The Truth About Real Estate Investing in 2024

David:
This is the BiggerPockets Podcast show 900. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast and I’m here today with Dave Meyer joining me to co-host this momentous episode in BiggerPockets history.

Dave:
Well, thank you. I’m so excited to be here for this huge milestone. And in order to celebrate, we have something special cooked up we’ve been working on for quite a while here at BiggerPockets. We are bringing on three of our most beloved and seasoned BiggerPockets investors. These are people who have been around the BiggerPockets community for a long time. And we’re going to ask them some of the most burning important questions about the housing market. These are questions like, is now a good time to buy or should you wait for rates to drop, what strategies work in today’s market, and is real estate still a tool to help you reach financial freedom? We’re going to get into this, plus actionable, practical advice that these seasoned vets have for anyone who’s trying to get started today.

David:
That’s right. We have J Scott, we have Brian Burke, we have Scott Trench, and we have Dave and Dave all in today’s episode. So let’s get into it.
All right, let’s start with a question that is on the forefront of everybody’s mind. Should investors wait for rates to come down before they start to buy? Who would like to take a stab at this one?

Brian:
I say give it to J. That way I can disagree with him.

David:
All right. We’ll go there and then we’ll let Scott fill in afterwards. J, what do you think?

J:
I see rates being high. And when I say high, rates are relatively high. We’re at what? 6, 6.5% at this point, and that’s historically about where they’re supposed to be, but I think we all know that they’re likely to head down in the near future as opposed to up. And so from my perspective, that gives us upside. That means when interest rates were at 2%, 3%, 4%, all we had was downside. We knew the next move in rates was going to be up. And so if we bought any floating rate debt, if we bought anything that didn’t have long-term fixed rate debt, we were going to be in a position where when we had to refinance or when we had to recapitalize, that things were going to be worse than they are now.
But right now we’re in a situation where we can be fairly certain that the next move over the next couple of years is going to be down. And so if we can find a deal that works today and we can put decent debt in place, then the best case scenario is that in a couple of years, we can refinance that debt, we can bring our cost down, we can continue to cashflow or cashflow more. And our worst case scenario is we’re in the same position we are now a few years from now.

David:
Scott?

Scott:
To reframe the question, I think the right time to buy is when your personal financial position is conducive to it, right? For me, real estate investing is a long-term bet on inflation in US housing stock prices and long-term rent growth. And I buy based on that premise consistently but not aggressively over a long time horizon. That said, just to kind of disagree with J before Brian can, yes, the best scenario is that rates go down. But I think what’s much more likely is the fed’s going to do exactly what they said, lower them two to three times, and then it’s anybody’s guess after that. And if they do nothing, the yield curve will continue to un-invert and the 10 year will continue to rise and that is directly correlated with both mortgage rates and commercial debt financing rates. So I think that I’m planning on, and believe, that there’s a much higher probability that rates stay the same or begin to climb rather than stay flat or go down.

David:
Can you briefly define what you mean by the yield curve will continue to invert?

Scott:
Yeah, so when the Federal Reserve changes rates, they’re increasing kind of overnight borrowing rates, very short-term yields. The US Treasury borrows money both in a short term and long-term basis. And right now, short-term debt for the US Treasury is trading at a 5, 5.25 yield and longer term debt from the US Treasury is trading at a lower yield like 4%, 4.25 for the 10-year treasury. That’s an inverted yield curve. And what I believe is going to happen is either there’s going to be a recession that’s going to force the Fed to drive rates down dramatically very, very quickly, which they are not saying they’re going to do or planning on, or that 10-year treasury is going to be yielding more than the overnight federal funds rate and the short-term treasury rate.

J:
I think you’re overcomplicating this, Scott. And nothing wrong with that. I think it’s easy to overcomplicate, but I’m a big believer that history is the best predictor of the future. And historically, mortgage rates are somewhere between 1.5 and 2 points above whatever the federal funds rate is. Right now we’re at a smaller delta than that, but that’s historically where we are and I expect we’ll get back to somewhere between 1.5 and 2 points above the federal funds rate.
And if you look at basically what the market is pricing in for the federal funds rate at the end of 2024, it’s somewhere between 3.75% and 4%. Don’t know that that’s actually going to be the case, but that’s what the market thinks. So assuming we’re actually at 3.75 to 4% in Federal funds rate, at the end of this year, and assuming we expand back to that historic 1.5 to 2 points above that for mortgage rates, we’re probably looking at somewhere in the high 5s by the end of this year, which is a good bit below where we are right now. So I mean that’s my best guess. I know we’re all guessing and I am not saying you’re wrong. I mean you have as much chance of being right as I do, but I just think that we can take a simpler view than what you were putting out there.

