically stopped paying out distributions. Those are the two deals that I lose the least sleep over because I know that those two operators, one, they probably stopped, not probably, I know they did, but they stopped distributions. More as a cautionary measure and a way to preserve capital. It was actually a strategic move for them. They were willing to say to their investors, "We're going to take money out of your pocket short-term to lower risk."

Safeguarding Investors in the Real Estate Inflation Hedge

J: It's hard, as an operator, to tell your investors, "We're going to stop paying you." But it's very brave to be able to say, "We're going to stop paying you because we know it's the right thing to do for this deal." I don't know if they're going to lose investors, but they're certainly going to generate some ill will from their investors short term. Because a lot of investors, they get scared when they see that distributions have slowed down or stopped.

But I think, at the end of the day, those two operators are both going to do really well on those deals because they're being conservative. They're mitigating risk. And, at the end of the day, I think all their investors will look back and say, "Wow, they did the right thing. All these other deals that I did kept paying cash flow, but at what risk? At what expense?" And a lot of times, that risk is that you're running on fewer reserves, or fewer reserves, or running thinner every month.

So, I like operators that are willing to do hard things, things that aren't necessarily popular, because it's conservative. And it's basically protecting their investors long-term.

Darin: I love that term, brave. I mean, it is, especially if they're first out there, and ten other people haven't already done that same thing, and they're just kind of falling on and jumping on the bandwagon. But if they are solid, and then, like you say, they do a strategic move, that is brave. So, you do coaching also. Is that correct?

J: We do.

Darin: What does that look like for you guys?

Empowering Investors in the Real Estate Inflation Hedge

Photographer: Scott Graham | Source: Unsplash

J: So, we actually started mentoring in multifamily coaching and multifamily about two years ago. The main goal for us, and we do charge for it, is full disclosure, but the main goal for us wasn't income. In fact, for the time we spend and the effort we put in, the income that we're generating isn't really worth as much as us doing more deals. The value to us in doing the coaching was being able to build a community of new investors that we hope will be finding lots of deals.

And when finding lots of deals or when finding deals, they're going to realize, or they're going to decide, "Hey, we could use some help on these deals." Because multifamily, and you know this, and anybody that's operated or invested in multifamily knows, multifamily is a team sport. You can't do it by yourself. It's one of the things I love about multifamily, is that I get to focus, as a member of my team, and as a partner in the company. I get to focus on the couple of things that I'm really, really good at.

And Ashley, my partner, focuses on a couple of things that she's really good at. We surround ourselves with employees and contractors and other people that are amazing and really good at the things that they're good at. And you build a team. So, our goal in building the coaching program was to bring in new investors. And teach them how to do deals, in the hopes that, when they started finding deals. If they hadn't yet put together a team, they would come to us and say, "Hey. Let's partner on these deals".

Creating A Symbiotic Relationship

J: Which would increase our deal flow and increase our ability to get a footprint in other parts of the country. Increase our ability to learn new markets. So, basically, I don't want to say we're using our students, but it's a very symbiotic relationship.

Darin: Absolutely.

J: We're getting benefit from them, as much as they're getting benefit from us, and everybody gets propped up, long-term. And, so, that was the main reason for starting. But yes, so Ashley and I have a mentoring group. I'd say the big thing that differentiates us from a lot of groups out there is we do focus on finding deals. We focus a lot on finding deals. We focus a lot on raising capital and funding deals, but we also focus a lot on that third piece, which is operations.

Darin: Operations.

J: And Ashley's been through some coaching programs. I've looked at some coaching programs. And the one thing that they all seem to have in common is, they kind of start to celebrate when the deal is acquired. When you get to the closing table on the purchase, everybody's like, "Congratulations, you did it."

And, as far as I'm concerned, that's the starting line. You haven't done anything at that point. That's not where the money is made. The money's made for the next three or five or seven years. And, so, a lot of these programs don't focus on the next three or five or seven years. And that's what we really like to focus on.

Maximizing Results in the Real Estate Inflation Hedge

Darin: Yes, I love that. I've seen that model definitely work with other coaching programs, and mentorship programs, where the coaches develop relationships with the new people, and then they end up partnering. And, so, I definitely can see coming to fruition. Another thing you said was, you kind of didn't tie them together, but earlier, you were talking about how people reach out to you, and that's why you wrote the books. There was another syndicator, who's done very well for himself, and I met with him personally.

And he said, "Darin, I was getting all these phone calls, and I love to help people. I love getting on the phone and talking to them. But sometimes, I talk to them for half-hour, an hour, an hour-and-a-half, and then I have no idea if they'd do anything. There's one call or two calls and then they're gone. I'm good if they used that, and they actually went out and took action and got something done. But if they just got off the phone and was like, 'Oh, that's cool,' and then they went on to some other thing, well, that was a waste of my time."

So, he's like, "I started charging to talk with people and mentor people not because I was trying to make money off it. As much as I wanted to make sure I wasn't wasting my time, that I was qualifying the people that I was talking to, that they were serious, that they were planning to take action."

J: Yes. And it's one of those things that I remember when I used to hear people say that, it sounds like a cop-out, "I'm charging because I have to, not because I want the money."

The Impact of Knowledge in the Realm of Real Estate as an Inflation Hedge

J: But what I've learned is, it really is true. And for years, anytime somebody said, "Let me take you to lunch, let me buy you a coffee, can we jump on a phone call?" I'm a people-pleaser. I'm not good at saying no. I've gotten a little better at it, but I'm still not very good at it. So, literally, probably thousands of hours I've wasted on people that have never done anything because they asked, and I couldn't say no. And I couldn't really set a bar that made it more likely that they would.