Dave:
Given that we’re just guessing and we don’t actually know though, I’m curious what you think investors should be doing. Should they be waiting? Scott gave an answer that he thinks the best time is when you’re financially able to do that. Brian, what do you think? Do you think that investors, given the unknowable nature about the future of mortgage rates, should waiting or should they be jumping in right now?

Brian:
Well, I’ve often been quoted as saying the phrase that there’s a good time to sell, there’s a good time to buy and there’s a good time to sit on the beach. And as soon as the sun rises and I can open the curtains behind me, you’ll notice that I practice what I preach when you see the ocean behind me, that there’s actually good times to just sit on the beach. Now having said that, I think we’re starting to come to a point where we’re about to maybe crawl out of that hole. And I’ve been a pretty vocal real estate bear for the last couple of years. I think it’s no secret I’ve said on this show and other shows that in ’21 I started selling most of my portfolio. I sold 3/4 of all the real estate I owned in 2021 and early ’22 because I thought the market was going to come down. It did in the sector that I work in.
Now I’m in large multifamily, right? 100 unit and larger apartment complexes, commercial real estate type stuff. And in that market, it suffered a significant hit. Now conversely, single family on the other hand didn’t suffer any ills really at much at all in most markets. In some markets, single family is up over where it was a couple of years ago. So the question of whether it’s a good time to buy now is a difficult question to answer because there’s so many different components to real estate. There’s so many local markets in real estate, there’s so many different strategies in real estate that a case could be made for buying any time at any point during the cycle, no sense in waiting for interest rates to change if your strategy gels well with the current interest rate environment. So if you’re flipping, you don’t really care what interest rates are. You don’t care what pricing movement is, it’s an arbitrage play. So you can certainly still do that. So it’s a really tough question to answer.

Dave:
Scott, what do you think about this question?

Scott:
This melds perfectly with the way I think about things. In commercial real estate, large multifamily, syndicated funds, those types of things, there’s a time horizon for investments that is finite. You can’t just buy the thing and hold onto it for 30 years in most of these funds. That’s not meeting the expectations of investors. And there are debt and balloon terms and other things that force your hand at a certain point in time. So in that space, you have to do what Brian is doing to maximize returns. There has to be a buy time, a sell time, and a sit on the beach time. And I’m so glad you’re enjoying the sun soon here in Maui and got up early with us.
In the single family and small multifamily space that I play in, I don’t have that constraint because I’m using 30 year fixed rate Fannie Mae insured mortgages and I’m putting down a down payment and can operate myself if I need to and I can hold on for the decades. There is no timing pressure unless I screw something up badly in my personal financial situation. So to me, it’s always the buy time whenever as my capital accumulates, I’m dollar cost averaging into single family or small multifamily that I can hold in perpetuity here in Denver. But if I’m going into one of these other asset classes, I got to be really, really careful about when you go in because that matters so greatly to your returns and there’s a time pressure on it.

Brian:
And I would say that just to counter what Scott just said just a little bit, well yes, there’s always a time to get in somehow. If you tell a single family rental real estate investors who bought in 2004 that what their decision was a good decision, they would probably counter that point because there is times when single family can take a significant hit.
Now ultimately it recovered. It took years to do so and that was certainly an impact on the time value of money. But what you got to think about is the holistic world of real estate investing and where do you think the risks are. And in ’04 and ’05, home prices were so high. I mean they really only had one way to go. There were plenty of risks in the Fannie financing that was going on at that time and all that stuff. Now we don’t have those risks. So a sharp residential downside is probably not part of the cards. So you still have to factor in the overall market conditions and thoughts of where something’s hiding around a corner to kill you, but right now it’s not there in my opinion, especially in the single family space.

J:
And it’s also worth noting that, I mean no matter how smart we are, we are all dumb to some extent. I mean if I said to you, Brian, you sold everything in 2021, if I said to you in January of 2020 that we’re about to have a global pandemic, we’re going to be shut down for a year and a half, basically supply chains are going to be frozen, but you have the opportunity to sell your entire portfolio before March 13th, would you have done it?

Brian:
Yeah, I probably would have. And that would’ve been a huge mistake.

J:
Exactly. You’re the smartest multifamily investor I know, but even you couldn’t predict these weird macroeconomic situations. And so, this is why it’s often said that time in the market is more important than timing of the market. I’m not going to disagree that we can do this portfolio play where we say, “Hey, we’re not going to buy a whole lot when things are really frothy.” But to say we’re just going to sit on the sidelines… And I’m not talking about you. I mean, if you buy right all the time and sell right all the time, then you’re always going to have an opportunity to sit on the beach. You did that. Most of us, we don’t have that crystal ball. And so yeah, we can kind of slow down a little bit when we think things are frothy, we can speed up when we think there’s good opportunities. But to Scott’s point, I think it’s always a good time to be buying when your financial situation allows it and when your time horizon allows it as well.
And I’ll just say, I mean Scott pointed out that we can’t do that in the multifamily world. I agree. To some extent, it’s a lot harder because we do have investors. And our investors don’t want to sit on an investment necessarily for 10 or 15 or 20 years. And loan terms typically are not 30 years. They’re typically seven or 10 or 12 years. But that still gives us seven or 10 or 12 years. And if you look at historical trends again, what you’ll see is over any 10 year period in the history of this country, real estate has gone up peak to peak. And so yeah, maybe we’re not going to make a ton of money for our investors if we hold for 10 years, but we’re probably not going to lose money either.
And so if you make a good investment, and when I say a good investment, investment that’s not going to be forced to sell based on macroeconomic conditions, something that you’re going to be able to hold through a downturn, if you can hold that for five or 10 years, you’re probably going to come out unscathed and at least make a little bit of money.

Brian:
And you have to have the loan maturity to match.

Dave:
Am I the only one who doesn’t mind interest rates where they are? I feel like it’s actually a pretty good opportunity to buy right now. And I do think it sort of helps cool down the housing market and creates a little bit less competition. So for me, I’ve actually personally gotten a little bit more active in the last couple of months than I have in the previous few years.

David:
All right. We’re going to take a quick break but stick around because we’re about to answer the questions everyone is asking lately, is cashflow still possible and what strategies actually do work in this market right after this break.
And welcome back to the BiggerPockets Real Estate Podcast. We are here with some of the smartest real estate investors in the game right now, debating the most pressing questions on investors’ minds.

Dave:
Let’s transition our conversation here a little bit to what strategies actually are working in today’s market given rates. Let’s just assume they stay where they are because we don’t know what’s going to happen. Brian, I know you have a couple that you don’t think will work, but are there any that you do think are going to work in the coming months?

Brian:
I think you can flip houses in any economic climate. In fact, the best my flipping business ever did was during the ’08 to 2013 real estate down cycle. And you can do really, really well with an arbitrage strategy. You can also do really well with single family rentals. I mean, single family rentals aren’t really like… They’re not the cashflow play people want to think they are and that many people promote that they are. I mean, if you really looked at somebody’s five-year total cashflow including capital improvements and everything else, they’re not a huge money maker, but they’re a wealth builder.
I mean, the thing about real estate is there’s two things required to build wealth in real estate, money and time. And the money doesn’t have to be yours, it could be somebody else’s. But the time, you can’t do anything about. You have to give it time. And that time is going to create appreciation in two ways, rental growth and price growth. And it’s from that rental growth is where you’re going to start to make cashflow in time. And if you’re patient enough, and as J alluded to, if you can hold long enough, and I think even just as importantly, you have the financing structure that allows you to hold long enough, i.e. you don’t have a loan maturity looming and you can actually hold, you can do well. And I think I agree with you, Dave. I hate to say that. Gosh, that pains me.

Dave:
Do you want to agree with everyone or do you just come on here trying to disagree with as many people as possible?

Brian:
My role is to disagree. I’m brought on this show to be the bear or to disagree. But no, I agree that the strategy play I think right now in the single family side is, you can buy at today’s rates that are a little bit higher. And if you can find a deal that works, the numbers work at today’s rates. Then later when rates do fall, you can refinance and improve your returns and improve your cashflow. And this is a really good time to do that play. You couldn’t have done that play three years ago. That play was off the table. So when you talk about, and I talk about, “There’s times to do this, there’s times to do that, there’s time to do nothing,” there’s also times to just change up your strategy. And I think that’s the strategy play right now, Dave.

David:
Brian is like the enforcer that is brought in on a hockey team who ends up hugging everybody and being their friend when he’s supposed to be laying down the law.
Scott, what do you think about strategies that are working in today’s market? Is this a question that people are asking that they shouldn’t be or is this a relevant question that we should be putting focus on?