And again, while I love helping people, I just think, "What could I have done in those thousands of hours that I could have helped other people?" So, I do. I spend a lot of time speaking, I mean, I travel around the country speaking at events where I don't get paid. I was in Dallas two weeks ago, I was in Miami last week. I'll be in Dallas again this week, I'll be in Orlando later in the year. I'll be in San Antonio later. And these are all things that, they're just conferences that people are putting on.

They're not paying me to come speak. I'm not selling anything there. But that allows me to scale the teaching up a little bit better. It allows me to get in front of 100 people or 300 people for an hour, as opposed to going to lunch with somebody for an hour. And now, there's 300 people that have potentially gotten benefit from what I have to say. Then I'll spend two or three days at the conference, talking to people. And, so, it really is a scale thing.

Real Estate Ventures and Family Adventures

Real Estate Ventures and Family Adventures
Photographer: Natalya Zaritskaya | Source: Unsplash

J: And I hope, and I would love for people to realize that. If you ever reach out to somebody like me or you or anybody else, that has this service attitude but can't give as much as they want, it's not necessarily because they're stingy with their time. It's not necessarily because they don't like you. It's not necessarily because they don't want to help. It really just is a scale thing. And it can be very difficult at times to say no. But we have to because there's just not enough time in the day for me to be able to help everybody I'd like to help and everybody that would like to be helped.

Darin: Yes, that's a great way to put it. And well, if you're coming back to Dallas, we might have to get together, so I'll have to figure that out. We could talk about that another time.

J: Be there in two weeks.

Darin: All right. Well, I'll make it a point, if you have any spare time. so, maybe we could get together for coffee or something.

J: I would actually love that.

Darin: That's great. So, hey, what do you like to do outside of work for fun?

J: So, these days, it's a lot of family stuff.

Darin: Like family vacations?

J: Yes. So, I have two boys, 12 and 13.

Darin: Okay. Sports?

J: Yes. They're in that. Lots of soccer and piano and those sorts of things. For the first six, seven, and eight years of their lives, we were very fortunate. Basically, we wouldn't travel, or I wouldn't travel, without my family. So, my wife and I worked together for the first ten years.

Work-Life Integration: Building a Family-Centric Real Estate Journey

J: We flipped houses together for about 10 years. And the reason we left the tech world was literally because we wanted to be able to put our family first. And, so, everybody that knew me, up until a few years ago, knew that if I showed up at a conference, I was with my wife and my two kids. Even when they were babies.

Darin: That's awesome.

J: We dragged the babies to closings. We dragged the babies to properties. We dragged the babies to conferences, up until the time they were eight, or nine years old. And then, at that point, school kind of became more demanding, and we couldn't do it as much.

So, for the first eight years, I was with my wife and my kids literally every second of the day, and I loved it. And then, for the last few years, they started to get their own lives. And they're in school now, so they can't travel with us as much. My wife can't travel as much. And I'm starting to recognize that I only have a couple of years left.

And, so, these days, we still travel as a family to a lot of conferences. We like to find places that we want to go on vacation, and we'll find a conference that happens to be in that location, that coincides with when we want to go. And, so, we do a lot of strategic scheduling, to kind of bring our work life and our family life together. And I guess that's probably the best way to say it.

Real Estate Vision Beyond Flips and Multifamily Success

Darin: That's very cool. There was a Netflix special documentary on golfers. I don't know if you're a golfer. But there was one of the golfers, who decided to bring his family everywhere, to every tournament. And that was unique, but he was really focused on making, "Look, I love golf, but I want to make sure that I'm not away from my family all the time, so I'm going to bring them with me." So, that's fantastic.

J: It's not for everybody, but for us, it's like the fact that we have the ability to do it, there's no reason not to.

Darin: That's awesome. So, now, you've done a ton. I mean, you flipped 50-some-odd homes and you're a big multifamily guy.

J: 450.

Darin: 450 homes?

J: Yes.

Darin: Oh, you have a 50 to 60 still?

J: Yes.

Darin: Oh my gosh. 450 units, single family. That's massive. So, what do you do next? You've written five books. You've done with the conference circuit. What do you do next?

J: I've been doing multifamily for the last four or five years, and I love it. And, so, one of the things I realized I had to do when I got into multifamily was, I did the single family. We flipped houses for ten years. I didn't take investments from other people. I didn't take money, for the most part, from other people. And, so, I would never be in a situation, where I had anybody that was relying on me to be successful in order to get their money back or to get their profits.

Unveiling the Future Path in Real Estate Inflation Hedge

J: But I realized that, as soon as I got into multifamily, and we started doing syndications, I would be taking tens of millions of dollars from people. And the only way I can do that is if I'm willing to commit to focusing my time 100% on those endeavors. And commit to doing it for as long as it took to get those investors repaid and get them everything that they deserved.

So, I made a commitment four or five years ago, when I came into the multifamily space, that I would do this for some period of time. I said 10 years. And, so, for at least the next five years, this is kind of what I'm doing full-time. And I owe that to my investors. I owe that to everybody that's kind of invested with us and rely on us and works with us. And, so, that's where I'm for the next five years. Past that, I don't know. I tend to do things in 10-year chunks. So, I'll reevaluate in a couple of years.

Darin: That's awesome. Well, how do people reach out to you if they want to get to know you better? What's the best way for them to do that?

J: www.connectwithjscott.com. Just letter J, scott.com. Connectwithjscott.com. That'll link you out to everything you need to know, including my email address and anything else you might be interested in.

Darin: Awesome. J, when we stop recording here, I'm going to ask you more about getting together in Dallas. But thank you so much for coming on, and sharing with the listeners. Listeners, I hope that you enjoyed that one. Until next week, signing off.

How to Reach J. Scott

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Darin Batchelder


Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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