Scott:
I agree with the single family rental. And again, I’ll throw in the small multifamily property area. I did some research a few months ago and posted a webinar to the BiggerPockets YouTube channel, and I think released on the Real Estate feed here, around where to find the cashflow, right? And there’s markets around the country. I like upstate New York, there’s a couple of examples there. Cleveland, I love the south, especially in the build-to-rent space. A lot of people built a ton of properties. They’re brand new inventory, they’re designed to be rentals. And the institutions that were supposed to buy them aren’t there anymore. And so that’s a really good opportunity for investors to do that.
Are you going to get a ton of cashflow there with those deals? Nope. But you can cashflow with a traditional down payment and today’s rates on those. And I agree completely with Brian’s thesis here around, hey, if you’re going to be buying these types of properties, that’s a long-term wealth play. You’re letting the loan amortization go, you’re getting a solid but not incredible cash on cash return. You’re going to benefit from long-term rent and pricing appreciation on those.
If you want cashflow in a big way, the obvious answer in a higher interest rate environment is to turn to debt. For example, I purchased a couple of hard money notes last year and I’ve been re-rolling those, right? Flipping is still a great way to make money. And I feel like if my worst case scenario as a real estate investor doing this for 10 years is foreclosing on a property and finishing a project, I’m comfortable with that. And that’s given me a 12 to I think about 13% blended rate on the several loans that I’ve owned over the last year. So I think that’s an obvious solution here as well to be backed by real estate if you’re really looking for that cashflow. There’s no tax advantages to that. I paid a tax, man, on my interest by the way, unless I were to move it into my retirement accounts, but it is significant.

David:
Okay. So for years, we’ve been able to get almost every single benefit that real estate offers out of the same deal because real estate was in its heyday. You could get appreciation, tax benefits, cashflow, loan pay down, easy financing, the ability to partner with people, almost a free education from doing a deal and “Hey, if it didn’t work out, you could just sell it and make money.” There was almost no downside in general to real estate and you could get all the upside in the same deal.
It sounds like what we’re saying is that it’s not quite as easy as it was. It’s still possible, but you’re maybe not going to get everything out of the same deal. Do we think investors should be looking at building a portfolio that has some properties that are a long-term appreciation play, some opportunities like Scot just said that are going to be cashflow heavy but they’re not going to shelter your taxes, other properties that might be a good tax savings for money that you’re making in business? What’s your guys thoughts on if we need to maybe lower our expectations and become a little more strategic on the type of real estate we’re putting in our portfolio?

J:
Yeah, I think it’s important that we’re all a bit more introspective. I mean, I think the biggest lesson here is throughout again the history of this country, we’ve become accustomed to recessions every four or five, six years. That’s just the way it works. And basically what that means is every four or five six years, we as business owners and investors get our asses kicked and we learn we’re not the smartest people in the room, we’re not the smartest people on the planet and many of us have no idea what we’re doing.

Scott:
Except Brian.

J:
Except Brian.

David:
Nobody beats up the enforcer.

J:
And it forces us to really come to terms with the fact that we may not be as smart as we thought we were and it makes us get better at investing and do things the right way or get the hell out of the business. Well, the problem is, since 2008, we haven’t had that kick ourselves in the ass moment for people to recognize that they may not be as smart as they think they are, they may not be as good at an investor as they think they are. They may have been thinking for the last 15 years they’ve been doing everything right because you buy a bad flip, you take too long to flip it, you get the wrong financing, you spend too much on renovation, you don’t sell it for as quickly as you thought and you still make money because the market just kept going up.
And so I think we’re going to have a big revelation in this industry that a lot of people who have built big brands and big names, and hopefully I’m not one of them, but a lot of people that have built big brands and big names aren’t necessarily as smart and successful as they thought they were. So I just want to start with that.
In terms of what we should be doing now though, I agree with what everybody said, buy and hold. Like Scott and Brian both said, I mean there are lots of benefits. There’s cashflow, there’s principal pay down, there’s tax benefits, there’s appreciation. But the one thing we’re not going to see a lot of in a higher interest rate environment is cashflow. And so for all those people that for 10 years were saying, “I’m going to buy a couple rental properties and retire from my W2,” I still think it’s a great idea to buy a couple rental properties. Buy a property a year, but you’re not going to be retiring from your W2 thanks to the cashflow like you were doing a few years ago.
And so I think people have to kind of reset their expectations on the cashflow piece. But again, those other pieces are so valuable that if you’re buying now, in 10 or 15 years, you’re going to find that your net worth has increased significantly and you’re going to have an opportunity again at some point to recapture that cash flow. So buy and hold always good. Transactional type flipping stuff, I’d say be cautious, but it can still work.

Scott:
I think that the two kind of words that bubble to the surface in my mind in this conversation are fear and enough. And I think that over the last 10 years, there wasn’t enough fear in the real estate market, right? You talk about these commercial real estate deals, for example, like office and some multifamily in certain areas, you can be the smartest guy in the room. You can be doing this for a decade or two and there’s nothing you can do when Austin, Texas is adding 10% to its existing multifamily stock in year 2024. Rents are going down, property taxes are going up, insurance rates are going up. There’s nothing you can do and you’re helpless. And you’ve got to have fear in this business in addition to the long-term belief that I voiced earlier around depreciation and rent growth.
I have both of those at all times. I’m scared every time I buy a property to this day. I was terrified the first time in 2014. Prices have gone up for six years and we’re right around the corner from the recession that happens every five to six years that J just talked about, and in 2017, in ’18 and ’19. And there’s always a bubble. You’ve always got to have that fear I think in addition to the belief in the long-term thesis. And that comes back to me from the thing I’ve been harping on this whole time around personal finances and the ability to hold the asset for a very, very long period of time. That’s how you compound growth and don’t lose your principle.
And the other side of this is enough, the penny can’t double forever. It’s completely tied into the fear concept here. What is enough for you and do you need to keep leveraging that whole time and do you need to get there overnight? Can you accept the fact that a good real estate investor might get mid-teens returns over a 5, 10, 15 year period? A small spread to what you can get for example, against an index fund and a stock market, but a worthwhile one to chase. Not in the 20s, right? Not in the 25%. Not these huge doubling of your investment in three, four years that we experienced over the last 10 years. What is enough for you and are you structuring your portfolio to get there? And I think that those are the two things that got lost in the last 10 years by a lot of folks and some of the loudest folks in the real estate community.

Dave:
Scott, I love that so much. I completely agree with you. I think it’s so important that people have a healthy understanding of risk and reward. And everyone talks a lot about reward and how they’re getting these outsized returns, but they don’t talk about how much risk they’re taking on. And it’s okay to take on risk, but you sort of have to be thinking about that and cognizant that with reward and upside comes risk. And I think knowing when you have enough is also just probably the most important lesson I’ve ever learned as a real estate investor. You can use that to work backwards and figure out how much risk is appropriate for you and how much reward is appropriate to you to get to your long-term goals.

Scott:
It’s just super hard when these 22 year olds are racing past you from a wealth creation perspective because they’ve bought a hundred deals in the last two months with other people’s money. So I get it, but you have to have that fear and enough.

Dave:
But it’s a tortoise in the hare thing, right? You have to just be slow and steady if that’s your approach. If you want to go fast, you can, but there is more risk there.
All right. I like it. This is starting to heat up. When we come back, we’ll name the elephant in the room and ask the question, is real estate a viable path to financial freedom? Stick around.

David:
Welcome back, everyone. Dave Meyer and I are here with Scott Trench, J Scott, and Brian Burke and we’re talking about the biggest questions this market is asking. Let’s get back into it.

Dave:
Now, Brian, I want to turn it over to you, but I just first want to point out that you are perfectly blending into your background right now. Anyone watching this on YouTube, he just opened the door and he’s got this beautiful Hawaiian backdrop, but he’s wearing a Hawaiian shirt. And you can’t even see him. He just fits perfectly into this setting. But enough about that, Brian. How do you view this risk reward situation and discussion we’re talking about?

Brian:
Well, I think one of the biggest things I’ve seen in real estate in my 34 years of doing this in multiple cycles, I kind of see the same thing repeat itself time after time. People tend to fail to treat real estate investing like the loaded gun that it is, because this business can save your life and it can also kill you in a figurative sense. The risk is real and people tend to forget about it. And when you find the greatest amount of euphoria is usually the biggest signal to me that we’re nearing the end of an upcycle, and that’s what was happening in ’20 and ’21 when I decided to start selling everything, is because there was just so much euphoria, you couldn’t make a mistake, you could do nothing wrong, everyone was making money, everyone had to buy. And when everybody wants something, it’s a good to allow them to have it. So if you have it, it’s a good time to turn it over when everybody wants it. Because when nobody wants it, it’s a really bad time to sell it.
Scott nailed it. You really have to focus on the fundamentals now because no more is the market going to necessarily bail you out. Now you might get a gift in a year or two where you can refinance and get a lower interest rate and increase your cashflow, but you have to buy right. And there’s really a couple things I think that are failure points for most real estate investors. They either have the wrong strategy at the wrong time or they have the wrong capital stack. Those are the two things that kill people. They’re buying to hold when they should flip, or they’re flipping when they should buy to hold, or they’re buying and holding with three year maturities on their loan and in three years they’re going to have to refinance or sell or do something. You’ve got investors that have a short call window. You’ve got preferred equity, which means that somebody is going to knock on your door soon and say, “I want my money back.”
If there’s anybody that’s going to want their money back in a short period of time that’s involved in your real estate deal, you’re dramatically increasing your risk profile. If you have long-term capital, a long-term horizon and the right strategy, even if you bought wrong, you’re probably going to come out okay. I mean, you don’t hear a lot of real estate investors saying, “I failed because I bought this property wrong.” It’s like, “No, you failed because you got short-term financing, you had the wrong strategy.” That’s where people get tripped up.

David:
So we all agree that real estate is a great option, but it’s foolish to not consider the risk that you’re taking on when you buy it. Brian, you made some great points there of what people can do to reduce their risk.
In Pillars of Wealth I talk about, “Hey, if you want to scale up big and you want to go big, that’s great. You have to temper that with more savings, more reserves and more offense. You have to be able to make more money in your business if you want to scale up the real estate.” If it’s proportional, you’re fine, but to Scott’s point, it’s a big problem when you’re 22 years old, you have no money in the bank, you borrowed a bunch of money from other people, you don’t understand the debt instruments you’re using and you’re just throwing it all on black and trusted that Roulette’s going to work out every single time because it has before. So I thought that was some very sound advice.
Since I’ve been involved in real estate, the carrot that we’ve used to get people into this game is to buy some real estate, get some cashflow, quit your job. It’s always been the same strategy that’s been marketed over and over and over. “Do you hate your job? Do you hate your life? Does your cat sit on somebody else’s lap instead of yours? Are you having a hard time getting a girlfriend? Well, if you had some cashflow, all of that would go away, so come buy some cashflow and you can fix all your problems.” And now that the cashflow has somewhat evaporated from rates going up, nobody knows what to do and they’re all losing their minds. Is it still possible to reach financial freedom and quit your job in a couple years with real estate today? Or do we think that people should be acquiring real estate before a different purpose?

Brian:
Was it ever possible?

David:
It was presented that way, right? I mean, I think a lot of people listening to this, that’s how they got here, is that’s what they got sold, is they had a bad day at work and someone said, “Well, if you had cashflow, you wouldn’t have to listen to your boss or wake up on time or be sitting in traffic.” And so that’s why they got into the game and I see a lot of bitterness in the real estate investing communities when they’re like, “Well, I thought I was going to be able to quit and I can’t make it happen.” What do you think, Brian?

Brian:
I think that if your expectation ever was that you’re going to get all this cashflow in two years by buying any kind of real estate, you’re probably fooling yourself. Single family rentals don’t throw off enough cashflow unless you’re paying all cash, so that means you already have money and you’re already financially free. If you’re getting the money from somebody else, you’re paying them a lot of what you’re getting in cashflow. If you’re buying large apartment complexes like I do, there’s a concept called preferred return, which means that investors get 100% of the cashflow until they reach a specific return threshold. That means you as the sponsor who raised all this money is getting nothing in cashflow during that period of time. You really make your money when you sell.
So getting rich in real estate in two years, the problem with it is it’s just a misnomer. It’s a misguided expectation. Real estate has always been a long game. It’s always been a way to build wealth over time. You can buy all kinds of real estate right now and build up this huge portfolio with just a tiny, tiny, tiny bit of cashflow, and what’s going to happen is over time you’re going to be able to refinance into a lower interest rates, rents will eventually go up, those increased rents coupled with a lower mortgage payment are going to produce cashflow eventually. At some point the loan will be paid off and you’ll have massive cashflow. And if you do that enough and you can buy enough property, you’ll accumulate massive wealth. And I promise you, you will get a girlfriend and the cat will sit on your lap. All those problems will go away, but it’s not going to go away in two years. This problem takes time to solve like any complex problem.

Scott:
I completely agree with that. This has never been a two-year journey to wealth, and it never should be considered that. But I believe that if people are buying this year, next year, the year after, every other year, whatever, if you buy three to five properties over the next 10 years starting today, you have a great shot at accumulating more than a million dollars in net worth from a standing start, especially if you’re willing to house hack or do any of those strategies where you’re going to add a little bit of value or work on the portfolio yourself. And you will start seeing material cashflow by the end of that first decade in this business that has a really good boost to your life. You will see that continue to expand if we see anything like the historical appreciation rates and price growth in rents, which I expect and fundamentally believe in. But no, you won’t get there overnight. And it’s a consistent grind of continuing to accumulate, building up your cash position and steadily continuing to expand your portfolio at least in the single family space. Go ahead, Brian.

Brian:
I just want to add something to that, Scott, because what you said is absolutely true. And I just want to relate a story to people because I think it’s important. 25 years ago I made a pledge to myself that I was going to buy one house a year. That was going to be my big break. I was working, I was getting a W2, I was in law enforcement like David. I just wanted to buy a house a year and I thought that was going to make me rich. I started out on that and here I am 25 years later, I’ve bought over $800 million worth of real estate during that time.
Some of my very early single family homes that I bought, I did a 1031 exchange, which means I could sell these two properties and buy a larger property. I bought a 16 unit apartment complex. I held that 16 unit apartment complex for 15 years and then I sold that in a 1031 exchange and bought this very spot that I’m sitting in right now with this ocean view behind me in Hawaii. And that is how the road to wealth works. You start small with a goal, you take active steps to get there, you accumulate probably… It doesn’t matter if you get 100 houses in two years, like the 22-year-old you’re competing with whoever mentioned that. Where’s that guy in five years? Probably in bankruptcy court. What you got to do is just make a goal that fits for you, chip away at it one piece at a time, and eventually you’ll have what you’re seeking. It just will take time. It took me what? 20 years to get into here. And it will take you time. Just be patient.

J:
If only there was a game that taught us that if we buy houses today, in the future we could turn those into something else like hotels or something, that’d be really cool. We should create that game. The key here is that… And I think Monopoly is actually a good analogy for this because what do we do in Monopoly? We don’t spend the game trying to buy fancy cars and expensive dinners and traveling around the world. What we’re doing is we’re buying assets and we’re letting those assets grow. And most of us in Monopoly, we find every time around the board, we’re looking forward to collecting that $200 because we’re running out of money because we keep buying assets. And that’s the way to do it because by the end of the game, if you’ve done it well, you’ve got a whole lot of assets and that’s worth a whole lot of cash.
I think we kind of use the terms rich and wealthy interchangeably, but from my perspective, there’s a big difference. Rich people, they have a lot of cash. They can go out and buy a nice car, they can go out and go on fancy vacations and they can do all those things that you think about when you think about rich and flashy. But wealthy is where you want to be. Wealthy is your net worth. Wealthy is that equity. Maybe it’s tied up for now. Maybe it’s tied up for the next five years or 10 years, but at some point in the future you’re going to wake up and you’re going to realize that “I’m worth a lot of money and I can take that equity and I can convert it into cashflow or I can convert it into another type of equity and I can quit my job.”
And yeah, it’s not going to happen in two years, but again, if you do things the right way like Brian did and like Scott’s doing, like David did and Dave and me, I mean in five or 10 or 15 years, you’re going to wake up… You’re going to wake up in 15 years either way, at least wake up rich. Excuse me, wealthy.

Dave:
Great advice, J. If only there was a book that talked about return on equity that perhaps you and I wrote that people could check out, that might work out for people.
Last question here before we get out of here. I want to hear from each of you quickly what practical actionable advice would you give new investors. So we’ve talked a lot about what people who have been in the game for a while should be doing, but what advice would you give new investors who want to get started here in 2024? Scott, let’s start with you.

Scott:
It’s the age old stuff. There’s nothing new here. It’s strong personal financial position. Build up your cash reserves. Develop the mental models that you need to. That’s a pompous way of saying start learning the way that what J just said there. And look, consider a house hack or a live-in flip, right? Those are the most powerful tools you have the huge advantages when you’re just getting started that completely multiply your leverage and multiply your opportunity and upside while diminishing risk if you can live in the property, operate it yourself and maybe add a little bit of value. It’s all tax-free if you do the live-in flip correctly and live in there for two years and sell it within five years of doing that. I would strongly encourage people to be looking there for those opportunities because they’re so high upside and so low risk in any year, but at any point where you’re getting started.

J:
I meet two types of people in this business all the time. Number one, I meet people that have never done a deal. And most of the people I meet have never done a deal. 95, 96, 98% of the people I meet have never done a deal. And then the other type of people I meet are people that have done 5, 10, 50, 100 deals. There’s one type of person I never meet in this business, and that’s somebody that’s done one deal. So anybody out there that’s listening, don’t do a bad deal, but don’t give up until you get to that first deal because after you get that first one, it gets so much easier and you get your head around the process. And I promise you, if you do one deal, you’re going to do 10 or 20 or 50 or 100 deals.

Dave:
Right. Brian, what’s your advice for new investors?

Brian:
The first thing you need to be doing right now is getting your plan together. What strategy do you want to employ? What markets do you want to invest in? Where are you going to get your capital? And that includes both equity capital and debt capital. Get everything lined out. If you’re going to use investors, build your investor list. If you don’t know what you’re doing, build your partner list. If you don’t know how to turn a wrench, build your contractor list. Get everything ready, get it lined up because the opportunities are presenting themselves and they will in more quantity as time goes on. And if you’re ready for it, you’ll be ready to pounce when you see opportunity.
The people that get caught flatfooted are the ones that they have no plan, they have no money, and they just say, “Oh, I found this great deal,” and it’s like, “Okay, what do you know about great deals? Where are you getting the money? Where are you getting the debt? What are you going to do with it?”
“Oh, I haven’t thought about any of that.”
“Well, then it’s too late. The great deal is already gone.” So you have to have all that other stuff ready so that when the great deal comes along, you’re absolutely ready to do it and do it right.
The second thing I think people need to think about is don’t get in too far over your skis. One of the things that really killed investors back in the last downturn in ’05 was they took on way too much debt over what the property or they could support. The problem with this business is, if your career gets really shortened because you really screwed up, it’s even harder to get the second deal. J’s right. It’s easier to get the second deal, but it’s harder to get the second deal if your first one was a total disaster.

Dave:
Well, Brian, I totally agree with you. I think if I had to give my advice concisely, it would be to start with the end in mind, to really think about where you want to go, Scott alluded to that earlier, and what you’re trying to accomplish through real estate. And then work backwards to identify the strategies, the markets, the financing structures that work for you and are appropriate given your personal situation and your personal goals. I see a lot of people just jump right into that first deal. And J’s right, you should get into that first deal, but make sure that it’s one that’s appropriate for you and that is well aligned with your long-term goals.

David:
Nice. The thing I would tell a newbie is to think about the long-term. When you guys were talking, I was thinking about my experience that I’ve had in real estate since I got into it. And it seems like real estate tends to move in these really big waves. If you think about the market as the ocean tides, it goes up very quickly when we print a bunch of money and it goes down very violently when we get into a recession. And there’s occasionally times where it just slowly increases at that 2 to 3%, but we can never predict when that’s going to happen. So the idea is how do you get as many buoys in the water in the best markets that you can, and then you ask yourself the question, “How do I keep them there? How do I not lose the properties that I bought?” Obviously, cashflow is a really strong way to do that, but that’s the profit and loss of a property.
Think about the profit and loss of your life. Are you saving money? Did you get a little bit of cash and immediately go buy yourself a Mercedes-Benz and jeopardize the health of your investment portfolio because you can’t stop spending money? If you could be disciplined with your own finances and always be bringing more value to your employer, more value to the marketplace, more value to your customers, increasing your income while keeping your expenses low, you’ve now earned the right to take the risk that is involved with real estate investing that will pay off if you can wait long enough. So just stop trying to outsmart the market and out time the market and ask yourself, “How do I get the best buoys in the water, in the best markets and keep them there for as long as possible?”
And then what happens is 10 years, 15 years, 20 years later, you got a butt load, that’s a technical term everybody, of equity, and you can ask these cool questions like, “How do I move this into a different asset class?”
All right, gentlemen, thank you all for joining me here on this stellar 900th episode of the BiggerPockets Podcast. I was first featured as a guest on episode 169. And I can’t believe how quickly we are flying towards 1,000.

Scott:
I just want to throw something out there. You first appeared on Show 169. J, what was your first episode? Do you remember that one?

J:
Episode 10.

Scott:
Whoa! 10. That’s pretty good. Brian, what was your first episode?

Brian:
Episode 3.

Dave:
Talk about OG on this. J and Brian. Wow. Thank you guys for being around from the very beginning and coming back all the way here for 900.
If you are one of those people who have listened to all 900 episodes, please find me on BiggerPockets and shoot me a message. We want to hear from you and your experience. We would love to know if you have listened to all 900.

David:
And let us know in the comments on YouTube what your favorite BiggerPockets show was. All right, I’ve got to record episode 901, so I’m going to get us out of here. Thanks everyone.